Linn Energy
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LINN ENERGY, LLC (Form: 10-K, Received: 02/21/2013 16:09:22)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number:  000-51719

LINN ENERGY, LLC
(Exact name of registrant as specified in its charter)
Delaware
 
65-1177591
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

 

600 Travis, Suite 5100
Houston, Texas
 
77002
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code
(281) 840-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class

Name of each exchange on which registered
Units Representing Limited Liability Company Interests

The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act :
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes  x No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  ¨ No x



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  x No  ¨  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.       x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   x     Accelerated filer   ¨     Non-accelerated filer   ¨ Smaller reporting company   ¨

Indicate by check-mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $7.5 billion on June 30, 2012, based on $38.10 per unit, the last reported sales price of the units on the NASDAQ Global Select Market on such date.

As of January 31, 2013, there were 235,129,742 units outstanding.

Documents Incorporated By Reference:

Certain information called for in Items 10, 11, 12, 13 and 14 of Part III are incorporated by reference from the registrant’s definitive proxy statement for the annual meeting of unitholders to be held on April 23, 2013.



TABLE OF CONTENTS



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GLOSSARY OF TERMS

As commonly used in the oil and natural gas industry and as used in this Annual Report on Form 10-K, the following terms have the following meanings:
Basin. A large area with a relatively thick accumulation of sedimentary rocks.
Bbl. One stock tank barrel or 42 United States (“U.S.”) gallons liquid volume.
Bcf. One billion cubic feet.
Bcfe. One billion cubic feet equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
Btu. One British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 degrees to 59.5 degrees Fahrenheit.
Development well. A well drilled within the proved area of a reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production would exceed production expenses and taxes.
Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.
Formation. A stratum of rock that is recognizable from adjacent strata consisting mainly of a certain type of rock or combination of rock types with thickness that may range from less than two feet to hundreds of feet.
Gross acres or gross wells. The total acres or wells, as the case may be, in which a working interest is owned.
MBbls. One thousand barrels of oil or other liquid hydrocarbons.
MBbls/d. MBbls per day.
Mcf. One thousand cubic feet.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
MMBbls. One million barrels of oil or other liquid hydrocarbons.
MMBoe. One million barrels of oil equivalent, determined using a ratio of one Bbl of oil, condensate or natural gas liquids to six Mcf.
MMBtu. One million British thermal units.
MMcf. One million cubic feet.
MMcf/d. MMcf per day.
MMcfe. One million cubic feet equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.
MMcfe/d. MMcfe per day.
MMMBtu. One billion British thermal units.

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GLOSSARY OF TERMS - Continued

Net acres or net wells. The sum of the fractional working interests owned in gross acres or gross wells, as the case may be.
NGL. Natural gas liquids, which are the hydrocarbon liquids contained within natural gas.
Productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceeds production expenses and taxes.
Proved developed reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well. Additional reserves expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included in “proved developed reserves” only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.
Proved reserves. Reserves that by analysis of geoscience and engineering data can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
Proved undeveloped drilling location. A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves.
Proved undeveloped reserves or PUDs. Reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances. Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time. Estimates for proved undeveloped reserves are not attributed to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, or by other evidence using reliable technology establishing reasonable certainty.
Recompletion. The completion for production of an existing wellbore in another formation from that which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a natural accumulation of economically productive natural gas and/or oil that is confined by impermeable rock or water barriers and is individual and separate from other reserves.
Royalty interest. An interest that entitles the owner of such interest to a share of the mineral production from a property or to a share of the proceeds there from. It does not contain the rights and obligations of operating the property and normally does not bear any of the costs of exploration, development and operation of the property.
Spacing. The number of wells which conservation laws allow to be drilled on a given area of land.
Standardized measure of discounted future net cash flows. The present value of estimated future net revenues to be generated from the production of proved reserves, determined in accordance with the regulations of the Securities and Exchange Commission (“SEC”), without giving effect to non-property related expenses such as general and administrative expenses, debt service, future income tax expenses or depreciation, depletion and amortization; discounted using an annual discount rate of 10%.
Tcfe. One trillion cubic feet equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil, condensate or natural gas liquids.

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GLOSSARY OF TERMS - Continued

Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil, natural gas and NGL regardless of whether such acreage contains proved reserves.
Unproved reserves. Reserves that are considered less certain to be recovered than proved reserves. Unproved reserves may be further sub-classified to denote progressively increasing uncertainty of recoverability and include probable reserves and possible reserves.
Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.
Workover. Maintenance on a producing well to restore or increase production.
Zone. A stratigraphic interval containing one or more reservoirs.

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Part I

Item 1.    Business
This Annual Report on Form 10-K contains forward-looking statements based on expectations, estimates and projections as of the date of this filing. These statements by their nature are subject to risks, uncertainties and assumptions and are influenced by various factors. As a consequence, actual results may differ materially from those expressed in the forward-looking statements. For more information, see “Forward-Looking Statements” included at the end of this Item 1. “Business” and see also Item 1A. “Risk Factors.”
References
When referring to Linn Energy, LLC (“LINN Energy” or the “Company”), the intent is to refer to LINN Energy and its consolidated subsidiaries as a whole or on an individual basis, depending on the context in which the statements are made.
A reference to a “Note” herein refers to the accompanying Notes to Consolidated Financial Statements contained in Item 8. “Financial Statements and Supplementary Data.”
Overview
LINN Energy’s mission is to acquire, develop and maximize cash flow from a growing portfolio of long-life oil and natural gas assets. LINN Energy is an independent oil and natural gas company that began operations in March 2003 and completed its initial public offering (“IPO”) in January 2006. The Company’s properties are located in the United States (“U.S.”), in the Mid-Continent, the Hugoton Basin, the Green River Basin, the Permian Basin, Michigan, Illinois, the Williston/Powder River Basin, California and east Texas.
Proved reserves at December 31, 2012, were 4,796 Bcfe, of which approximately 24% were oil, 54% were natural gas and 22% were natural gas liquids (“NGL”). Approximately 65% were classified as proved developed, with a total standardized measure of discounted future net cash flows of $6.1 billion. At December 31, 2012, the Company operated 11,048 or 70% of its 15,804 gross productive wells and had an average proved reserve-life index of approximately 16 years, based on the December 31, 2012, reserve report and fourth quarter 2012 annualized production.
Strategy
The Company’s primary goal is to provide stability and growth of distributions for the long-term benefit of its unitholders. The following is a summary of the key elements of the Company’s business strategy:
•
grow through acquisition of long-life, high quality properties;
•
efficiently operate and develop acquired properties; and
•
reduce cash flow volatility through hedging.
The Company’s business strategy is discussed in more detail below.
Grow Through Acquisition of Long-Life, High Quality Properties
The Company’s acquisition program targets oil and natural gas properties that it believes will be financially accretive and offer stable, long-life, high quality production with relatively predictable decline curves, as well as lower-risk development opportunities. The Company evaluates acquisitions based on rate of return, field cash flow, operational efficiency, reserve life, development costs and decline profile. As part of this strategy, the Company continually seeks to optimize its asset portfolio, which may include the divestiture of noncore assets. This allows the Company to redeploy capital into projects to develop lower-risk, long-life and low-decline properties that are better suited to its business strategy.
Since January 1, 2007, excluding three acquisitions of Appalachian Basin properties sold in July 2008, the Company has completed 40 acquisitions of working and royalty interests in oil and natural gas properties and related gathering and pipeline assets. Total acquired proved reserves at the date of acquisition were approximately 4.5 Tcfe with acquisition costs of approximately $2.01 per Mcfe. The Company finances acquisitions with a combination of funds from equity and debt offerings, bank borrowings and cash flow from operations. See Note 2 for additional details about the Company’s acquisitions.

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Item 1.    Business - Continued

Efficiently Operate and Develop Acquired Properties
The Company has centralized the operation of its acquired properties into defined operating regions to minimize operating costs and maximize production and capital efficiency. The Company maintains a large inventory of drilling and optimization projects within each region to achieve organic growth from its capital development program. The Company generally seeks to be the operator of its properties so that it can develop drilling programs and optimization projects that not only replace production, but add value through reserve and production growth and future operational synergies. The development program is focused on lower-risk, repeatable drilling opportunities to maintain and/or grow cash flow. Many of the wells are completed in multiple producing zones with commingled production and long economic lives. In addition, the Company seeks to deliver attractive financial returns by leveraging its experienced workforce and scalable infrastructure. For 2013, the Company estimates its total capital expenditures, excluding acquisitions, will be approximately $1.2 billion, including $1.1 billion related to its oil and natural gas capital program and $67 million related to its plant and pipeline capital. This estimate is under continuous review and is subject to ongoing adjustments. The Company expects to fund these capital expenditures primarily with cash flow from operations and bank borrowings.
Reduce Cash Flow Volatility Through Hedging
An important part of the Company’s business strategy includes hedging a significant portion of its forecasted production to reduce exposure to fluctuations in the prices of oil and natural gas and provide long-term cash flow predictability to pay distributions, service debt and manage its business. By removing a significant portion of the price volatility associated with future production, the Company expects to mitigate, but not eliminate, the potential effects of variability in cash flow from operations due to fluctuations in commodity prices.
The Company enters into commodity hedging transactions primarily in the form of swap contracts and put options that are designed to provide a fixed price (swap contracts) or fixed price floor with the opportunity for upside (put options) that the Company will receive as compared to floating market prices. For additional details about the Company’s commodity derivative contracts, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.” See also Note 7 and Note 8.
In addition, the Company may from time to time enter into derivative contracts in the form of interest rate swaps to minimize the effects of fluctuations in interest rates. Currently, the Company has no outstanding interest rate swaps.
Recent Developments
LinnCo Initial Public Offering
On October 17, 2012, LinnCo, LLC (“LinnCo”), an affiliate of LINN Energy, completed its initial public offering (the “LinnCo IPO”) of 34,787,500 common shares representing limited liability company interests (“Common Shares”) for net proceeds of approximately $1.2 billion. The net proceeds LinnCo received from the offering were used to acquire 34,787,500 LINN Energy units which are equal to the number of LinnCo shares sold in the offering. The Company used the proceeds from the sale of the units to LinnCo to pay the expenses of the offering and repay a portion of the outstanding indebtedness under its Credit Facility.
LinnCo is a Delaware limited liability company formed on April 30, 2012, under the Delaware Limited Liability Company Act and its Common Shares are listed on the NASDAQ Global Select Market under the symbol “LNCO.” LinnCo’s sole purpose is to own units in LINN Energy and it expects to have no significant assets or operations other than those related to its interest in LINN Energy. At December 31, 2012, LINN Energy owned 100% of LinnCo’s sole voting share and all of LinnCo’s Common Shares were held by the public. At December 31, 2012, LinnCo owned approximately 15% of LINN Energy’s outstanding units.
Acquisitions
On July 31, 2012, the Company completed the acquisition of certain oil and natural gas properties in the Jonah Field located in the Green River Basin of southwest Wyoming from BP America Production Company (“BP”) for total consideration of approximately $990 million. The acquisition included approximately 806 Bcfe of proved reserves as of the acquisition date.

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Item 1.    Business - Continued

On May 1, 2012, the Company completed the acquisition of certain oil and natural gas properties located in east Texas for total consideration of approximately $168 million. The acquisition included approximately 110 Bcfe of proved reserves as of the acquisition date.
On April 3, 2012, the Company entered into a joint-venture agreement (“JV Agreement”) with an affiliate of Anadarko Petroleum Corporation (“Anadarko”) whereby the Company participates as a partner in the CO2 enhanced oil recovery development of the Salt Creek Field, located in the Powder River Basin of Wyoming. Anadarko assigned the Company 23% of its interest in the field in exchange for future funding of $400 million of Anadarko’s development costs. As of December 31, 2012, the Company has paid approximately $201 million towards the future funding commitment. The acquisition included approximately 16 MMBoe (96 Bcfe) of proved reserves as of the JV Agreement date.
On March 30, 2012, the Company completed the acquisition of certain oil and natural gas properties and the Jayhawk natural gas processing plant located in the Hugoton Basin in Kansas from BP for total consideration of approximately $1.16 billion. The acquisition included approximately 689 Bcfe of proved reserves as of the acquisition date.
During 2012, the Company completed other smaller acquisitions of oil and natural gas properties located in its various operating regions. The Company, in the aggregate, paid approximately $122 million in total consideration for these properties.
Proved reserves as of the acquisition date for all of the above referenced acquisitions were estimated using the average oil and natural gas prices during the preceding 12-month period, determined as an unweighted average of the first-day-of-the-month prices for each month.
The Company regularly engages in discussions with potential sellers regarding acquisition opportunities. Such acquisition efforts may involve its participation in auction processes, as well as situations in which the Company believes it is the only party or one of a very limited number of potential buyers in negotiations with the potential seller. These acquisition efforts can involve assets that, if acquired, would have a material effect on its financial condition and results of operations.
Distributions
On January 24, 2013, the Company’s Board of Directors declared a cash distribution of $0.725 per unit, or $2.90 per unit on an annualized basis, with respect to the fourth quarter of 2012. The distribution, totaling approximately $170 million, was paid on February 14, 2013, to unitholders of record as of the close of business on February 7, 2013.
Operating Regions
The Company’s properties are located in eight operating regions in the U.S.:
•
Mid-Continent, which includes properties in Oklahoma, Louisiana and the eastern portion of the Texas Panhandle (including the Granite Wash and Cleveland horizontal plays);
•
Hugoton Basin, which includes properties located primarily in Kansas and the Shallow Texas Panhandle;
•
Green River Basin, which includes properties located in southwest Wyoming;
•
Permian Basin, which includes areas in west Texas and southeast New Mexico;
•
Michigan/Illinois, which includes the Antrim Shale formation in the northern part of Michigan and oil properties in southern Illinois;
•
Williston/Powder River Basin, which includes the Bakken formation in North Dakota and the Powder River Basin in Wyoming;
•
California, which includes the Brea Olinda Field of the Los Angeles Basin; and
•
East Texas, which includes properties located in east Texas.
Mid-Continent
The Mid-Continent region includes properties located in Oklahoma, Louisiana and the eastern portion of the Texas Panhandle (including the Granite Wash and Cleveland horizontal plays). Wells in this diverse region produce from both oil and natural gas reservoirs at depths ranging from 1,500 feet to over 18,000 feet. The Granite Wash formation and other shallower producing horizons are currently being developed using horizontal drilling and multi-stage stimulations. In the northern

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Item 1.    Business - Continued

Texas Panhandle and extending into western Oklahoma, the Cleveland formation is being developed as a horizontal oil play. Elsewhere in Oklahoma, several producing formations are being targeted using similar horizontal drilling and completion technologies. The majority of wells in this region are mature, low-decline oil and natural gas wells.
Mid-Continent proved reserves represented approximately 34% of total proved reserves at December 31, 2012, of which 59% were classified as proved developed. This region produced 313 MMcfe/d or 48% of the Company’s 2012 average daily production. During 2012, the Company invested approximately $578 million to drill in this region. During 2013, the Company anticipates spending approximately 49% of its total oil and natural gas capital budget for development activities in the Mid-Continent region, primarily in the Granite Wash formation.
To more efficiently transport its natural gas in the Mid-Continent region to market, the Company owns and operates a network of natural gas gathering systems comprised of approximately 300 miles of pipeline and associated compression and metering facilities. In connection with the horizontal development activities in the Granite Wash formation, the Company continues to expand this gathering system which connects to numerous natural gas processing facilities in the region.
Hugoton Basin
The Hugoton Basin is a large oil and natural gas producing area located in the central portion of the Texas Panhandle extending into southwestern Kansas. The Company’s Texas properties in the basin primarily produce from the Brown Dolomite formation at depths of approximately 3,200 feet. The Company’s Kansas properties in the basin, acquired in March 2012, primarily produce from the Council Grove and Chase formations at depths ranging from 2,500 feet to 3,000 feet. Hugoton Basin proved reserves represented approximately 21% of total proved reserves at December 31, 2012, of which 85% were classified as proved developed. This region produced 120 MMcfe/d or 18% of the Company’s 2012 average daily production. During 2012, the Company invested approximately $11 million to drill in this region. During 2013, the Company anticipates spending approximately 3% of its total oil and natural gas capital budget for development activities in the Hugoton Basin region.
To more efficiently transport its natural gas in the Texas Panhandle to market, the Company owns and operates a network of natural gas gathering systems comprised of approximately 665 miles of pipeline and associated compression and metering facilities that connect to numerous sales outlets in the area. The Company also owns and operates the Jayhawk natural gas processing plant in southwestern Kansas with a capacity of approximately 450 MMcfe/d, allowing it to extract maximum value from the liquids-rich natural gas produced in the area. The Company’s production in the area is delivered to the plant via a system of approximately 2,100 miles of pipeline and related facilities operated by the Company, of which approximately 250 miles of pipeline are owned by the Company.
Green River Basin
The Green River Basin region consists of properties acquired in July 2012. These properties are located in southwest Wyoming and primarily produce natural gas at depths ranging from 8,000 feet to 12,000 feet. Green River Basin proved reserves represented approximately 21% of total proved reserves at December 31, 2012, of which 43% were classified as proved developed. This region produced 62 MMcfe/d or 9% of the Company’s 2012 average daily production. During 2012, the Company invested approximately $22 million to drill in this region. During 2013, the Company anticipates spending approximately 12% of its total oil and natural gas capital budget for development activities in the Green River Basin region.
Permian Basin
The Permian Basin is one of the largest and most prolific oil and natural gas basins in the U.S. The Company’s properties are located in west Texas and southeast New Mexico and produce at depths ranging from 2,000 feet to 12,000 feet. The Wolfberry trend is located in the north central portion of the basin where the Company has been actively drilling vertical oil wells since 2010. The Company also produces oil and natural gas from mature, low-decline wells including several waterflood properties located across the basin. Permian Basin proved reserves represented approximately 8% of total proved reserves at December 31, 2012, of which 56% were classified as proved developed. This region produced 83 MMcfe/d or 12% of the Company’s 2012 average daily production. During 2012, the Company invested approximately $240 million to drill in this region. During 2013, the Company anticipates spending approximately 20% of its total oil and natural gas capital budget for development activities in the Permian Basin region, primarily in the Wolfberry trend.

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Item 1.    Business - Continued

Michigan/Illinois
The Michigan/Illinois region includes properties producing from the Antrim Shale formation in the northern part of Michigan and oil properties in southern Illinois. These wells produce at depths ranging from 600 feet to 4,000 feet. Michigan/Illinois proved reserves represented approximately 6% of total proved reserves at December 31, 2012, of which 94% were classified as proved developed. This region produced 35 MMcfe/d or 5% of the Company’s 2012 average daily production. During 2013, the Company anticipates spending approximately 1% of its total oil and natural gas capital budget for development activities in the Michigan/Illinois region.
Williston/Powder River Basin
The Williston/Powder River Basin region includes the Bakken formation in North Dakota and the Powder River Basin in Wyoming. The Company’s nonoperated properties in the Williston Basin, one of the premier oil basins in the U.S., produce at depths ranging from 9,000 feet to 12,000 feet. The Company’s properties in the Powder River Basin, acquired in April 2012, consist of a CO2 flood operated by Anadarko in the Salt Creek Field. Williston/Powder River Basin proved reserves represented approximately 4% of total proved reserves at December 31, 2012, of which 66% were classified as proved developed. This region produced 29 MMcfe/d or 4% of the Company’s 2012 average daily production. During 2012, the Company invested approximately $124 million to drill in this region. During 2013, the Company anticipates spending approximately 12% of its total oil and natural gas capital budget for development activities in the Williston/Powder River Basin region.
California
The California region consists of the Brea Olinda Field of the Los Angeles Basin. The Brea Olinda Field was discovered in 1880 and produces from the shallow Pliocene formation to the deeper Miocene formation at depths ranging from 1,000 feet to 7,500 feet. California proved reserves represented approximately 4% of total proved reserves at December 31, 2012, of which 96% were classified as proved developed. This region produced 13 MMcfe/d or 2% of the Company’s 2012 average daily production. During 2012, the Company invested approximately $1 million to drill in this region. During 2013, the Company anticipates spending approximately 2% of its total oil and natural gas capital budget for development activities in the California region.
East Texas
The East Texas region consists of properties acquired in May 2012. These properties are located in east Texas and primarily produce natural gas from the Cotton Valley formation at depths of approximately 11,000 feet. Proved reserves for these mature, low-decline producing properties, all of which are proved developed, represented approximately 2% of total proved reserves at December 31, 2012. This region produced 16 MMcfe/d or 2% of the Company’s 2012 average daily production. During 2013, the Company anticipates spending approximately 1% of its total oil and natural gas capital budget for development activities in the East Texas region.

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Item 1.    Business - Continued

Drilling and Acreage
The following sets forth the wells drilled during the periods indicated (“gross” refers to the total wells in which the Company had a working interest and “net” refers to gross wells multiplied by the Company’s working interest):

 
Year Ended December 31,

 
2012
 
2011
 
2010
Gross wells:
 
 
 
 
 
 
Productive
 
436

 
292

 
138

Dry
 
4

 
2

 
1


 
440

 
294

 
139

Net development wells:
 
 
 
 
 
 
Productive
 
223

 
186

 
116

Dry
 
2

 
2

 
1


 
225

 
188

 
117

Net exploratory wells:
 
 
 
 
 
 
Productive
 
—

 
—

 
—

Dry
 
—

 
—

 
—


 
—

 
—

 
—

The totals above do not include 8 lateral segments added to existing vertical wellbores in the Hugoton Basin region during the year ended December 31, 2010. There were no lateral segments added to existing vertical wellbores during the years ended December 31, 2012, or December 31, 2011. At December 31, 2012, the Company had 139 gross (53 net) wells in progress (two wells were temporarily suspended).
This information should not be considered indicative of future performance, nor should it be assumed that there is necessarily any correlation between the number of productive wells drilled and the quantities or economic value of reserves found. Productive wells are those that produce commercial quantities of oil, natural gas or NGL, regardless of whether they generate a reasonable rate of return.
The following sets forth information about the Company’s drilling locations and net acres of leasehold interests as of December 31, 2012:
 
Total   (1)
 
 
Proved undeveloped
2,504

Other locations
8,477

Total drilling locations
10,981

 
 
Leasehold interests - net acres (in thousands)
1,770

(1)  
Does not include optimization projects.
As shown in the table above, as of December 31, 2012, the Company had 2,504 proved undeveloped drilling locations (specific drilling locations as to which the independent engineering firm, DeGolyer and MacNaughton, assigned proved undeveloped reserves as of such date) and the Company had identified 8,477 additional unproved drilling locations (specific drilling locations as to which DeGolyer and MacNaughton has not assigned any proved reserves) on acreage that the Company has under existing leases. As successful development wells frequently result in the reclassification of adjacent lease acreage from unproved to proved, the Company expects that a significant number of its unproved drilling locations will be reclassified as proved drilling locations prior to the actual drilling of these locations.

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Item 1.    Business - Continued

Productive Wells
The following sets forth information relating to the productive wells in which the Company owned a working interest as of December 31, 2012. Productive wells consist of producing wells and wells capable of production, including wells awaiting pipeline or other connections to commence deliveries. “Gross” wells refers to the total number of producing wells in which the Company has an interest, and “net” wells refers to the sum of its fractional working interests owned in gross wells. The number of wells below does not include approximately 2,590 productive wells in which the Company owns a royalty interest only.
 
 
Natural Gas Wells
 
Oil Wells
 
Total Wells
 
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
 
Operated (1)
 
6,929

 
5,925

 
4,119

 
3,825

 
11,048

 
9,750

Nonoperated (2)
 
2,273

 
564

 
2,483

 
381

 
4,756

 
945

 
 
9,202

 
6,489

 
6,602

 
4,206

 
15,804

 
10,695

(1)  
The Company had 12 operated wells with multiple completions at December 31, 2012.
(2)  
The Company had no nonoperated wells with multiple completions at December 31, 2012.
Developed and Undeveloped Acreage
The following sets forth information relating to leasehold acreage as of December 31, 2012:
 
 
Developed
Acreage
 
Undeveloped
Acreage
 
Total
Acreage
 
 
Gross
 
Net
 
Gross
 
Net
 
Gross
 
Net
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Leasehold acreage
 
2,536

 
1,719

 
118

 
51

 
2,654

 
1,770

Production, Price and Cost History
The Company’s natural gas production is primarily sold under market sensitive contracts which are typically priced at a differential to the New York Mercantile Exchange (“NYMEX”) price or the published natural gas index price for the producing area due to the natural gas quality and the proximity to major consuming markets. The Company’s natural gas production is sold to purchasers under percentage-of-proceeds contracts, percentage-of-index contracts or spot price contracts. Under percentage-of-proceeds contracts, the Company receives a percentage of the resale price received by the purchaser for sales of residual natural gas and NGL recovered after transportation and processing of natural gas. These purchasers sell the residual natural gas and NGL based primarily on spot market prices. Under percentage-of-index contracts, the Company receives a price for natural gas based on indexes published for the producing area. Although exact percentages vary daily, as of December 31, 2012, approximately 85% of the Company’s natural gas and NGL production was sold under short-term contracts at market-sensitive or spot prices. At December 31, 2012, the Company had natural gas throughput delivery commitments under long-term contracts of approximately 24 Bcf to be delivered by August 2015.
The Company’s oil production is primarily sold under market sensitive contracts, which typically sell at a differential to NYMEX, and as of December 31, 2012, approximately 90% of its oil production was sold under short-term contracts. At December 31, 2012, the Company had no delivery commitments for oil production.
As discussed in the “Strategy” section above, the Company enters into derivative contracts primarily in the form of swap contracts and put options to reduce the impact of commodity price volatility on its cash flow from operations. By removing a significant portion of the price volatility associated with future production, the Company expects to mitigate, but not eliminate, the potential effects of variability in cash flow due to fluctuations in commodity prices.

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The following sets forth information regarding average daily production, average prices and average costs for each of the periods indicated:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
Average daily production:
 
 
 
 
 
 
Natural gas (MMcf/d)
 
349

 
175

 
137

Oil (MBbls/d)
 
29.2

 
21.5

 
13.1

NGL (MBbls/d)
 
24.5

 
10.8

 
8.3

Total (MMcfe/d)
 
671

 
369

 
265

 
 
 
 
 
 
 
Weighted average prices (hedged):   (1)
 
 
 
 
 
 
Natural gas (Mcf)
 
$
5.48

 
$
8.20

 
$
8.52

Oil (Bbl)
 
$
93.10

 
$
89.21

 
$
94.71

NGL (Bbl)
 
$
32.10

 
$
42.88

 
$
39.14

 
 
 
 
 
 
 
Weighted average prices (unhedged):   (2)
 
 
 
 
 
 
Natural gas (Mcf)
 
$
2.87

 
$
4.35

 
$
4.24

Oil (Bbl)
 
$
88.59

 
$
91.24

 
$
75.16

NGL (Bbl)
 
$
32.10

 
$
42.88

 
$
39.14

 
 
 
 
 
 
 
Average NYMEX prices:
 
 

 
 

 
 

Natural gas (MMBtu)
 
$
2.79

 
$
4.05

 
$
4.40

Oil (Bbl)
 
$
94.20

 
$
95.12

 
$
79.53

 
 
 
 
 
 
 
Costs per Mcfe of production:
 
 
 
 
 
 
Lease operating expenses
 
$
1.29

 
$
1.73

 
$
1.64

Transportation expenses
 
$
0.31

 
$
0.21

 
$
0.20

General and administrative expenses (3)
 
$
0.71

 
$
0.99

 
$
1.02

Depreciation, depletion and amortization
 
$
2.47

 
$
2.48

 
$
2.46

Taxes, other than income taxes
 
$
0.54

 
$
0.58

 
$
0.47

(1)  
Includes the effect of realized gains on derivatives of approximately $381 million (excluding $22 million realized gains on recovery of bankruptcy claim), $230 million (excluding $27 million realized gains on canceled contracts of which the proceeds were reallocated within the Company’s derivatives portfolio), and $308 million for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively.
(2)  
Does not include the effect of realized gains (losses) on derivatives.
(3)  
General and administrative expenses for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, include approximately $28 million, $21 million and $13 million, respectively, of noncash unit-based compensation expenses. Excluding these amounts, general and administrative expenses for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, were $0.59 per Mcfe, $0.83 per Mcfe and $0.88 per Mcfe, respectively. This measure is not in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and thus is a non-GAAP measure, used by management to analyze the Company’s performance.

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Reserve Data
Proved Reserves
The following sets forth estimated proved oil, natural gas and NGL reserves and the standardized measure of discounted future net cash flows at December 31, 2012, based on reserve reports prepared by independent engineers, DeGolyer and MacNaughton: 
Estimated proved developed reserves:
 
Natural gas (Bcf)
1,661

Oil (MMBbls)
131

NGL (MMBbls)
113

Total (Bcfe)
3,127

 
 
Estimated proved undeveloped reserves:
 
Natural gas (Bcf)
910

Oil (MMBbls)
60

NGL (MMBbls)
66

Total (Bcfe)
1,669

 
 
Estimated total proved reserves (Bcfe)
4,796

Proved developed reserves as a percentage of total proved reserves
65
%
Standardized measure of discounted future net cash flows (in millions) (1)
$
6,073

 
 
Representative NYMEX prices:   (2)
 
Natural gas (MMBtu)
$
2.76

Oil (Bbl)
$
94.64

(1)  
This measure is not intended to represent the market value of estimated reserves.
(2)  
In accordance with Securities and Exchange Commission (“SEC”) regulations, reserves were estimated using the average price during the 12-month period, determined as an unweighted average of the first-day-of-the-month price for each month, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. The average price used to estimate reserves is held constant over the life of the reserves.
During the year ended December 31, 2012, the Company’s proved undeveloped reserves (“PUDs”) increased to 1,669 Bcfe from 1,336 Bcfe at December 31, 2011, representing an increase of 333 Bcfe. The increase was primarily due to 415 Bcfe added as a result of the Company’s acquisitions in the Mid-Continent, Hugoton Basin, Williston/Powder River Basin, East Texas and Green River Basin regions and 588 Bcfe added as a result of its drilling activities, partially offset by 443 Bcfe of revisions and 227 Bcfe of PUDs developed during 2012.
During the year ended December 31, 2012, the Company incurred approximately $442 million in capital expenditures to convert 208 Bcfe of reserves classified as PUDs at December 31, 2011. Based on the December 31, 2012 reserve report, the amounts of capital expenditures estimated to be incurred in 2013, 2014 and 2015 to develop the Company’s PUDs are approximately $679 million, $688 million and $622 million, respectively. The amount and timing of these expenditures will depend on a number of factors, including actual drilling results, service costs and product prices. None of the 1,669 Bcfe of PUDs at December 31, 2012, has remained undeveloped for five years or more. All PUD properties are included in the Company’s current five-year development plan.
Reserve engineering is inherently a subjective process of estimating underground accumulations of oil, natural gas and NGL that cannot be measured exactly. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretation and judgment. Accordingly, reserve estimates may vary from the quantities of oil, natural gas and NGL that are ultimately recovered. Future prices received for production may vary, perhaps significantly, from the prices assumed for the purposes of estimating the standardized measure of discounted future net cash flows. The

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standardized measure of discounted future net cash flows should not be construed as the market value of the reserves at the dates shown. The 10% discount factor required to be used under the provisions of applicable accounting standards may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with the Company or the oil and natural gas industry. The standardized measure of discounted future net cash flows is materially affected by assumptions about the timing of future production, which may prove to be inaccurate.
The reserve estimates reported herein were prepared by independent engineers, DeGolyer and MacNaughton. The process performed by the independent engineers to prepare reserve amounts included their estimation of reserve quantities, future producing rates, future net revenue and the present value of such future net revenue, is based in part on data provided by the Company. When preparing the reserve estimates, the independent engineering firm did not independently verify the accuracy and completeness of the information and data furnished by the Company with respect to ownership interests, production, well test data, historical costs of operation and development, product prices, or any agreements relating to current and future operations of the properties and sales of production. However, if in the course of their work, something came to their attention that brought into question the validity or sufficiency of any such information or data, they did not rely on such information or data until they had satisfactorily resolved their questions relating thereto. The estimates of reserves conform to the guidelines of the SEC, including the criteria of “reasonable certainty,” as it pertains to expectations about the recoverability of reserves in future years. The independent engineering firm also prepared estimates with respect to reserve categorization, using the definitions for proved reserves set forth in Regulation S-X Rule 4-10(a) and subsequent SEC staff interpretations and guidance.
The Company’s internal control over the preparation of reserve estimates is a process designed to provide reasonable assurance regarding the reliability of the Company’s reserve estimates in accordance with SEC regulations. The preparation of reserve estimates was overseen by the Company’s Reservoir Engineering Advisor, who has Master of Petroleum Engineering and Master of Business Administration degrees and more than 25 years of oil and natural gas industry experience. The reserve estimates were reviewed and approved by the Company’s senior engineering staff and management, with final approval by its Executive Vice President and Chief Operating Officer. For additional information regarding estimates of reserves, including the standardized measure of discounted future net cash flows, see “Supplemental Oil and Natural Gas Data (Unaudited)” in Item 8. “Financial Statements and Supplementary Data.” The Company has not filed reserve estimates with any federal authority or agency, with the exception of the SEC.
Operational Overview
General
The Company generally seeks to be the operator of its properties so that it can develop drilling programs and optimization projects that not only replace production, but add value through reserve and production growth and future operational synergies. Many of the Company’s wells are completed in multiple producing zones with commingled production and long economic lives.
Principal Customers
For the year ended December 31, 2012, sales of oil, natural gas and NGL to Enbridge Energy Partners, L.P. and DCP Midstream Partners, LP accounted for approximately 24% and 13%, respectively, of the Company’s total production volumes, or 37% in the aggregate. If the Company were to lose any one of its major oil and natural gas purchasers, the loss could temporarily cease or delay production and sale of its oil and natural gas in that particular purchaser’s service area. If the Company were to lose a purchaser, it believes it could identify a substitute purchaser. However, if one or more of these large purchasers ceased purchasing oil and natural gas altogether, it could have a detrimental effect on the oil and natural gas market in general and on the volume of oil and natural gas that the Company is able to sell.
Competition
The oil and natural gas industry is highly competitive. The Company encounters strong competition from other independent operators and master limited partnerships in acquiring properties, contracting for drilling and other related services and securing trained personnel. The Company is also affected by competition for drilling rigs and the availability of related equipment. In the past, the oil and natural gas industry has experienced shortages of drilling rigs, equipment, pipe and

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personnel, which has delayed development drilling and has caused significant price increases. The Company is unable to predict when, or if, such shortages may occur or how they would affect its drilling program.
Operating Hazards and Insurance
The oil and natural gas industry involves a variety of operating hazards and risks that could result in substantial losses from, among other things, injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. The Company may be liable for environmental damages caused by previous owners of property it purchases and leases. As a result, the Company may incur substantial liabilities to third parties or governmental entities, the payment of which could reduce or eliminate funds available for acquisitions, development or distributions, or result in the loss of properties. In addition, the Company participates in wells on a nonoperated basis and therefore may be limited in its ability to control the risks associated with the operation of such wells.
In accordance with customary industry practices, the Company maintains insurance against some, but not all, potential losses. The Company cannot provide assurance that any insurance it obtains will be adequate to cover any losses or liabilities. The Company has elected to self-insure for certain items for which it has determined that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event not fully covered by insurance could have a material adverse effect on the Company’s financial position and results of operations. For more information about potential risks that could affect the Company, see Item 1A. “Risk Factors.”
Title to Properties
Prior to the commencement of drilling operations, the Company conducts a title examination and performs curative work with respect to significant defects. To the extent title opinions or other investigations reflect title defects on those properties, the Company is typically responsible for curing any title defects at its expense prior to commencing drilling operations. Prior to completing an acquisition of producing leases, the Company performs title reviews on the most significant leases and, depending on the materiality of properties, the Company may obtain a title opinion or review previously obtained title opinions. As a result, the Company has obtained title opinions on a significant portion of its properties and believes that it has satisfactory title to its producing properties in accordance with standards generally accepted in the industry. Oil and natural gas properties are subject to customary royalty and other interests, liens for current taxes and other burdens which do not materially interfere with the use of or affect the carrying value of the properties.
Seasonal Nature of Business
Seasonal weather conditions and lease stipulations can limit the drilling and producing activities and other operations in regions of the U.S. in which the Company operates. These seasonal conditions can pose challenges for meeting the well drilling objectives and increase competition for equipment, supplies and personnel, which could lead to shortages and increase costs or delay operations. For example, Company operations may be impacted by ice and snow in the winter and by electrical storms and high temperatures in the spring and summer, as well as by wild fires in the fall.
The demand for natural gas typically decreases during the summer months and increases during the winter months. Seasonal anomalies sometimes lessen this fluctuation. In addition, certain natural gas users utilize natural gas storage facilities and purchase some of their anticipated winter requirements during the summer, which can also lessen seasonal demand fluctuations.
Environmental Matters and Regulation
The Company’s operations are subject to stringent federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. The Company’s operations are subject to the same environmental laws and regulations as other companies in the oil and natural gas industry. These laws and regulations may:
•
require the acquisition of various permits before drilling commences;
•
require the installation of expensive pollution control equipment;

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•
restrict the types, quantities and concentration of various substances that can be released into the environment in connection with drilling and production activities;
•
limit or prohibit drilling activities on lands lying within wilderness, wetlands, areas inhabited by endangered species and other protected areas;
•
require remedial measures to prevent pollution from former operations, such as pit closure and plugging of abandoned wells;
•
impose substantial liabilities for pollution resulting from operations; and
•
with respect to operations affecting federal lands or leases, require preparation of a Resource Management Plan, an Environmental Assessment, and/or an Environmental Impact Statement.
These laws, rules and regulations may also restrict the production rate of oil, natural gas and NGL below the rate that would otherwise be possible. The regulatory burden on the industry increases the cost of doing business and consequently affects profitability. Additionally, Congress and federal and state agencies frequently revise environmental laws and regulations, and any changes that result in more stringent and costly waste handling, disposal and cleanup requirements for the oil and natural gas industry could have a significant impact on operating costs.
The environmental laws and regulations applicable to the Company and its operations include, among others, the following U.S. federal laws and regulations:
•
Clean Air Act, and its amendments, which governs air emissions;
•
Clean Water Act, which governs discharges to and excavations within the waters of the U.S.;
•
Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), which imposes liability where hazardous releases have occurred or are threatened to occur (commonly known as “Superfund”);
•
Energy Independence and Security Act of 2007, which prescribes new fuel economy standards and other energy saving measures;
•
National Environmental Policy Act, which governs oil and natural gas production activities on federal lands;
•
Resource Conservation and Recovery Act (“RCRA”), which governs the management of solid waste;
•
Safe Drinking Water Act, which governs the underground injection and disposal of wastewater; and
•
U.S. Department of Interior regulations, which impose liability for pollution cleanup and damages.
Various states regulate the drilling for, and the production, gathering and sale of, oil, natural gas and NGL, including imposing production taxes and requirements for obtaining drilling permits. States also regulate the method of developing new fields, the spacing and operation of wells and the prevention of waste of resources. States may regulate rates of production and may establish maximum daily production allowables from natural gas wells based on market demand or resource conservation, or both. States do not regulate wellhead prices or engage in other similar direct economic regulations, but there can be no assurance that they will not do so in the future. The effect of these regulations may be to limit the amounts of oil, natural gas and NGL that may be produced from the Company’s wells and to limit the number of wells or locations it can drill. The oil and natural gas industry is also subject to compliance with various other federal, state and local regulations and laws. Some of those laws relate to occupational safety, resource conservation and equal opportunity employment.
The Company believes that it substantially complies with all current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material adverse impact on its financial condition or results of operations. Future regulatory issues that could impact the Company include new rules or legislation regulating greenhouse gas emissions, hydraulic fracturing, endangered species and air emissions.
Climate Change
In response to findings that emissions of carbon dioxide and certain other gases may be contributing to warming of the Earth’s atmosphere, the Environmental Protection Agency (“EPA”) has adopted regulations under existing provisions of the federal Clean Air Act that would require a reduction in emissions of greenhouse gases (“GHG”) from motor vehicles and also may trigger construction and operating permit review for GHG emissions from certain stationary sources. The EPA has asserted that the final motor vehicle GHG emission standards triggered construction and operating permit requirements for stationary sources. Thus, on June 3, 2010, the EPA issued a final rule to address permitting of GHG emissions from stationary sources under the Clean Air Act’s Prevention of Significant Deterioration (“PSD”) and Title V programs. This final rule “tailors” the PSD and Title V programs to apply to certain stationary sources of GHG emissions in a multi-step

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process, with the largest sources first subject to permitting. In addition, on November 8, 2010, the EPA published a final rule expanding its existing GHG emissions reporting rule published in October 2009 to include onshore and offshore oil and natural gas production and onshore oil and natural gas processing, transmission, storage and distribution activities. Facilities containing petroleum and natural gas systems that emit 25,000 metric tons or more of CO2 equivalent per year are now required to report annual GHG emissions to the EPA, with the first report for emissions occurring in 2011 due on September 28, 2012. In addition, both houses of Congress have considered legislation to reduce emissions of GHGs, and almost one-half of the states have already taken legal measures to reduce emissions of GHGs, primarily through the planned development of GHG emission inventories and/or regional GHG cap and trade programs. Any laws or regulations that may be adopted to restrict or reduce emissions of U.S. greenhouse gases could require the Company to incur increased operating costs such as costs to purchase and operate emissions control systems, to acquire emissions allowances, or comply with new regulatory or reporting requirements, and could have an adverse effect on demand for oil and natural gas.
Hydraulic Fracturing
Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons from tight formations. The process involves the injection of water, sand and chemicals under pressure into formations to fracture the surrounding rock and stimulate production. Hydraulic fracturing operations have historically been overseen by state regulators as part of their oil and natural gas regulatory programs. However, the EPA has asserted federal regulatory authority over hydraulic fracturing involving fluids that contain diesel fuel under the Safe Drinking Water Act’s Underground Injection Control Program and has released draft permitting guidance for hydraulic fracturing operations that use diesel fuel in fracturing fluids in those states where the EPA is the permitting authority. Moreover, on November 23, 2011, the EPA announced that it was granting, in part, a petition to initiate rulemaking under the Toxic Substances Control Act, relating to chemical substances and mixtures used in oil and natural gas exploration or production. Further, on May 11, 2012, the Department of the Interior’s Bureau of Land Management (“BLM”) issued a proposed rule that, if adopted, would require public disclosure to the BLM of chemicals used in hydraulic fracturing operations after fracturing operations have been completed and would strengthen standards for well-bore integrity and management of fluids that return to the surface during and after fracturing operations on federal and Indian lands. In addition, legislation has been introduced before Congress that would provide for federal regulation of hydraulic fracturing and would require disclosure of the chemicals used in the fracturing process. If adopted, these bills could result in additional permitting requirements for hydraulic fracturing operations as well as various restrictions on those operations. These permitting requirements and restrictions could result in delays in operations at well sites and also increased costs to make wells productive.
We use a significant amount of water in our hydraulic fracturing operations. Our inability to locate sufficient amounts of water, or dispose of or recycle water used in our drilling and production operations, could adversely impact our operations. Moreover, new environmental initiatives and regulations could include restrictions on our ability to conduct certain operations such as hydraulic fracturing or disposal of waste, including, but not limited to, produced water, drilling fluids and other wastes associated with the development or production of natural gas. Compliance with environmental regulations and permit requirements governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells may increase our operating costs and cause delays, interruptions or termination of our operations, the extent of which cannot be predicted, all of which could have an adverse affect on our operations and financial condition.
A number of federal agencies are analyzing or have been requested to review a variety of environmental issues associated with hydraulic fracturing. The EPA is conducting a study of the potential environmental effects of hydraulic fracturing on drinking water and groundwater. On December 12, 2012, the EPA released a progress report outlining work currently underway and is expected to release results of the study in 2014. These on-going or proposed studies, depending on their course and any meaningful results obtained, could spur initiatives to further regulate hydraulic fracturing under the Safe Drinking Water Act, the Toxic Substances Control Act, and/or other regulatory mechanisms. President Obama created the Interagency Working Group on Unconventional Natural Gas and Oil by Executive Order on April 13, 2012, which is charged with coordinating and aligning federal agency research and scientific studies on unconventional natural gas and oil resources. Moreover, some states have adopted, and other states are considering adopting, regulations that could restrict hydraulic fracturing in certain circumstances. For example, both Texas and Louisiana have adopted disclosure regulations requiring varying degrees of disclosure of the constituents in hydraulic fracturing fluids. If new laws or regulations that significantly restrict hydraulic fracturing are adopted, such laws could make it more difficult or costly for us to perform fracturing to stimulate production from tight formations. In addition, any such added regulation could lead to operational delays, increased operating costs and additional regulatory burdens, and reduced production of oil and natural gas, which could adversely affect the Company’s revenues and results of operations.

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Endangered Species Act
The federal Endangered Species Act (“ESA”) restricts activities that may affect endangered and threatened species or their habitats. Some of the Company’s operations may be located in areas that are designated as habitat for endangered or threatened species. The Company believes that it is currently in substantial compliance with the ESA. However, the designation of previously unprotected species as being endangered or threatened could cause the Company to incur additional costs or become subject to operating restrictions in areas where the species are known to exist.
Air Emissions
On August 15, 2012, the EPA issued final rules that subject oil and natural gas production, processing, transmission and storage operations to regulation under the New Source Performance Standards (“NSPS”) and National Emission Standards for Hazardous Air Pollutants (“NESHAP”) programs. The EPA rules include NSPS standards for completions of hydraulically fractured natural gas wells. These standards require that prior to January 1, 2015, owners/operators reduce volatile organic compounds emissions from natural gas not sent to the gathering line during well completion either by flaring or by capturing the gas using green completions with a completion combustion device. Beginning January 1, 2015, operators must capture the gas and make it available for use or sale, which can be done through the use of green completions. The standards are applicable to newly fractured wells as well as existing wells that are refractured. Further, the finalized regulations also establish specific new requirements, effective in 2012, for emissions from compressors, controllers, dehydrators, storage tanks, gas processing plants and certain other equipment. These rules may require changes to our operations, including the installation of new equipment to control emissions.
The Company cannot predict how future environmental laws and regulations may impact its properties or operations. For the year ended December 31, 2012, the Company did not incur any material capital expenditures for installation of remediation or pollution control equipment at any of the Company’s facilities. The Company is not aware of any environmental issues or claims that will require material capital expenditures during 2013 or that will otherwise have a material impact on its financial position or results of operations.
Employees
As of December 31, 2012, the Company employed approximately 1,136 personnel. None of the employees are represented by labor unions or covered by any collective bargaining agreement. The Company believes that its relationship with its employees is satisfactory.
Principal Executive Offices
The Company is a Delaware limited liability company with headquarters in Houston, Texas. The principal executive offices are located at 600 Travis, Suite 5100, Houston, Texas 77002. The main telephone number is (281) 840-4000.
Company Website
The Company’s internet website is www.linnenergy.com . The Company makes available free of charge on or through its website Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Information on the Company’s website should not be considered a part of, or incorporated by reference into, this Annual Report on Form 10-K.
The SEC maintains an internet website that contains these reports at www.sec.gov . Any materials that the Company files with the SEC may be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information concerning the operation of the Public Reference Room may be obtained by calling the SEC at (800) 732-0330.

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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond the Company’s control. These statements may include discussions about the Company’s:
•
business strategy;
•
acquisition strategy;
•
financial strategy;
•
ability to maintain or grow distributions;
•
drilling locations;
•
oil, natural gas and NGL reserves;
•
realized oil, natural gas and NGL prices;
•
production volumes;
•
lease operating expenses, general and administrative expenses and development costs;
•
future operating results; and
•
plans, objectives, expectations and intentions.
All of these types of statements, other than statements of historical fact included in this Annual Report on Form 10-K, are forward-looking statements. These forward-looking statements may be found in Item 1. “Business;” Item 1A. “Risk Factors;” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other items within this Annual Report on Form 10-K. 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 Annual Report on Form 10-K are largely based on Company expectations, which reflect estimates and assumptions made by Company management. These estimates and assumptions reflect management’s best judgment based on currently known market conditions and other factors. Although the Company believes such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties beyond its control. In addition, management’s assumptions may prove to be inaccurate. The Company cautions that the forward-looking statements contained in this Annual Report on Form 10-K are not guarantees of future performance, and it cannot assure any reader that such statements will be realized or the forward-looking statements or events will occur. Actual results may differ materially from those anticipated or implied in forward-looking statements due to factors listed in the “Risk Factors” section and elsewhere in this Annual Report on Form 10-K. 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.
Item 1A.    Risk Factors
Our business has many risks. Factors that could materially adversely affect our business, financial position, operating results or liquidity and the trading price of our units are described below. This information should be considered carefully, together with other information in this report and other reports and materials we file with the SEC.
We may not have sufficient cash flow from operations to pay the quarterly distribution at the current distribution level, or at all, and future distributions to our unitholders may fluctuate from quarter to quarter.
We may not have sufficient cash flow from operations each quarter to pay the quarterly distribution at the current distribution level or at all. Under the terms of our limited liability company agreement, the amount of cash otherwise available for distribution will be reduced by our operating expenses and any cash reserve amounts that our Board of Directors establishes to provide for future operations, future capital expenditures, future debt service requirements and future cash distributions to our unitholders. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:
•
produced volumes of oil, natural gas and NGL;
•
prices at which oil, natural gas and NGL production is sold;
•
level of our operating costs;
•
payment of interest, which depends on the amount of our indebtedness and the interest payable thereon; and
•
level of our capital expenditures.

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In addition, the actual amount of cash we will have available for distribution will depend on other factors, some of which are beyond our control, including:
•
availability of borrowings on acceptable terms under our Credit Facility to pay distributions;
•
the costs of acquisitions, if any;
•
fluctuations in our working capital needs;
•
timing and collectibility of receivables;
•
restrictions on distributions contained in our Credit Facility and the Indentures governing our November 2019 Senior Notes, May 2019 Senior Notes, 2010 Issued Senior Notes, and our Original Senior Notes, as defined in Note 6;
•
prevailing economic conditions;
•
access to credit or capital markets; and
•
the amount of cash reserves established by our Board of Directors for the proper conduct of our business.
As a result of these factors, the amount of cash we distribute to our unitholders may fluctuate significantly from quarter to quarter and may be significantly less than the current distribution level, or the distribution may be suspended.
We actively seek to acquire oil and natural gas properties. Acquisitions involve potential risks that could adversely impact our future growth and our ability to increase or pay distributions at the current level, or at all.
Any acquisition involves potential risks, including, among other things:
•
the risk that reserves expected to support the acquired assets may not be of the anticipated magnitude or may not be developed as anticipated;
•
the risk of title defects discovered after closing;
•
inaccurate assumptions about revenues and costs, including synergies;
•
significant increases in our indebtedness and working capital requirements;
•
an inability to transition and integrate successfully or timely the businesses we acquire;
•
the cost of transition and integration of data systems and processes;
•
the potential environmental problems and costs;
•
the assumption of unknown liabilities;
•
limitations on rights to indemnity from the seller;
•
the diversion of management’s attention from other business concerns;
•
increased demands on existing personnel and on our corporate structure;
•
disputes arising out of acquisitions;
•
customer or key employee losses of the acquired businesses; and
•
the failure to realize expected growth or profitability.
The scope and cost of these risks may ultimately be materially greater than estimated at the time of the acquisition. Further, our future acquisition costs may be higher than those we have achieved historically. Any of these factors could adversely impact our future growth and our ability to increase or pay distributions.
If we do not make future acquisitions on economically acceptable terms, then our growth and ability to increase distributions will be limited.
Our ability to grow and to increase distributions to our unitholders is partially dependent on our ability to make acquisitions that result in an increase in available cash flow per unit. We may be unable to make such acquisitions because we are:
•
unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them;
•
unable to obtain financing for these acquisitions on economically acceptable terms; or
•
outbid by competitors.
In any such case, our future growth and ability to increase distributions will be limited. Furthermore, even if we do make acquisitions that we believe will increase available cash flow per unit, these acquisitions may nevertheless result in a decrease in available cash flow per unit.
We have significant indebtedness under our November 2019 Senior Notes, May 2019 Senior Notes, 2010 Issued Senior Notes, and Original Senior Notes (collectively, “Senior Notes”) and, from time to time, our Credit Facility. For a discussion of our Senior Notes, see Note 6. Our Credit Facility and the Indentures governing our Senior Notes have

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substantial restrictions and financial covenants and we may have difficulty obtaining additional credit, which could adversely affect our operations, our ability to make acquisitions and our ability to pay distributions to our unitholders.
As of January 31, 2013, we had an aggregate of approximately $6.1 billion outstanding under Senior Notes and our Credit Facility (with additional borrowing capacity of approximately $1.8 billion under our Credit Facility). As a result of our indebtedness, we will use a portion of our cash flow to pay interest and principal when due, which will reduce the cash available to finance our operations and other business activities and could limit our flexibility in planning for or reacting to changes in our business and the industry in which we operate.
The Credit Facility restricts our ability to obtain additional financing, make investments, lease equipment, sell assets, enter into commodity and interest rate derivative contracts and engage in business combinations. We are also required to comply with certain financial covenants and ratios under our Credit Facility and the Indentures governing our Senior Notes. Our ability to comply with these restrictions and covenants in the future is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. Our failure to comply with any of the restrictions and covenants could result in an event of default, which, if it continues beyond any applicable cure periods, could cause all of our existing indebtedness to be immediately due and payable.
We depend, in part, on our Credit Facility for future capital needs. We have drawn on our Credit Facility to fund or partially fund quarterly cash distribution payments, since we use operating cash flow primarily for drilling and development of oil and natural gas properties and acquisitions and borrow as cash is needed. Absent such borrowing, we would have at times experienced a shortfall in cash available to pay our declared quarterly cash distribution amount. If there is a default by us under our Credit Facility that continues beyond any applicable cure period, we would be unable to make borrowings to fund distributions. In addition, we may finance acquisitions through borrowings under our Credit Facility or the incurrence of additional debt. To the extent that we are unable to incur additional debt under our Credit Facility or otherwise because we are not in compliance with the financial covenants in the Credit Facility, we may not be able to complete acquisitions, which could adversely affect our ability to maintain or increase distributions. Furthermore, to the extent we are unable to refinance our Credit Facility on terms that are as favorable as those in our existing Credit Facility, or at all, our ability to fund our operations and our ability to pay distributions could be affected.
The borrowing base under our Credit Facility is determined semi-annually at the discretion of the lenders and is based in part on oil, natural gas and NGL prices. Significant declines in oil, natural gas or NGL prices may result in a decrease in our borrowing base. The lenders can unilaterally adjust the borrowing base and therefore the borrowings permitted to be outstanding under the Credit Facility. Any increase in the borrowing base requires the consent of all the lenders. Outstanding borrowings in excess of the borrowing base must be repaid immediately, or we must pledge other properties as additional collateral. We do not currently have substantial unpledged properties, and we may not have the financial resources in the future to make any mandatory principal prepayments required under the Credit Facility. Significant declines in our production or significant declines in realized oil, natural gas or NGL prices for prolonged periods and resulting decreases in our borrowing base may force us to reduce or suspend distributions to our unitholders.
Our ability to access the capital and credit markets to raise capital and borrow on favorable terms will be affected by disruptions in the capital and credit markets, which could adversely affect our operations, our ability to make acquisitions and our ability to pay distributions to our unitholders.
Disruptions in the capital and credit markets could limit our ability to access these markets or significantly increase our cost to borrow. Some lenders may increase interest rates, enact tighter lending standards, refuse to refinance existing debt at maturity on favorable terms or at all and may reduce or cease to provide funding to borrowers. If we are unable to access the capital and credit markets on favorable terms, our ability to make acquisitions and pay distributions could be affected.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our Credit Facility bear interest at variable rates and expose us to interest rate risk. If interest rates increase and we are unable to effectively hedge our interest rate risk, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash available for servicing our indebtedness would decrease.

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Increases in interest rates could adversely affect the demand for our units.
An increase in interest rates may cause a corresponding decline in demand for equity investments, in particular for yield-based equity investments such as our units. Any such reduction in demand for our units resulting from other more attractive investment opportunities may cause the trading price of our units to decline.
Our commodity derivative activities could result in financial losses or could reduce our income, which may adversely affect our ability to pay distributions to our unitholders.
To achieve more predictable cash flow and to reduce our exposure to adverse fluctuations in the prices of oil and natural gas, we enter into commodity derivative contracts for a significant portion of our production. Commodity derivative arrangements expose us to the risk of financial loss in some circumstances, including situations when production is less than expected. If we experience a sustained material interruption in our production or if we are unable to perform our drilling activity as planned, we might be forced to satisfy all or a portion of our derivative obligations without the benefit of the cash flow from our sale of the underlying physical commodity, resulting in a substantial reduction of our liquidity, which may adversely affect our ability to pay distributions to our unitholders.
Our limited ability to hedge our NGL production could adversely impact our cash flow and results of operations.
A liquid, readily available and commercially viable market for hedging NGLs has not developed in the same way that exists for crude oil and natural gas. The current direct NGL hedging market is constrained in terms of price, volume, tenor and number of counterparties, which limits our ability to hedge our NGL production effectively or at all. As a result, our cash flow and results of operations could be adversely impacted by fluctuations in the market prices for NGL products.
Counterparty failure may adversely affect our derivative positions.
We cannot be assured that our counterparties will be able to perform under our derivative contracts. If a counterparty fails to perform and the derivative arrangement is terminated, our cash flow and ability to pay distributions could be impacted.
Commodity prices are volatile, and a significant decline in commodity prices for a prolonged period would reduce our revenues, cash flow from operations and profitability and we may have to lower our distribution or may not be able to pay distributions at all.
Our revenue, profitability and cash flow depend upon the prices of and demand for oil, natural gas and NGL. The oil, natural gas and NGL market is very volatile and a drop in prices can significantly affect our financial results and impede our growth. Changes in oil, natural gas and NGL prices have a significant impact on the value of our reserves and on our cash flow. Prices for these commodities may fluctuate widely in response to relatively minor changes in the supply of and demand for them, market uncertainty and a variety of additional factors that are beyond our control, such as:
•
the domestic and foreign supply of and demand for oil, natural gas and NGL;
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the price and level of foreign imports;
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the level of consumer product demand;
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weather conditions;
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overall domestic and global economic conditions;
•
political and economic conditions in oil and natural gas producing countries;
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the ability of members of the Organization of Petroleum Exporting Countries to agree to and maintain price and production controls;
•
the impact of the U.S. dollar exchange rates on oil, natural gas and NGL prices;
•
technological advances affecting energy consumption;
•
domestic and foreign governmental regulations and taxation;
•
the impact of energy conservation efforts;
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the proximity and capacity of pipelines and other transportation facilities; and
•
the price and availability of alternative fuels.
In the past, the prices of oil, natural gas and NGL have been extremely volatile, and we expect this volatility to continue. If commodity prices decline significantly for a prolonged period, our cash flow from operations will decline, and we may have to lower our distribution or may not be able to pay distributions at all.

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Future price declines or downward reserve revisions may result in a write down of our asset carrying values , which could adversely affect our results of operations and limit our ability to borrow funds.
Declines in oil, natural gas and NGL prices may result in our having to make substantial downward adjustments to our estimated proved reserves. If this occurs, or if our estimates of development costs increase, production data factors change or drilling results deteriorate, accounting rules may require us to write down, as a noncash charge to earnings, the carrying value of our properties for impairments. We capitalize costs to acquire, find and develop our oil and natural gas properties under the successful efforts accounting method. We are required to perform impairment tests on our assets periodically and whenever events or changes in circumstances warrant a review of our assets. To the extent such tests indicate a reduction of the estimated useful life or estimated future cash flows of our assets, the carrying value may not be recoverable and therefore would require a write down. We have incurred impairment charges in the past and may do so in the future. Any impairment could be substantial and have a material adverse effect on our results of operations in the period incurred and on our ability to borrow funds under our Credit Facility, which in turn may adversely affect our ability to make cash distributions to our unitholders.
Unless we replace our reserves, our reserves and production will decline, which would adversely affect our cash flow from operations and our ability to make distributions to our unitholders.
Producing oil, natural gas and NGL reservoirs are characterized by declining production rates that vary depending upon reservoir characteristics and other factors. The overall rate of decline for our production will change if production from our existing wells declines in a different manner than we have estimated and can change when we drill additional wells, make acquisitions and under other circumstances. Thus, our future oil, natural gas and NGL reserves and production and, therefore, our cash flow and income, are highly dependent on our success in efficiently developing our current reserves and economically finding or acquiring additional recoverable reserves. We may not be able to develop, find or acquire additional reserves to replace our current and future production at acceptable costs, which would adversely affect our cash flow from operations and our ability to make distributions to our unitholders.
Our estimated reserves are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves.
No one can measure underground accumulations of oil, natural gas and NGL in an exact manner. Reserve engineering requires subjective estimates of underground accumulations of oil, natural gas and NGL and assumptions concerning future oil, natural gas and NGL prices, production levels and operating and development costs. As a result, estimated quantities of proved reserves and projections of future production rates and the timing of development expenditures may prove to be inaccurate. Independent petroleum engineering firms prepare estimates of our proved reserves. Some of our reserve estimates are made without the benefit of a lengthy production history, which are less reliable than estimates based on a lengthy production history. Also, we make certain assumptions regarding future oil, natural gas and NGL prices, production levels and operating and development costs that may prove incorrect. Any significant variance from these assumptions by actual amounts could greatly affect our estimates of reserves, the economically recoverable quantities of oil, natural gas and NGL attributable to any particular group of properties, the classifications of reserves based on risk of recovery and estimates of the future net cash flows. Numerous changes over time to the assumptions on which our reserve estimates are based, as described above, often result in the actual quantities of oil, natural gas and NGL we ultimately recover being different from our reserve estimates.
The present value of future net cash flows from our proved reserves is not necessarily the same as the current market value of our estimated oil, natural gas and NGL reserves. We base the estimated discounted future net cash flows from our proved reserves on an unweighted average of the first-day-of-the month price for each month during the 12-month calendar year and year-end costs. However, actual future net cash flows from our oil and natural gas properties also will be affected by factors such as:
•
actual prices we receive for oil, natural gas and NGL;
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the amount and timing of actual production;
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the timing and success of development activities;
•
supply of and demand for oil, natural gas and NGL; and
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changes in governmental regulations or taxation.

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In addition, the 10% discount factor required to be used under the provisions of applicable accounting standards when calculating discounted future net cash flows, may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general.
Our development operations require substantial capital expenditures, which will reduce our cash available for distribution. We may be unable to obtain needed capital or financing on satisfactory terms, which could lead to a decline in our reserves.
The oil and natural gas industry is capital intensive. We make and expect to continue to make substantial capital expenditures in our business for the development and production of oil, natural gas and NGL reserves. These expenditures will reduce our cash available for distribution. We intend to finance our future capital expenditures with cash flow from operations and to the extent necessary, with equity and debt offerings or bank borrowings. Our cash flow from operations and access to capital are subject to a number of variables, including:
•
our proved reserves;
•
the level of oil, natural gas and NGL we are able to produce from existing wells;
•
the prices at which we are able to sell our oil, natural gas and NGL; and
•
our ability to acquire, locate and produce new reserves.
If our revenues or the borrowing base under our Credit Facility decrease as a result of lower oil, natural gas and NGL prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels. Our Credit Facility restricts our ability to obtain new financing. If additional capital is needed, we may not be able to obtain debt or equity financing on terms favorable to us, or at all. If cash flow from operations or cash available under our Credit Facility is not sufficient to meet our capital requirements, the failure to obtain additional financing could result in a curtailment of our development operations, which in turn could lead to a possible decline in our reserves.
We may decide not to drill some of the prospects we have identified, and locations that we decide to drill may not yield oil, natural gas and NGL in commercially viable quantities.
Our prospective drilling locations are in various stages of evaluation, ranging from a prospect that is ready to drill to a prospect that will require additional geological and engineering analysis. Based on a variety of factors, including future oil, natural gas and NGL prices, the generation of additional seismic or geological information, the availability of drilling rigs and other factors, we may decide not to drill one or more of these prospects. As a result, we may not be able to increase or maintain our reserves or production, which in turn could have an adverse effect on our business, financial position, results of operations and our ability to pay distributions. In addition, the SEC’s reserve reporting rules include a general requirement that, subject to limited exceptions, proved undeveloped reserves may only be booked if they relate to wells scheduled to be drilled within five years of the date of booking. At December 31, 2012, we had 2,504 proved undeveloped drilling locations. To the extent that we do not drill these locations within five years of initial booking, they may not continue to qualify for classification as proved reserves, and we may be required to reclassify such reserves as unproved reserves. The reclassification of such reserves could also have a negative effect on the borrowing base under our Credit Facility.
The cost of drilling, completing and operating a well is often uncertain, and cost factors can adversely affect the economics of a well. Our efforts will be uneconomic if we drill dry holes or wells that are productive but do not produce enough oil, natural gas and NGL to be commercially viable after drilling, operating and other costs. If we drill future wells that we identify as dry holes, our drilling success rate would decline, which could have an adverse effect on our business, financial position or results of operations.
Our business depends on gathering and transportation facilities. Any limitation in the availability of those facilities would interfere with our ability to market the oil, natural gas and NGL we produce, and could reduce our cash available for distribution and adversely impact expected increases in oil, natural gas and NGL production from our drilling program.
The marketability of our oil, natural gas and NGL production depends in part on the availability, proximity and capacity of gathering and pipeline systems. The amount of oil, natural gas and NGL that can be produced and sold is subject to limitation in certain circumstances, such as pipeline interruptions due to scheduled and unscheduled maintenance, excessive pressure, physical damage to the gathering or transportation system, or lack of contracted capacity on such systems. The curtailments arising from these and similar circumstances may last from a few days to several months. In many cases, we are

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provided only with limited, if any, notice as to when these circumstances will arise and their duration. In addition, some of our wells are drilled in locations that are not serviced by gathering and transportation pipelines, or the gathering and transportation pipelines in the area may not have sufficient capacity to transport additional production. As a result, we may not be able to sell the oil, natural gas and NGL production from these wells until the necessary gathering and transportation systems are constructed. Any significant curtailment in gathering system or pipeline capacity, or significant delay in the construction of necessary gathering and transportation facilities, would interfere with our ability to market the oil, natural gas and NGL we produce, and could reduce our cash available for distribution and adversely impact expected increases in oil, natural gas and NGL production from our drilling program.
We depend on certain key customers for sales of our oil, natural gas and NGL. To the extent these and other customers reduce the volumes they purchase from us or delay payment, our revenues and cash available for distribution could decline. Further, a general increase in nonpayment could have an adverse impact on our financial position and results of operations.
For the year ended December 31, 2012, Enbridge Energy Partners, L.P. and DCP Midstream Partners, LP accounted for approximately 24% and 13%, respectively, of our total production volumes, or 37% in the aggregate. For the year ended December 31, 2011, Enbridge Energy Partners, L.P. and DCP Midstream Partners, LP accounted for approximately 21% and 19%, respectively, of our total production volumes, or 40% in the aggregate. To the extent these and other customers reduce the volumes of oil, natural gas or NGL that they purchase from us, our revenues and cash available for distribution could decline.
Many of our leases are in areas that have been partially depleted or drained by offset wells.
Our key project areas are located in some of the most active drilling areas of the producing basins in the U.S. As a result, many of our leases are in areas that have already been partially depleted or drained by earlier offset drilling. This may inhibit our ability to find economically recoverable quantities of reserves in these areas.
Our identified drilling location inventories are scheduled out over several years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling, resulting in temporarily lower cash from operations, which may impact our ability to pay distributions.
Our management has specifically identified and scheduled drilling locations as an estimation of our future multi-year drilling activities on our existing acreage. As of December 31, 2012, we had identified 10,981 drilling locations, of which 2,504 were proved undeveloped locations and 8,477 were other locations. These identified drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these locations depends on a number of factors, including the availability of capital, seasonal conditions, regulatory approvals, oil, natural gas and NGL prices, costs and drilling results. In addition, DeGolyer and MacNaughton has not estimated proved reserves for the 8,477 other drilling locations we have identified and scheduled for drilling, and therefore there may be greater uncertainty with respect to the success of drilling wells at these drilling locations. Our final determination on whether to drill any of these drilling locations will be dependent upon the factors described above as well as, to some degree, the results of our drilling activities with respect to our proved drilling locations. Because of these uncertainties, we do not know if the numerous drilling locations we have identified will be drilled within our expected timeframe or will ever be drilled or if we will be able to produce oil, natural gas and NGL from these or any other potential drilling locations. As such, our actual drilling activities may materially differ from those presently identified, which could adversely affect our business.
Drilling for and producing oil, natural gas and NGL are high risk activities with many uncertainties that could adversely affect our financial position or results of operations and, as a result, our ability to pay distributions to our unitholders.
Our drilling activities are subject to many risks, including the risk that we will not discover commercially productive reservoirs. Drilling for oil, natural gas and NGL can be uneconomic, not only from dry holes, but also from productive wells that do not produce sufficient revenues to be commercially viable. In addition, our drilling and producing operations may be curtailed, delayed or canceled as a result of other factors, including:
•
the high cost, shortages or delivery delays of equipment and services;
•
unexpected operational events;
•
adverse weather conditions;
•
facility or equipment malfunctions;

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•
title problems;
•
pipeline ruptures or spills;
•
compliance with environmental and other governmental requirements;
•
unusual or unexpected geological formations;
•
loss of drilling fluid circulation;
•
formations with abnormal pressures;
•
fires;
•
blowouts, craterings and explosions; and
•
uncontrollable flows of oil, natural gas and NGL or well fluids.
Any of these events can cause increased costs or restrict our ability to drill the wells and conduct the operations which we currently have planned. Any delay in the drilling program or significant increase in costs could impact our ability to generate sufficient cash flow to pay quarterly distributions to our unitholders at the current distribution level or at all. Increased costs could include losses from personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution, environmental contamination, loss of wells and regulatory penalties. We ordinarily maintain insurance against certain losses and liabilities arising from our operations. However, it is impossible to insure against all operational risks in the course of our business. Additionally, we may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the perceived risks presented. Losses could therefore occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could have a material adverse impact on our business activities, financial position and results of operations.
We have limited control over the activities on properties we do not operate.
Other companies operate some of the properties in which we have an interest. Nonoperated wells represented approximately 30% of our total owned gross wells, or approximately 9% of our owned net wells, as of December 31, 2012. We have limited ability to influence or control the operation or future development of these nonoperated properties, including timing of drilling and other scheduled operations activities, compliance with environmental, safety and other regulations, or the amount of capital expenditures that we are required to fund with respect to them. The failure of an operator of our wells to adequately perform operations, an operator’s breach of the applicable agreements or an operator’s failure to act in ways that are in our best interest could reduce our production and revenues. Our dependence on the operator and other working interest owners for these projects and our limited ability to influence or control the operation and future development of these properties could materially adversely affect the realization of our targeted returns on capital in drilling or acquisition activities and lead to unexpected future costs.
Because we handle oil, natural gas and NGL and other hydrocarbons, we may incur significant costs and liabilities in the future resulting from a failure to comply with new or existing environmental regulations or an accidental release of hazardous substances into the environment.
The operations of our wells, gathering systems, turbines, pipelines and other facilities are subject to stringent and complex federal, state and local environmental laws and regulations. Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial requirements, and the issuance of orders enjoining future operations. There is an inherent risk that we may incur environmental costs and liabilities due to the nature of our business and the substances we handle. Certain environmental statutes, including the RCRA, CERCLA and analogous state laws and regulations, impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances have been disposed of or otherwise released. In addition, an accidental release from one of our wells or gathering pipelines could subject us to substantial liabilities arising from environmental cleanup and restoration costs, claims made by neighboring landowners and other third parties for personal injury and property damage and fines or penalties for related violations of environmental laws or regulations.
Moreover, the possibility exists that stricter laws, regulations or enforcement policies could significantly increase our compliance costs and the cost of any remediation that may become necessary, and these costs may not be recoverable from insurance. For a more detailed discussion of environmental and regulatory matters impacting our business, see Item 1. “Business - Environmental Matters and Regulation.”

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We are subject to complex federal, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of doing business.
Our operations are regulated extensively at the federal, state and local levels. Environmental and other governmental laws and regulations have resulted in delays and increased the costs to plan, design, drill, install, operate and abandon oil and natural gas wells. Under these laws and regulations, we could also be liable for personal injuries, property damage and other damages. Failure to comply with these laws and regulations may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties. Moreover, public interest in environmental protection has increased in recent years, and environmental organizations have opposed, with some success, certain drilling projects.
Part of the regulatory environment in which we operate includes, in some cases, legal requirements for obtaining environmental assessments, environmental impact studies and/or plans of development before commencing drilling and production activities. In addition, our activities are subject to the regulations regarding conservation practices and protection of correlative rights. These regulations affect our operations and limit the quantity of oil, natural gas and NGL we may produce and sell. A major risk inherent in our drilling plans is the need to obtain drilling permits from state and local authorities. Delays in obtaining regulatory approvals or drilling permits, the failure to obtain a drilling permit for a well or the receipt of a permit with unreasonable conditions or costs could have a material adverse effect on our ability to develop our properties. Additionally, the regulatory environment could change in ways that might substantially increase the financial and managerial costs of compliance with these laws and regulations and, consequently, adversely affect our ability to pay distributions to our unitholders. For a description of the laws and regulations that affect us, see Item 1. “Business - Environmental Matters and Regulation.”
Federal and state legislation and regulatory initiatives related to hydraulic fracturing could result in increased costs and operating restrictions or delays.
Hydraulic fracturing is an important and common practice that is used to stimulate production of hydrocarbons from tight formations. Due to concerns raised relating to potential impacts of hydraulic fracturing on groundwater quality, legislative and regulatory efforts at the federal level and in some states have been initiated to render permitting and compliance requirements more stringent for hydraulic fracturing or prohibit the activity altogether. For example, the EPA has asserted federal regulatory authority over hydraulic fracturing involving fluids that contain diesel fuel under the Safe Drinking Water Act’s Underground Injection Control Program and has released draft permitting guidance for hydraulic fracturing operations that use diesel fuel in fracturing fluids in those states where the EPA is the permitting authority. In addition, both Texas and Louisiana have adopted disclosure regulations requiring varying degrees of disclosure of the constituents in hydraulic fracturing fluids. Such efforts could have an adverse effect on our oil and natural gas production activities. For a more detailed discussion of hydraulic fracturing matters impacting our business, see Item 1. “Business - Environmental Matters and Regulation.”
We may issue additional units without unitholder approval, which would dilute existing ownership interests.
We may issue an unlimited number of limited liability company interests of any type, including units, without the approval of our unitholders.
The issuance of additional units or other equity securities may have the following effects:
•
an individual unitholder’s proportionate ownership interest in us may decrease;
•
the relative voting strength of each previously outstanding unit may be reduced;
•
the amount of cash available for distribution per unit may decrease; and
•
the market price of the units may decline.
Our management may have conflicts of interest with the unitholders. Our limited liability company agreement limits the remedies available to our unitholders in the event unitholders have a claim relating to conflicts of interest.
Conflicts of interest may arise between our management on one hand, and the Company and our unitholders on the other hand, related to the divergent interests of our management. Situations in which the interests of our management may differ from interests of our nonaffiliated unitholders include, among others, the following situations:
•
our limited liability company agreement gives our Board of Directors broad discretion in establishing cash reserves for the proper conduct of our business, which will affect the amount of cash available for distribution. For example, our

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management will use its reasonable discretion to establish and maintain cash reserves sufficient to fund our drilling program;
•
our management team, subject to oversight from our Board of Directors, determines the timing and extent of our drilling program and related capital expenditures, asset purchases and sales, borrowings, issuances of additional units and reserve adjustments, all of which will affect the amount of cash that we distribute to our unitholders; and
•
affiliates of our directors are not prohibited from investing or engaging in other businesses or activities that compete with the Company.
We do not have the same flexibility as other types of organizations to accumulate cash and equity to protect against illiquidity in the future.
Unlike a corporation, our limited liability company agreement requires us to make quarterly distributions to our unitholders of all available cash reduced by any amounts of reserves for commitments and contingencies, including capital and operating costs and debt service requirements. The value of our units may decrease in direct correlation with decreases in the amount we distribute per unit. Accordingly, if we experience a liquidity problem in the future, we may have difficulty issuing more equity to recapitalize.
Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of entity level taxation by individual states. If the Internal Revenue Service (“IRS”) were to treat us as a corporation for federal income tax purposes or we were to become subject to entity level taxation for state tax purposes, taxes paid, if any, would reduce the amount of cash available for distribution.
The anticipated after-tax economic benefit of an investment in our units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS on this or any other tax matter that affects us.
If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rates, currently at a maximum rate of 35%. Distributions would generally be taxed again as corporate distributions, and no income, gain, loss, deduction or credit would flow through to unitholders. Because a tax may be imposed on us as a corporation, our cash available for distribution to our unitholders could be reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our units.
Current law or our business may change so as to cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity level taxation. Any modification to current law or interpretations thereof may or may not be applied retroactively and could make it more difficult or impossible to meet the requirements for partnership status, affect or cause us to change our business activities, affect the tax considerations of an investment in us, change the character or treatment of portions of our income and adversely affect an investment in our units.
In addition, because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships and limited liability companies to entity level taxation through the imposition of state income, franchise or other forms of taxation. For example, we are required to pay Texas franchise tax on our total revenue apportioned to Texas at a maximum effective rate of 0.7%. Imposition of a tax on us by any other state would reduce the amount of cash available for distribution to our unitholders.
A successful IRS contest of the federal income tax positions we take may adversely affect the market for our units, and the cost of an IRS contest will reduce our cash available for distribution to our unitholders.
The IRS may adopt tax positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with some or all of the positions we take. Any contest with the IRS may materially and adversely impact the market for our units and the price at which they trade.
Unitholders are required to pay taxes on their share of our taxable income, including their share of ordinary income and capital gain upon dispositions of properties by us, even if they do not receive any cash distributions from us. A unitholder’s share of our taxable income, gain, loss and deduction, or specific items thereof, may be substantially different than the unitholder’s interest in our economic profits.

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Item 1A.    Risk Factors - Continued

Our unitholders are required to pay federal income taxes and, in some cases, state and local income taxes on their share of our taxable income, whether or not they receive cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from their share of our taxable income. For example, we may sell a portion of our properties and use the proceeds to pay down debt or acquire other properties rather than distributing the proceeds to our unitholders, and some or all of our unitholders may be allocated substantial taxable income with respect to that sale.
A unitholder’s share of our taxable income upon a disposition of property by us may be ordinary income or capital gain or some combination thereof. Even where we dispose of properties that are capital assets, what otherwise would be capital gains may be recharacterized as ordinary income in order to “recapture” ordinary deductions that were previously allocated to that unitholder related to the same property.
A unitholder’s share of our taxable income and gain (or specific items thereof) may be substantially greater than, or our tax losses and deductions (or specific items thereof) may be substantially less than, the unitholder’s interest in our economic profits. This may occur, for example, in the case of a unitholder who purchases units at a time when the value of our units or of one or more of our properties is relatively low or a unitholder who acquires units directly from us in exchange for property whose fair market value exceeds its tax basis at the time of the exchange.
A unitholder’s taxable gain or loss on the disposition of our units could be more or less than expected.
If unitholders sell their units, they will recognize a gain or loss equal to the difference between the amount realized and their tax basis in those units. Prior distributions to our unitholders in excess of the total net taxable income they were allocated for a unit, which decreases their tax basis, will become taxable income to our unitholders if the unit is sold at a price greater than their tax basis in that unit, even if the price received is less than their original cost.
A substantial portion of the amount realized, whether or not representing gain, may be ordinary income. In addition, if unitholders sell their units, they may incur a tax liability in excess of the amount of cash they receive from the sale. If the IRS successfully contests some positions we take, unitholders could recognize more gain on the sale of units than would be the case under those positions, without the benefit of decreased income in prior years.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning our units that may result in adverse tax consequences to them.
Investment in units by tax-exempt entities, such as individual retirement accounts (known as IRAs) and other retirement plans, and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file U.S. federal tax returns and pay tax on their share of our taxable income.
We treat each purchaser of units as having the same economic and tax characteristics without regard to the units purchased. The IRS may challenge this treatment, which could adversely affect the value of the units.
Because we cannot match transferors and transferees of units, we must maintain uniformity of the economic and tax characteristics of our units to a purchaser of units. We take depletion, depreciation and amortization and other positions that are intended to maintain such uniformity. These positions may not conform with all aspects of existing Treasury regulations and may affect the amount or timing of income, gain, loss or deduction allocable to a unitholder or the amount of gain from a unitholder’s sale of units. A successful IRS challenge to those positions could also adversely affect the amount or timing of income, gain, loss or deduction allocable to a unitholder, or the amount of gain from a unitholder’s sale of units and could have a negative impact on the value of our units or result in audit adjustments to unitholder tax returns.
The sale or exchange of 50% or more of our capital and profits interests within a 12-month period will result in the deemed termination of our tax partnership for federal income tax purposes.
We will be considered to have terminated for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. Our termination would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing

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Item 1A.    Risk Factors - Continued

our taxable income. If this occurs, our unitholders will be allocated an increased amount of federal taxable income for the year in which we are considered to be terminated as a percentage of the cash distributed to the unitholders with respect to that period.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month (or in some cases for periods shorter than a month) based upon the ownership of our units on the first day of each month (or shorter period), instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month (or in some cases for periods shorter than a month) based upon the ownership of our units on the first day of each month (or shorter period), instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury regulations. If the IRS were to challenge this method or new Treasury regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders.
A unitholder whose units are loaned to a “short seller” to cover a short sale of units may be considered as having disposed of those units. If so, the unitholder would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.
Because a unitholder whose units are loaned to a “short seller” to cover a short sale of units may be considered as having disposed of the loaned units, the unitholder may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss, or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.
Unitholders may be subject to state and local taxes and return filing requirements in states and jurisdictions where they do not live as a result of investing in our units.
In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property now or in the future, even if they do not reside in any of those jurisdictions. Our unitholders will likely be required to file foreign, state and local income tax returns and pay state and local income taxes in some or all of these jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. In 2012, we have been registered to do business or have owned assets in Arkansas, California, Colorado, Illinois, Indiana, Kansas, Louisiana, Michigan, Mississippi, Montana, New Mexico, North Dakota, Oklahoma, Pennsylvania, South Dakota, Texas and Wyoming. As we make acquisitions or expand our business, we may do business or own assets in other states in the future. It is the responsibility of each unitholder to file all U.S. federal, state and local tax returns that may be required of such unitholder.
Changes to current federal tax laws may affect unitholders’ ability to take certain tax deductions.
Substantive changes to the existing federal income tax laws have been proposed that, if adopted, would affect, among other things, the ability to take certain operations-related deductions, including deductions for intangible drilling and percentage depletion and deductions for U.S. production activities. Other proposed changes may affect our ability to remain taxable as a partnership for federal income tax purposes. We are unable to predict whether any changes, or other proposals to such laws, ultimately will be enacted. Any such changes could negatively impact the value of an investment in our units.
Recently enacted derivatives legislation could have an adverse impact on our ability to use derivative instruments to reduce the effect of commodity price, interest rate and other risks associated with our business.
New comprehensive financial reform legislation was signed into law by the President on July 21, 2010. The legislation calls for the Commodity Futures Trading Commission (the “CFTC”) to regulate certain markets for over-the-counter (“OTC”) derivative products. In its rulemaking under the new legislation, the CFTC has proposed regulations to set position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalent. Certain

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Item 1A.    Risk Factors - Continued

bona fide hedging transactions or positions would be exempt from these position limits. The position limits rule was challenged in court by two industry associations and was vacated and remanded by a federal district court. The CFTC appealed the district court’s ruling and that appeal is pending. The financial reform legislation may also require our swap-dealer counterparties to comply with margin requirements and/or capital requirements relating to our uncleared swaps with those counterparties, but the timing of any adoption of any such regulations, and their scope, are uncertain. These and other CFTC rules implementing Dodd-Frank could impose burdens on market participants to such an extent that liquidity in the bilateral OTC derivative market decreases substantially. The legislation and new regulations may also require counterparties to our derivative instruments to spin off some of their derivatives activities to separate entities, which may not be as creditworthy as the current counterparties. The new legislation and any new regulations, including determinations with respect to the applicability of margin and capital requirements for uncleared trades, could significantly increase the cost of derivative contracts, materially alter the terms of derivative contracts, reduce the availability of derivatives to protect against risks we encounter, reduce our ability to monetize or restructure our existing derivative contracts, and increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures and to generate sufficient cash flow to pay quarterly distributions at the current levels or at all. Any of these consequences could have a material, adverse effect on us, our financial condition, and our results of operations.
Item 1B.    Unresolved Staff Comments
None
Item 2.    Properties
Information concerning proved reserves, production, wells, acreage and related matters are contained in Item 1. “Business.”
The Company’s obligations under its Credit Facility are secured by mortgages on a substantial majority of its oil and natural gas properties.  See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 6 for additional information concerning the Credit Facility.
Offices
The Company’s principal corporate office is located at 600 Travis, Suite 5100, Houston, Texas 77002. The Company maintains additional offices in California, Illinois, Kansas, Louisiana, Michigan, New Mexico, Oklahoma, Texas and Wyoming.

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Item 3.    Legal Proceedings
For a discussion of general legal proceedings, see Note 11 of Notes to Consolidated Financial Statements.
Executive Officers of the Company
Name
 
Age
 
Position with the Company
 
 
 
 
 
Mark E. Ellis
 
57
 
Chairman, President and Chief Executive Officer
Kolja Rockov
 
42
 
Executive Vice President and Chief Financial Officer
Arden L. Walker, Jr.
 
53
 
Executive Vice President and Chief Operating Officer
Charlene A. Ripley
 
49
 
Senior Vice President and General Counsel
David B. Rottino
 
47
 
Senior Vice President of Finance, Business Development and Chief Accounting Officer
Mark E. Ellis is the Chairman, President and Chief Executive Officer and has served in such capacity since December 2011. He previously served as President, Chief Executive Officer and Director from January 2010 to December 2011 and from December 2007 to January 2010, Mr. Ellis served as President and Chief Operating Officer of the Company. Mr. Ellis is a member of the Society of Petroleum Engineers and the National Petroleum Council. Mr. Ellis serves on the boards of America’s Natural Gas Alliance, American Exploration & Production Council, Industry Board of Petroleum Engineering at Texas A&M University, the Visiting Committee of Petroleum Engineering at the Colorado School of Mines, Houston Museum of Natural Science and The Center for the Performing Arts at The Woodlands. In addition, he is Chairman of the Board for The Center for Hearing and Speech, and holds a position as trustee on the Texas A&M University 12th Man Foundation Board of Trustees.
Kolja Rockov is the Executive Vice President and Chief Financial Officer and has served in such capacity since joining the Company in March 2005. Mr. Rockov is the founding chairman of a philanthropic organization benefitting Texas Children’s Cancer Center in Houston, which has raised more than $1 million since 2009.
Arden L. Walker, Jr. is the Executive Vice President and Chief Operating Officer and has served in such capacity since January 2011. From January 2010 to January 2011, he served as Senior Vice President and Chief Operating Officer. Mr. Walker joined the Company in February 2007 as Senior Vice President, Operations and Chief Engineer. Mr. Walker is a member of the Society of Petroleum Engineers and Independent Petroleum Association of America. He also serves on the boards of the Sam Houston Area Council of the Boy Scouts of America and Theatre Under The Stars.
Charlene A. Ripley is the Senior Vice President and General Counsel and has served in such capacity since April 2007. She also serves on several nonprofit boards, including the Impact Youth Development Center, Girls Inc., the American Heart Association of Houston and Mercury - The Orchestra Redefined.
David B. Rottino is the Senior Vice President of Finance, Business Development and Chief Accounting Officer and has served in such capacity since July 2010. From June 2008 to July 2010, Mr. Rottino served as the Senior Vice President and Chief Accounting Officer. Prior to joining LINN Energy, Mr. Rottino served as Vice President and E&P Controller for El Paso Corporation from June 2006 to May 2008. Mr. Rottino is a Certified Public Accountant. In addition, he currently serves on the Board of Camp for All.
Item 4.    Mine Safety Disclosures
Not applicable

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Part II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s units are listed on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “LINE.” At the close of business on January 31, 2013, there were approximately 202 unitholders of record.
The following sets forth the range of high and low last reported sales prices per unit, as reported by NASDAQ, for the quarters indicated. In addition, distributions declared during each quarter are presented.
 
 
Unit Price Range
 
Cash
Distributions
Declared
Per Unit
Quarter
 
High
 
Low
 
2012:
 
 
 
 
 
 
October 1 - December 31
 
$
42.52

 
$
35.24

 
$
0.725

July 1 - September 30
 
$
41.47

 
$
38.46

 
$
0.725

April 1 - June 30
 
$
40.70

 
$
35.00

 
$
0.725

January 1 - March 31
 
$
38.84

 
$
35.67

 
$
0.69

2011:
 
 
 
 
 
 
October 1 - December 31
 
$
39.05

 
$
32.80

 
$
0.69

July 1 - September 30
 
$
40.90

 
$
31.91

 
$
0.69

April 1 - June 30
 
$
40.38

 
$
36.65

 
$
0.66

January 1 - March 31
 
$
39.94

 
$
37.34

 
$
0.66

Distributions
The Company’s limited liability company agreement requires it to make quarterly distributions to unitholders of all “available cash.” Available cash means, for each fiscal quarter, all cash on hand at the end of the quarter less the amount of cash reserves established by the Board of Directors to:
•
provide for the proper conduct of business (including reserves for future capital expenditures, future debt service requirements, and for anticipated credit needs); and
•
comply with applicable laws, debt instruments or other agreements;
plus all cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter for which the determination is being made.
Working capital borrowings are borrowings that will be made under the Company’s Credit Facility and in all cases are used solely for working capital purposes or to pay distributions to unitholders. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for a discussion on the payment of future distributions.
Unitholder Return Performance Presentation
The performance graph below compares the total unitholder return on the Company’s units, with the total return of the Standard & Poor’s 500 Index (the “S&P 500 Index”) and the Alerian MLP Index, a weighted composite of 50 prominent energy master limited partnerships. Total return includes the change in the market price, adjusted for reinvested dividends or distributions, for the period shown on the performance graph and assumes that $100 was invested in the Company on December 31, 2007, and the S&P 500 Index and the Alerian MLP Index on the same date. The results shown in the graph below are not necessarily indicative of future performance.

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Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Continued

 
 
December 31, 2007
 
December 31, 2008
 
December 31, 2009
 
December 31, 2010
 
December 31, 2011
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
LINN Energy
 
$
100

 
$
68

 
$
145

 
$
212

 
$
230

 
$
230

Alerian MLP Index
 
$
100

 
$
63

 
$
111

 
$
152

 
$
173

 
$
180

S&P 500 Index
 
$
100

 
$
63

 
$
80

 
$
92

 
$
94

 
$
109

Notwithstanding anything to the contrary set forth in any of the Company’s previous or future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 that might incorporate this Annual Report on Form 10-K or future filings with the Securities and Exchange Commission (“SEC”), in whole or in part, the preceding performance information shall not be deemed to be “soliciting material” or to be “filed” with the SEC or incorporated by reference into any filing except to the extent this performance presentation is specifically incorporated by reference therein.
Securities Authorized for Issuance Under Equity Compensation Plans
See the information incorporated by reference under Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” regarding securities authorized for issuance under the Company’s equity compensation plans, which information is incorporated by reference into this Item 5.
Sales of Unregistered Securities
None
Issuer Purchases of Equity Securities
In October 2008, the Board of Directors of the Company authorized the repurchase of up to $100 million of the Company’s outstanding units from time to time on the open market or in negotiated purchases. The repurchase plan does not obligate the Company to acquire any specific number of units and may be discontinued at any time. The Company did not repurchase any units during the three months ended December 31, 2012. At December 31, 2012, approximately $56 million was available for unit repurchase under the program.

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Item 6.    Selected Financial Data
The selected financial data set forth below should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data.”
Because of rapid growth through acquisitions and development of properties, the Company’s historical results of operations and period-to-period comparisons of these results and certain other financial data may not be meaningful or indicative of future results. The results of the Company’s Appalachian Basin and Mid Atlantic Well Service, Inc. operations, which were disposed of in 2008, are classified as discontinued operations for the years ended December 31, 2008, and December 31, 2009. Unless otherwise indicated, results of operations information presented herein relates only to continuing operations.
 
 
At or for the Year Ended December 31,
 
 
2012
 
2011
 
2010
 
2009
 
2008
 
 
(in thousands, except per unit amounts)
Statement of operations data:
 
 
 
 
 
 
 
 
 
 
Oil, natural gas and natural gas liquids sales
 
$
1,601,180

 
$
1,162,037

 
$
690,054

 
$
408,219

 
$
755,644

Gains (losses) on oil and natural gas derivatives
 
124,762

 
449,940

 
75,211

 
(141,374
)
 
662,782

Depreciation, depletion and amortization
 
606,150

 
334,084

 
238,532

 
201,782

 
194,093

Interest expense, net of amounts capitalized
 
379,937

 
259,725

 
193,510

 
92,701

 
94,517

Income (loss) from continuing operations
 
(386,616
)
 
438,439

 
(114,288
)
 
(295,841
)
 
825,657

Income (loss) from discontinued operations, net of taxes (1)
 
—

 
—

 
—

 
(2,351
)
 
173,959

Net income (loss)
 
(386,616
)
 
438,439

 
(114,288
)
 
(298,192
)
 
999,616

Income (loss) per unit - continuing operations:
 
 

 
 

 
 

 
 

 
 

Basic
 
(1.92
)
 
2.52

 
(0.80
)
 
(2.48
)
 
7.18

Diluted
 
(1.92
)
 
2.51

 
(0.80
)
 
(2.48
)
 
7.18

Income (loss) per unit - discontinued operations:
 
 

 
 

 
 

 
 

 
 

Basic
 
—

 
—

 
—

 
(0.02
)
 
1.52

Diluted
 
—

 
—

 
—

 
(0.02
)
 
1.52

Net income (loss) per unit:
 
 

 
 

 
 

 
 

 
 

Basic
 
(1.92
)
 
2.52

 
(0.80
)
 
(2.50
)
 
8.70

Diluted
 
(1.92
)
 
2.51

 
(0.80
)
 
(2.50
)
 
8.70

Distributions declared per unit
 
2.865

 
2.70

 
2.55

 
2.52

 
2.52

Weighted average units outstanding
 
203,775

 
172,004

 
142,535

 
119,307

 
114,140

 
 
 
 
 
 
 
 
 
 
 
Cash flow data:
 
 

 
 

 
 

 
 

 
 

Net cash provided by (used in):
 
 

 
 

 
 

 
 

 
 

Operating activities (2)
 
$
350,907

 
$
518,706

 
$
270,918

 
$
426,804

 
$
179,515

Investing activities
 
(3,684,829
)
 
(2,130,360
)
 
(1,581,408
)
 
(282,273
)
 
(35,550
)
Financing activities
 
3,334,051

 
1,376,767

 
1,524,260

 
(150,968
)
 
(116,738
)
 
 
 
 
 
 
 
 
 
 
 
Balance sheet data:
 
 

 
 

 
 

 
 

 
 

Total assets
 
$
11,451,238

 
$
7,928,854

 
$
5,933,148

 
$
4,340,256

 
$
4,722,020

Long-term debt
 
6,037,817

 
3,993,657

 
2,742,902

 
1,588,831

 
1,653,568

Unitholders’ capital
 
4,427,180

 
3,428,910

 
2,788,216

 
2,452,004

 
2,760,686

(1)  
Includes gains (losses) on sale of assets, net of taxes.

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Item 6.    Selected Financial Data - Continued

(2)  
Includes premiums paid for derivatives of approximately $583 million, $134 million, $120 million, $94 million and $130 million for the years ended December 31, 2012, December 31, 2011, December 31, 2010, December 31, 2009, and December 31, 2008, respectively.
 
 
At or for the Year Ended December 31,
 
 
2012
 
2011
 
2010
 
2009
 
2008
Production data:
 
 
 
 
 
 
 
 
 
 
Average daily production - continuing operations:
 
 
 
 
 
 
 
 
 
 
Natural gas (MMcf/d)
 
349

 
175

 
137

 
125

 
124

Oil (MBbls/d)
 
29.2

 
21.5

 
13.1

 
9.0

 
8.6

NGL (MBbls/d)
 
24.5

 
10.8

 
8.3

 
6.5

 
6.2

Total (MMcfe/d)
 
671

 
369

 
265

 
218

 
212

Average daily production - discontinued operations:
 
 
 
 
 
 
 
 
 
 
Total (MMcfe/d)
 
—

 
—

 
—

 
—

 
12

 
 
 
 
 
 
 
 
 
 
 
Estimated proved reserves:   (1)
 
 
 
 
 
 
 
 
 
 
Natural gas (Bcf)
 
2,571

 
1,675

 
1,233

 
774

 
851

Oil (MMBbls)
 
191

 
189

 
156

 
102

 
84

NGL (MMBbls)
 
179

 
94

 
71

 
54

 
51

Total (Bcfe)
 
4,796

 
3,370

 
2,597

 
1,712

 
1,660

(1)  
In accordance with Securities and Exchange Commission (“SEC”) regulations, reserves at December 31, 2012, December 31, 2011, December 31, 2010, and December 31, 2009, were estimated using the average price during the 12-month period, determined as an unweighted average of the first-day-of-the-month price for each month, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. In accordance with SEC regulations, reserves at December 31, 2008, were estimated using year-end prices. The price used to estimate reserves is held constant over the life of the reserves.

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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 “Consolidated Financial Statements” and “Notes to Consolidated 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, market prices for oil, natural gas and NGL, production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, credit and capital market conditions, regulatory changes and other uncertainties, as well as those factors 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 Consolidated Financial Statements contained in Item 8. “Financial Statements and Supplementary Data.”
Executive Overview
LINN Energy’s mission is to acquire, develop and maximize cash flow from a growing portfolio of long-life oil and natural gas assets. LINN Energy is an independent oil and natural gas company that began operations in March 2003 and completed its initial public offering in January 2006. The Company’s properties are located in eight operating regions in the United States (“U.S.”):
•
Mid-Continent, which includes properties in Oklahoma, Louisiana and the eastern portion of the Texas Panhandle (including the Granite Wash and Cleveland horizontal plays);
•
Hugoton Basin, which includes properties located primarily in Kansas and the Shallow Texas Panhandle;
•
Green River Basin, which includes properties located in southwest Wyoming;
•
Permian Basin, which includes areas in west Texas and southeast New Mexico;
•
Michigan/Illinois, which includes the Antrim Shale formation in the northern part of Michigan and oil properties in southern Illinois;
•
Williston/Powder River Basin, which includes the Bakken formation in North Dakota and the Powder River Basin in Wyoming;
•
California, which includes the Brea Olinda Field of the Los Angeles Basin; and
•
East Texas, which includes properties located in east Texas.
Results for the year ended December 31, 2012, included the following:
•
oil, natural gas and NGL sales of approximately $1.6 billion compared to $1.2 billion in 2011;
•
average daily production of 671 MMcfe/d compared to 369 MMcfe/d in 2011;
•
realized gains on commodity derivatives of approximately $403 million compared to $257 million in 2011;
•
adjusted EBITDA of approximately $1.4 billion compared to approximately $1.0 billion in 2011;
•
adjusted net income of approximately $293 million compared to $313 million in 2011;
•
capital expenditures, excluding acquisitions, of approximately $1.1 billion compared to $697 million in 2011; and
•
440 wells drilled (436 successful) compared to 294 wells drilled (292 successful) in 2011.
Adjusted EBITDA and adjusted net income are non-GAAP financial measures used by management to analyze Company performance. Adjusted EBITDA is a measure used by Company management to evaluate cash flow and the Company’s ability to sustain or increase distributions. The most significant reconciling items between net income (loss) and adjusted EBITDA are interest expense and noncash items, including the change in fair value of derivatives, and depreciation, depletion and amortization. Adjusted net income is used by Company management to evaluate its operational performance from oil and natural gas properties, prior to unrealized (gains) losses on derivatives, realized (gains) losses on canceled derivatives, realized gains on recovery of bankruptcy claim, impairment of long-lived assets, loss on extinguishment of debt and (gains) losses on sale of assets, net . See “Non-GAAP Financial Measures” on page 56 for a reconciliation of each non-GAAP financial measure to its most directly comparable financial measure calculated and presented in accordance with GAAP.

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

Acquisitions
On July 31, 2012, the Company completed the acquisition of certain oil and natural gas properties in the Jonah Field located in the Green River Basin of southwest Wyoming from BP America Production Company (“BP”) for total consideration of approximately $990 million. The acquisition included approximately 806 Bcfe of proved reserves as of the acquisition date.
On May 1, 2012, the Company completed the acquisition of certain oil and natural gas properties located in east Texas for total consideration of approximately $168 million. The acquisition included approximately 110 Bcfe of proved reserves as of the acquisition date.
On April 3, 2012, the Company entered into a joint-venture agreement (“JV Agreement”) with an affiliate of Anadarko Petroleum Corporation (“Anadarko”) whereby the Company participates as a partner in the CO2 enhanced oil recovery development of the Salt Creek Field, located in the Powder River Basin of Wyoming. Anadarko assigned the Company 23% of its interest in the field in exchange for future funding of $400 million of Anadarko’s development costs. As of December 31, 2012, the Company has paid approximately $201 million towards the future funding commitment. The acquisition included approximately 16 MMBoe (96 Bcfe) of proved reserves as of the JV Agreement date.
On March 30, 2012, the Company completed the acquisition of certain oil and natural gas properties and the Jayhawk natural gas processing plant located in the Hugoton Basin in Kansas from BP for total consideration of approximately $1.16 billion. The acquisition included approximately 689 Bcfe of proved reserves as of the acquisition date.
During 2012, the Company completed other smaller acquisitions of oil and natural gas properties located in its various operating regions. The Company, in the aggregate, paid approximately $122 million in total consideration for these properties.
Proved reserves as of the acquisition date for all of the above referenced acquisitions were estimated using the average oil and natural gas prices during the preceding 12-month period, determined as an unweighted average of the first-day-of-the-month prices for each month.
Acquisition - Subsequent Event
On February 21, 2013, LinnCo, LLC (“LinnCo”), an affiliate of LINN Energy, 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.
Financing and Liquidity
The Company’s Fifth Amended and Restated Credit Agreement (“Credit Facility”) provides for a revolving credit facility up to the lesser of: (i) the then-effective borrowing base and (ii) maximum commitment amount. The Credit Facility has a borrowing base of $4.5 billion with a maximum commitment amount of $3.0 billion. The maturity date is April 2017. At January 31, 2013, the borrowing capacity under the Credit Facility was approximately $1.8 billion, which includes a $5 million reduction in availability for outstanding letters of credit.
In January 2012, the Company, under its equity distribution agreement, issued and sold 1,539,651 units representing limited liability company interests at an average unit price of $38.02 for proceeds of approximately $57 million (net of approximately $2 million in commissions and professional services expenses). The Company used the net proceeds for general corporate purposes, including the repayment of a portion of the indebtedness outstanding under its Credit Facility. At December 31, 2012, units equaling approximately $411 million in aggregate offering price remained available to be issued and sold under the agreement.

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

In January 2012, the Company also completed a public offering of units for net proceeds of approximately $674 million. The Company used the net proceeds from the sale of these units to repay a portion of the outstanding indebtedness under its Credit Facility.
In March 2012, the Company issued $1.8 billion in aggregate principal amount of 6.25% senior notes due November 2019 (see Note 6) and used the net proceeds of approximately $1.77 billion to fund the Hugoton acquisition (see Note 2). The remaining proceeds were used to repay indebtedness under the Company’s Credit Facility and for general corporate purposes.
On May 8, 2012, the Company filed a registration statement on Form S-4 to register exchange notes that are identical in all material respects to those of the outstanding May 2019 Senior Notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the outstanding notes do not apply to the exchange notes. On September 24, 2012, the registration statement was declared effective and the Company commenced an offer to exchange any and all of its $750 million outstanding principal amount of May 2019 Senior Notes for an equal amount of new May 2019 Senior Notes. The offer expired on October 23, 2012.
On October 17, 2012, LinnCo completed its initial public offering (the “LinnCo IPO”) of 34,787,500 common shares representing limited liability company interests for net proceeds of approximately $1.2 billion. The net proceeds LinnCo received from the offering were used to acquire 34,787,500 LINN Energy units which are equal to the number of LinnCo shares sold in the offering. The Company used the proceeds from the sale of the units to LinnCo to pay the expenses of the offering and repay a portion of the outstanding indebtedness under its Credit Facility.
Commodity Derivatives
During the year ended December 31, 2012, the Company entered into commodity derivative contracts consisting of oil swaps for 2012 through 2017, natural gas swaps for 2012 through 2018, and oil and natural gas puts for 2012 through 2017 and paid premiums for put options of approximately $583 million. The Company also entered into natural gas basis swaps for 2012 through 2016 and trade month roll swaps for 2012 through 2017. Currently, the Company has limited abilities to hedge its NGL production because there is no commercially viable market established for this purpose. Therefore, the Company does not directly hedge its NGL production.
Operating Regions
Following is a discussion of the Company’s eight operating regions.
Mid-Continent
The Mid-Continent region includes properties located in Oklahoma, Louisiana and the eastern portion of the Texas Panhandle (including the Granite Wash and Cleveland horizontal plays). Wells in this diverse region produce from both oil and natural gas reservoirs at depths ranging from 1,500 feet to over 18,000 feet. The Granite Wash formation and other shallower producing horizons are currently being developed using horizontal drilling and multi-stage stimulations. In the northern Texas Panhandle and extending into western Oklahoma, the Cleveland formation is being developed as a horizontal oil play. Elsewhere in Oklahoma, several producing formations are being targeted using similar horizontal drilling and completion technologies. The majority of wells in this region are mature, low-decline oil and natural gas wells.
Mid-Continent proved reserves represented approximately 34% of total proved reserves at December 31, 2012, of which 59% were classified as proved developed. This region produced 313 MMcfe/d or 48% of the Company’s 2012 average daily production. During 2012, the Company invested approximately $578 million to drill in this region. During 2013, the Company anticipates spending approximately 49% of its total oil and natural gas capital budget for development activities in the Mid-Continent region, primarily in the Granite Wash formation.
To more efficiently transport its natural gas in the Mid-Continent region to market, the Company owns and operates a network of natural gas gathering systems comprised of approximately 300 miles of pipeline and associated compression and metering facilities. In connection with the horizontal development activities in the Granite Wash formation, the Company continues to expand this gathering system which connects to numerous natural gas processing facilities in the region.

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

Hugoton Basin
The Hugoton Basin is a large oil and natural gas producing area located in the central portion of the Texas Panhandle extending into southwestern Kansas. The Company’s Texas properties in the basin primarily produce from the Brown Dolomite formation at depths of approximately 3,200 feet. The Company’s Kansas properties in the basin, acquired in March 2012, primarily produce from the Council Grove and Chase formations at depths ranging from 2,500 feet to 3,000 feet. Hugoton Basin proved reserves represented approximately 21% of total proved reserves at December 31, 2012, of which 85% were classified as proved developed. This region produced 120 MMcfe/d or 18% of the Company’s 2012 average daily production. During 2012, the Company invested approximately $11 million to drill in this region. During 2013, the Company anticipates spending approximately 3% of its total oil and natural gas capital budget for development activities in the Hugoton Basin region.
To more efficiently transport its natural gas in the Texas Panhandle to market, the Company owns and operates a network of natural gas gathering systems comprised of approximately 665 miles of pipeline and associated compression and metering facilities that connect to numerous sales outlets in the area. The Company also owns and operates the Jayhawk natural gas processing plant in southwestern Kansas with a capacity of approximately 450 MMcfe/d, allowing it to extract maximum value from the liquids-rich natural gas produced in the area. The Company’s production in the area is delivered to the plant via a system of approximately 2,100 miles of pipeline and related facilities operated by the Company, of which approximately 250 miles of pipeline are owned by the Company.
Green River Basin
The Green River Basin region consists of properties acquired in July 2012. These properties are located in southwest Wyoming and primarily produce natural gas at depths ranging from 8,000 feet to 12,000 feet. Green River Basin proved reserves represented approximately 21% of total proved reserves at December 31, 2012, of which 43% were classified as proved developed. This region produced 62 MMcfe/d or 9% of the Company’s 2012 average daily production. During 2012, the Company invested approximately $22 million to drill in this region. During 2013, the Company anticipates spending approximately 12% of its total oil and natural gas capital budget for development activities in the Green River Basin region.
Permian Basin
The Permian Basin is one of the largest and most prolific oil and natural gas basins in the U.S. The Company’s properties are located in west Texas and southeast New Mexico and produce at depths ranging from 2,000 feet to 12,000 feet. The Wolfberry trend is located in the north central portion of the basin where the Company has been actively drilling vertical oil wells since 2010. The Company also produces oil and natural gas from mature, low-decline wells including several waterflood properties located across the basin. Permian Basin proved reserves represented approximately 8% of total proved reserves at December 31, 2012, of which 56% were classified as proved developed. This region produced 83 MMcfe/d or 12% of the Company’s 2012 average daily production. During 2012, the Company invested approximately $240 million to drill in this region. During 2013, the Company anticipates spending approximately 20% of its total oil and natural gas capital budget for development activities in the Permian Basin region, primarily in the Wolfberry trend.
Michigan/Illinois
The Michigan/Illinois region includes properties producing from the Antrim Shale formation in the northern part of Michigan and oil properties in southern Illinois. These wells produce at depths ranging from 600 feet to 4,000 feet. Michigan/Illinois proved reserves represented approximately 6% of total proved reserves at December 31, 2012, of which 94% were classified as proved developed. This region produced 35 MMcfe/d or 5% of the Company’s 2012 average daily production. During 2013, the Company anticipates spending approximately 1% of its total oil and natural gas capital budget for development activities in the Michigan/Illinois region.
Williston/Powder River Basin
The Williston/Powder River Basin region includes the Bakken formation in North Dakota and the Powder River Basin in Wyoming. The Company’s nonoperated properties in the Williston Basin, one of the premier oil basins in the U.S., produce at depths ranging from 9,000 feet to 12,000 feet. The Company’s properties in the Powder River Basin, acquired in April 2012, consist of a CO2 flood operated by Anadarko in the Salt Creek Field. Williston/Powder River Basin proved reserves

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

represented approximately 4% of total proved reserves at December 31, 2012, of which 66% were classified as proved developed. This region produced 29 MMcfe/d or 4% of the Company’s 2012 average daily production. During 2012, the Company invested approximately $124 million to drill in this region. During 2013, the Company anticipates spending approximately 12% of its total oil and natural gas capital budget for development activities in the Williston/Powder River Basin region.
California
The California region consists of the Brea Olinda Field of the Los Angeles Basin. The Brea Olinda Field was discovered in 1880 and produces from the shallow Pliocene formation to the deeper Miocene formation at depths ranging from 1,000 feet to 7,500 feet. California proved reserves represented approximately 4% of total proved reserves at December 31, 2012, of which 96% were classified as proved developed. This region produced 13 MMcfe/d or 2% of the Company’s 2012 average daily production. During 2012, the Company invested approximately $1 million to drill in this region. During 2013, the Company anticipates spending approximately 2% of its total oil and natural gas capital budget for development activities in the California region.
East Texas
The East Texas region consists of properties acquired in May 2012. These properties are located in east Texas and primarily produce natural gas from the Cotton Valley formation at depths of approximately 11,000 feet. Proved reserves for these mature, low-decline producing properties, all of which are proved developed, represented approximately 2% of total proved reserves at December 31, 2012. This region produced 16 MMcfe/d or 2% of the Company’s 2012 average daily production. During 2013, the Company anticipates spending approximately 1% of its total oil and natural gas capital budget for development activities in the East Texas region.

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

Results of Operations
Year Ended December 31, 2012, Compared to Year Ended December 31, 2011
 
 
Year Ended December 31,
 
 
 
 
2012
 
2011
 
Variance
 
 
(in thousands)
Revenues and other:
 
 
 
 
 
 
Natural gas sales
 
$
367,550

 
$
278,714

 
$
88,836

Oil sales
 
946,304

 
714,385

 
231,919

NGL sales
 
287,326

 
168,938

 
118,388

Total oil, natural gas and NGL sales
 
1,601,180

 
1,162,037

 
439,143

Gains on oil and natural gas derivatives  (1)
 
124,762

 
449,940

 
(325,178
)
Marketing and other revenues
 
48,298

 
10,477

 
37,821

 
 
1,774,240

 
1,622,454

 
151,786

Expenses:
 
 
 
 
 
 
Lease operating expenses
 
317,699

 
232,619

 
85,080

Transportation expenses
 
77,322

 
28,358

 
48,964

Marketing expenses
 
31,821

 
3,681

 
28,140

General and administrative expenses (2)
 
173,206

 
133,272

 
39,934

Exploration costs
 
1,915

 
2,390

 
(475
)
Depreciation, depletion and amortization
 
606,150

 
334,084

 
272,066

Impairment of long-lived assets
 
422,499

 
—

 
422,499

Taxes, other than income taxes
 
131,679

 
78,522

 
53,157

Losses on sale of assets and other, net
 
1,539

 
3,494

 
(1,955
)
 
 
1,763,830

 
816,420

 
947,410

Other income and (expenses)
 
(394,236
)
 
(362,129
)
 
(32,107
)
Income (loss) before income taxes
 
(383,826
)
 
443,905

 
(827,731
)
Income tax expense
 
2,790

 
5,466

 
(2,676
)
Net income (loss)
 
$
(386,616
)
 
$
438,439

 
$
(825,055
)
 
 
 
 
 
 
 
Adjusted EBITDA   (3)
 
$
1,402,694

 
$
997,621

 
$
405,073

Adjusted net income   (3)
 
$
293,423

 
$
313,331

 
$
(19,908
)

(1)  
During the year ended December 31, 2011, the Company canceled (before the contract settlement date) derivative contracts on estimated future oil and natural gas production resulting in realized gains of approximately $27 million. The proceeds from the cancellation of the derivative contracts were reallocated within the Company’s derivatives portfolio.
(2)  
General and administrative expenses for the years ended December 31, 2012, and December 31, 2011, include approximately $28 million and $21 million, respectively, of noncash unit-based compensation expenses.
(3)  
This is a non-GAAP measure used by management to analyze the Company’s performance. See “Non-GAAP Financial Measures” on page 56 for a reconciliation of the non-GAAP financial measure to its most directly comparable financial measure calculated and presented in accordance with GAAP.

38
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

 
 
Year Ended December 31,
 
 
 
 
2012
 
2011
 
Variance
Average daily production:
 
 
 
 
 
 
Natural gas (MMcf/d)
 
349

 
175

 
99
 %
Oil (MBbls/d)
 
29.2

 
21.5

 
36
 %
NGL (MBbls/d)
 
24.5

 
10.8

 
127
 %
Total (MMcfe/d)
 
671

 
369

 
82
 %
 
 
 
 
 
 
 
Weighted average prices (hedged):   (1)
 
 
 
 
 
 
Natural gas (Mcf)
 
$
5.48

 
$
8.20

 
(33
)%
Oil (Bbl)
 
$
93.10

 
$
89.21

 
4
 %
NGL (Bbl)
 
$
32.10

 
$
42.88

 
(25
)%
 
 
 
 
 
 
 
Weighted average prices (unhedged):   (2)
 
 
 
 
 
 
Natural gas (Mcf)
 
$
2.87

 
$
4.35

 
(34
)%
Oil (Bbl)
 
$
88.59

 
$
91.24

 
(3
)%
NGL (Bbl)
 
$
32.10

 
$
42.88

 
(25
)%
 
 
 
 
 
 
 
Average NYMEX prices:
 
 
 
 
 
 
Natural gas (MMBtu)
 
$
2.79

 
$
4.05

 
(31
)%
Oil (Bbl)
 
$
94.20

 
$
95.12

 
(1
)%
 
 
 
 
 
 
 
Costs per Mcfe of production:
 
 
 
 
 
 
Lease operating expenses
 
$
1.29

 
$
1.73

 
(25
)%
Transportation expenses
 
$
0.31

 
$
0.21

 
48
 %
General and administrative expenses (3)
 
$
0.71

 
$
0.99

 
(28
)%
Depreciation, depletion and amortization
 
$
2.47

 
$
2.48

 
—

Taxes, other than income taxes
 
$
0.54

 
$
0.58

 
(7
)%

(1)  
Includes the effect of realized gains on derivatives of approximately $381 million (excluding $22 million realized gains on recovery of bankruptcy claim) and $230 million (excluding $27 million realized gains on canceled contracts of which the proceeds were reallocated within the Company’s derivatives portfolio) for the years ended December 31, 2012, and December 31, 2011, respectively.
(2)  
Does not include the effect of realized gains (losses) on derivatives.
(3)  
General and administrative expenses for the years ended December 31, 2012, and December 31, 2011, include approximately $28 million and $21 million, respectively, of noncash unit-based compensation expenses. Excluding these amounts, general and administrative expenses for the years ended December 31, 2012, and December 31, 2011, were $0.59 per Mcfe and $0.83 per Mcfe, respectively. This is a non-GAAP measure used by management to analyze the Company’s performance.

39
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Revenues and Other
Oil, Natural Gas and NGL Sales
Oil, natural gas and NGL sales increased by approximately $439 million or 38% to approximately $1.6 billion for the year ended December 31, 2012, from approximately $1.2 billion for the year ended December 31, 2011, due to higher production volumes partially offset by lower commodity prices. Lower natural gas, NGL and oil prices resulted in a decrease in revenues of approximately $189 million, $96 million and $28 million, respectively.
Average daily production volumes increased to 671 MMcfe/d during the year ended December 31, 2012, from 369 MMcfe/d during the year ended December 31, 2011. Higher natural gas, oil and NGL production volumes resulted in an increase in revenues of approximately $277 million, $260 million and $215 million, respectively.
The following sets forth average daily production by region:
 
 
Year Ended December 31,
 
 
 
 
 
 
2012
 
2011
 
Variance
Average daily production (MMcfe/d):
 
 
 
 
 
 
 
 
Mid-Continent
 
313

 
195

 
118

 
61
 %
Hugoton Basin
 
120

 
39

 
81

 
208
 %
Permian Basin
 
83

 
73

 
10

 
14
 %
Green River Basin
 
62

 
—

 
62

 
—

Michigan/Illinois
 
35

 
36

 
(1
)
 
(2
)%
Williston/Powder River Basin
 
29

 
12

 
17

 
129
 %
East Texas
 
16

 
—

 
16

 
—

California
 
13

 
14

 
(1
)
 
(6
)%
 
 
671

 
369

 
302

 
82
 %
The increase in average daily production volumes in the Mid-Continent region primarily reflects the Company’s 2011 and 2012 capital drilling programs in the Granite Wash formation, as well as the impact of the acquisition in the Cleveland horizontal play in June 2011 and the acquisition from Plains in December 2011. The increase in average daily production volumes in the Hugoton Basin region primarily reflects the impact of the acquisition from BP in March 2012. The increase in average daily production volumes in the Permian Basin region reflects the impact of acquisitions in 2011 and subsequent development capital spending. Average daily production volumes in the Green River Basin region reflect the impact of the acquisitions in 2012. The Michigan/Illinois and California regions consist of low-decline asset bases and continue to produce at consistent levels. The increase in average daily production volumes in the Williston/Powder River Basin region reflects the impact of acquisitions in 2011 and the joint-venture agreement entered into with Anadarko in April 2012. Average daily production volumes in the East Texas region reflect the impact of the acquisition in May 2012 (see Note 2).

40
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Gains (Losses) on Oil and Natural Gas Derivatives
The following presents the Company’s reported gains and losses on derivative instruments:
 
 
Year Ended December 31,
 
 
 
 
2012
 
2011
 
Variance
 
 
(in thousands)
Realized gains:
 
 
 
 
 
 
Commodity derivatives
 
$
381,141

 
$
230,237

 
$
150,904

Canceled derivatives
 
—

 
26,752

 
(26,752
)
Recoveries of bankruptcy claim (see Note 11)
 
21,503

 
—

 
21,503

 
 
402,644

 
256,989

 
145,655

Unrealized gains (losses):
 
 
 
 
 
 
Commodity derivatives
 
(277,882
)
 
192,951

 
(470,833
)
 
 
 
 
 
 
 
Total gains
 
$
124,762

 
$
449,940

 
$
(325,178
)
The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk,” Note 7 and Note 8 for additional information about the Company’s commodity derivatives. During the year ended December 31, 2012, the Company had commodity derivative contracts for approximately 110% of its natural gas production and 106% of its oil production, which resulted in realized gains of approximately $381 million. The results for 2012 also include realized gains of approximately $22 million related to the recovery of a bankruptcy claim (see Note 11). During the year ended December 31, 2011, the Company had commodity derivative contracts for approximately 101% of its natural gas production and 101% of its oil production, which resulted in realized gains of approximately $257 million (including realized gains on canceled contracts of approximately $27 million).
Unrealized gains and losses from commodity derivatives represent adjustments in market valuations of derivatives from period to period and include the premiums associated with put option contracts over time. For the years ended December 31, 2012, and December 31, 2011, the Company recorded net unrealized losses of approximately $278 million and net unrealized gains of approximately $193 million, respectively, on commodity derivatives. For information about the Company’s credit risk related to derivative contracts, see “Counterparty Credit Risk” in “Liquidity and Capital Resources” below.
Marketing and Other Revenues
Marketing revenues represent third-party activities associated with company-owned gathering systems and plants. Marketing and other revenues increased by approximately $38 million or 361% to approximately $48 million for the year ended December 31, 2012, from approximately $10 million for the year ended December 31, 2011, primarily due to revenues generated from the Jayhawk natural gas processing plant acquired from BP in March 2012.
Expenses
Lease Operating Expenses
Lease operating expenses include expenses such as labor, field office, vehicle, supervision, maintenance, tools and supplies and workover expenses. Lease operating expenses increased by approximately $85 million or 37% to approximately $318 million for the year ended December 31, 2012, from approximately $233 million for the year ended December 31, 2011. Lease operating expenses increased primarily due to costs associated with properties acquired during 2011 and 2012 (see Note 2). Lease operating expenses per Mcfe decreased to $1.29 per Mcfe for the year ended December 31, 2012, from $1.73 per Mcfe for the year ended December 31, 2011, primarily due to lower rates on newly acquired properties and cost saving initiatives.
Transportation Expenses
Transportation expenses increased by approximately $49 million or 173% to approximately $77 million for the year ended December 31, 2012, from approximately $28 million for the year ended December 31, 2011, primarily due to acquisitions in late 2011 and early 2012.

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

Marketing Expenses
Marketing expenses represent third-party activities associated with company-owned gathering systems and plants. Marketing expenses increased by approximately $28 million or 765% to approximately $32 million for the year ended December 31, 2012, from approximately $4 million for the year ended December 31, 2011, primarily due to expenses associated with the Jayhawk natural gas processing plant acquired from BP in March 2012.
General and Administrative Expenses
General and administrative expenses are costs not directly associated with field operations and reflect the costs of employees including executive officers, related benefits, office leases and professional fees. General and administrative expenses increased by approximately $40 million or 30% to approximately $173 million for the year ended December 31, 2012, from approximately $133 million for the year ended December 31, 2011. The increase was primarily due to an increase in salaries and benefits related expenses of approximately $20 million, driven primarily by increased employee headcount, and an increase in acquisition related expenses of approximately $16 million. Although general and administrative expenses increased, the unit rate decreased to $0.71 per Mcfe for the year ended December 31, 2012, from $0.99 per Mcfe for the year ended December 31, 2011, as a result of efficiencies gained from being a larger, more scalable organization.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased by approximately $272 million or 81% to approximately $606 million for the year ended December 31, 2012, from approximately $334 million for the year ended December 31, 2011. Higher total production volumes were the primary reason for the increased expense. Depreciation, depletion and amortization per Mcfe decreased to $2.47 per Mcfe for the year ended December 31, 2012, from $2.48 per Mcfe for the year ended December 31, 2011.
Impairment of Long-Lived Assets
During the year ended December 31, 2012, the Company recorded noncash impairment charges, before and after tax, of approximately $422 million associated with proved oil and natural gas properties related to a decline in commodity prices. The Company recorded no impairment charge for the year ended December 31, 2011. See Note 1 and “Critical Accounting Policies and Estimates” below for additional information.
Taxes, Other Than Income Taxes
Taxes, other than income taxes, which consist primarily of severance and ad valorem taxes, increased by approximately $53 million or 68% to approximately $132 million for the year ended December 31, 2012, from approximately $79 million for the year ended December 31, 2011. Severance taxes, which are a function of revenues generated from production, increased approximately $21 million compared to the year ended December 31, 2011, primarily due to higher production volumes partially offset by lower commodity prices. Ad valorem taxes, which are based on the value of reserves and production equipment and vary by location, increased by approximately $32 million compared to the year ended December 31, 2011, primarily due to property acquisitions in 2011 and 2012 and higher rates on the Company’s base properties.
Other Income and (Expenses)
 
 
Year Ended December 31,
 
 
 
 
2012
 
2011
 
Variance
 
 
(in thousands)
 
 
 
 
 
 
 
Loss on extinguishment of debt
 
$
—

 
$
(94,612
)
 
$
94,612

Interest expense, net of amounts capitalized
 
(379,937
)
 
(259,725
)
 
(120,212
)
Other, net
 
(14,299
)
 
(7,792
)
 
(6,507
)
 
 
$
(394,236
)
 
$
(362,129
)
 
$
(32,107
)
Other income and (expenses) increased by approximately $32 million during the year ended December 31, 2012, compared to the year ended December 31, 2011. Interest expense increased primarily due to higher outstanding debt during the period and higher amortization of financing fees associated with the May 2019 Senior Notes and the November 2019 Senior Notes, as defined in Note 6, and amendments made to the Company’s Credit Facility during 2012. For the year ended December 31, 2011, the Company also recorded a loss on extinguishment of debt of approximately $95 million as a result of the

42
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

redemptions of and cash tender offers for a portion of the Original Senior Notes, as defined in Note 6. See “Debt” in “Liquidity and Capital Resources” below for additional details.
Income Tax Expense
The Company is a limited liability company treated as a partnership for federal and state income tax purposes, with the exception of the state of Texas, in which income tax liabilities and/or benefits of the Company are passed through to unitholders. Limited liability companies are subject to Texas margin tax. Limited liability companies were also subject to state income taxes in the state of Michigan during 2011. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. The Company recognized income tax expense of approximately $3 million for the year ended December 31, 2012, compared to approximately $5 million for the same period in 2011. Income tax expense decreased primarily due to lower income in 2012 from the Company’s taxable subsidiaries.
Net Income (Loss)
Net income decreased by approximately $825 million or 188% to a net loss of approximately $387 million for the year ended December 31, 2012, from net income of approximately $438 million for the year ended December 31, 2011. The decrease was primarily due to lower gains on oil and natural gas derivatives and higher impairment charges and other expenses, including interest, partially offset by higher production revenues. See discussions above for explanations of variances.
Adjusted EBITDA
Adjusted EBITDA (a non-GAAP financial measure) increased by approximately $405 million or 41% to approximately $1.4 billion for the year ended December 31, 2012, from approximately $998 million for the year ended December 31, 2011. The increase was primarily due to higher revenues, partially offset by higher expenses. See discussions above for explanations of variances. See “Non-GAAP Financial Measures” on page 56 for a reconciliation of adjusted EBITDA to its most directly comparable financial measure calculated and presented in accordance with GAAP.
Adjusted Net Income
Adjusted net income (a non-GAAP financial measure) decreased by approximately $20 million or 6% to approximately $293 million for the year ended December 31, 2012, from approximately $313 million for the year ended December 31, 2011. The decrease was primarily due to higher expenses, including interest, partially offset by higher revenues. See discussions above for explanations of variances.

43
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Results of Operations
Year Ended December 31, 2011, Compared to Year Ended December 31, 2010
 
 
Year Ended December 31,
 
 
 
 
2011
 
2010
 
Variance
 
 
(in thousands)
Revenues and other:
 
 
 
 
 
 
Natural gas sales
 
$
278,714

 
$
211,596

 
$
67,118

Oil sales
 
714,385

 
359,996

 
354,389

NGL sales
 
168,938

 
118,462

 
50,476

Total oil, natural gas and NGL sales
 
1,162,037

 
690,054

 
471,983

Gains on oil and natural gas derivatives (1)
 
449,940

 
75,211

 
374,729

Marketing and other revenues
 
10,477

 
7,015

 
3,462

 
 
1,622,454

 
772,280

 
850,174

Expenses:
 
 
 
 
 
 
Lease operating expenses
 
232,619

 
158,382

 
74,237

Transportation expenses
 
28,358

 
19,594

 
8,764

Marketing expenses
 
3,681

 
2,716

 
965

General and administrative expenses (2)
 
133,272

 
99,078

 
34,194

Exploration costs
 
2,390

 
5,168

 
(2,778
)
Depreciation, depletion and amortization
 
334,084

 
238,532

 
95,552

Impairment of long-lived assets
 
—

 
38,600

 
(38,600
)
Taxes, other than income taxes
 
78,522

 
45,182

 
33,340

Losses on sale of assets and other, net
 
3,494

 
6,490

 
(2,996
)
 
 
816,420

 
613,742

 
202,678

Other income and (expenses)
 
(362,129
)
 
(268,585
)
 
(93,544
)
Income (loss) before income taxes
 
443,905

 
(110,047
)
 
553,952

Income tax expense
 
5,466

 
4,241

 
1,225

Net income (loss)
 
$
438,439

 
$
(114,288
)
 
$
552,727

 
 
 
 
 
 
 
Adjusted EBITDA   (3)
 
$
997,621

 
$
732,131

 
$
265,490

Adjusted net income   (3)
 
$
313,331

 
$
219,489

 
$
93,842


(1)  
During the year ended December 31, 2011, the Company canceled (before the contract settlement date) derivative contracts on estimated future oil and natural gas production resulting in realized gains of approximately $27 million. The proceeds from the cancellation of the derivative contracts were reallocated within the Company’s derivatives portfolio.
(2)  
General and administrative expenses for the years ended December 31, 2011, and December 31, 2010, include approximately $21 million and $13 million, respectively, of noncash unit-based compensation expenses.
(3)  
This is a non-GAAP measure used by management to analyze the Company’s performance. See “Non-GAAP Financial Measures” on page 56 for a reconciliation of the non-GAAP financial measure to its most directly comparable financial measure calculated and presented in accordance with GAAP.

44
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

 
 
Year Ended December 31,
 
 
 
 
2011
 
2010
 
Variance
Average daily production:
 
 
 
 
 
 
Natural gas (MMcf/d)
 
175

 
137

 
28
 %
Oil (MBbls/d)
 
21.5

 
13.1

 
64
 %
NGL (MBbls/d)
 
10.8

 
8.3

 
30
 %
Total (MMcfe/d)
 
369

 
265

 
39
 %
 
 
 
 
 
 
 
Weighted average prices (hedged):   (1)
 
 
 
 
 
 
Natural gas (Mcf)
 
$
8.20

 
$
8.52

 
(4
)%
Oil (Bbl)
 
$
89.21

 
$
94.71

 
(6
)%
NGL (Bbl)
 
$
42.88

 
$
39.14

 
10
 %
 
 
 
 
 
 
 
Weighted average prices (unhedged):   (2)
 
 
 
 
 
 
Natural gas (Mcf)
 
$
4.35

 
$
4.24

 
3
 %
Oil (Bbl)
 
$
91.24

 
$
75.16

 
21
 %
NGL (Bbl)
 
$
42.88

 
$
39.14

 
10
 %
 
 
 
 
 
 
 
Average NYMEX prices:
 
 
 
 
 
 
Natural gas (MMBtu)
 
$
4.05

 
$
4.40

 
(8
)%
Oil (Bbl)
 
$
95.12

 
$
79.53

 
20
 %
 
 
 
 
 
 
 
Costs per Mcfe of production:
 
 
 
 
 
 
Lease operating expenses
 
$
1.73

 
$
1.64

 
5
 %
Transportation expenses
 
$
0.21

 
$
0.20

 
5
 %
General and administrative expenses (3)
 
$
0.99

 
$
1.02

 
(3
)%
Depreciation, depletion and amortization
 
$
2.48

 
$
2.46

 
1
 %
Taxes, other than income taxes
 
$
0.58

 
$
0.47

 
23
 %
(1)  
Includes the effect of realized gains on derivatives of approximately $230 million (excluding $27 million realized gains on canceled contracts of which the proceeds were reallocated within the Company’s derivatives portfolio) and $308 million for the years ended December 31, 2011, and December 31, 2010, respectively.
(2)  
Does not include the effect of realized gains (losses) on derivatives.
(3)  
General and administrative expenses for the years ended December 31, 2011, and December 31, 2010, include approximately $21 million and $13 million, respectively, of noncash unit-based compensation expenses. Excluding these amounts, general and administrative expenses for the years ended December 31, 2011, and December 31, 2010, were $0.83 per Mcfe and $0.88 per Mcfe, respectively. This is a non-GAAP measure used by management to analyze the Company’s performance.

45
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Revenues and Other
Oil, Natural Gas and NGL Sales
Oil, natural gas and NGL sales increased by approximately $472 million or 68% to approximately $1.2 billion for the year ended December 31, 2011, from approximately $690 million for the year ended December 31, 2010, due to higher commodity prices and higher production volumes. Higher oil, NGL and natural gas prices resulted in an increase in revenues of approximately $126 million, $15 million and $7 million, respectively.
Average daily production volumes increased to 369 MMcfe/d during the year ended December 31, 2011, from 265 MMcfe/d during the year ended December 31, 2010. Higher oil, natural gas and NGL production volumes resulted in an increase in revenues of approximately $228 million, $60 million and $36 million, respectively.
The following sets forth average daily production by region:
 
 
Year Ended December 31,
 
 
 
 
 
 
2011
 
2010
 
Variance
Average daily production (MMcfe/d):
 
 
 
 
 
 
 
 
Mid-Continent
 
195

 
157

 
38

 
24
 %
Hugoton Basin
 
39

 
41

 
(2
)
 
(6
)%
Permian Basin
 
73

 
31

 
42

 
134
 %
Michigan/Illinois
 
36

 
22

 
14

 
61
 %
Williston/Powder River Basin
 
12

 
—

 
12

 
—

California
 
14

 
14

 
—

 
—

 
 
369

 
265

 
104

 
39
 %
The increase in average daily production volumes in the Mid-Continent region primarily reflects the Company’s 2010 and 2011 capital drilling programs in the Granite Wash formation, as well as the impact of the acquisition in the Cleveland horizontal play in June 2011. The decrease in average daily production volumes in the Hugoton Basin region reflects downtime related to weather and third-party plant maintenance, and the effects of natural declines, partially offset by the results of the Company’s drilling and optimization programs. The increase in average daily production volumes in the Permian Basin region reflects the impact of acquisitions in 2010 and 2011 and subsequent development capital spending. The increase in average daily production volumes in the Michigan/Illinois region reflects the full year impact of acquisitions in the second and fourth quarters of 2010. Average daily production volumes in the Williston/Powder River Basin region reflect the impact of the Company’s acquisitions in this region in 2011. The California region consists of a low-decline asset base and continues to produce at a consistent level.

46
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Gains (Losses) on Oil and Natural Gas Derivatives
The following presents the Company’s reported gains and losses on derivative instruments:
 
 
Year Ended December 31,
 
 
 
 
2011
 
2010
 
Variance
 
 
(in thousands)
Realized gains:
 
 
 
 
 
 
Commodity derivatives
 
$
230,237

 
$
307,587

 
$
(77,350
)
Canceled derivatives
 
26,752

 
—

 
26,752

 
 
256,989

 
307,587

 
(50,598
)
Unrealized gains (losses):
 
 
 
 
 
 
Commodity derivatives
 
192,951

 
(232,376
)
 
425,327

 
 
 
 
 
 
 
Total gains
 
$
449,940

 
$
75,211

 
$
374,729

The Company determines the fair value of its oil and natural gas derivatives utilizing pricing models that use a variety of techniques, including market quotes and pricing analysis. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk,” Note 7 and Note 8 for additional information about the Company’s commodity derivatives. During the year ended December 31, 2011, the Company had commodity derivative contracts for approximately 101% of its natural gas production and 101% of its oil production, which resulted in realized gains of approximately $257 million (including realized gains on canceled contracts of approximately $27 million). During the year ended December 31, 2010, the Company had commodity derivative contracts for approximately 114% of its natural gas production and 97% of its oil production, which resulted in realized gains of approximately $308 million.
Unrealized gains and losses from commodity derivatives represent adjustments in market valuations of derivatives from period to period and include the premiums associated with put option contracts over time. For the years ended December 31, 2011, and December 31, 2010, the Company recorded net unrealized gains of approximately $193 million and net unrealized losses of approximately $232 million, respectively, on commodity derivatives. For information about the Company’s credit risk related to derivative contracts, see “Counterparty Credit Risk” in “Liquidity and Capital Resources” below.
Expenses
Lease Operating Expenses
Lease operating expenses include expenses such as labor, field office, vehicle, supervision, maintenance, tools and supplies and workover expenses. Lease operating expenses increased by approximately $75 million or 47% to approximately $233 million for the year ended December 31, 2011, from approximately $158 million for the year ended December 31, 2010. Lease operating expenses per Mcfe also increased to $1.73 per Mcfe for the year ended December 31, 2011, from $1.64 per Mcfe for the year ended December 31, 2010. Lease operating expenses increased primarily due to costs associated with properties acquired during 2010 and 2011 (see Note 2). Temporary oil handling costs in the Granite Wash formation and higher post-acquisition maintenance costs in the Permian Basin also contributed to the increase.
Transportation Expenses
Transportation expenses increased by approximately $9 million or 45% to approximately $28 million for the year ended December 31, 2011, from approximately $19 million for the year ended December 31, 2010, primarily due to higher production volumes.
General and Administrative Expenses
General and administrative expenses are costs not directly associated with field operations and reflect the costs of employees including executive officers, related benefits, office leases and professional fees. General and administrative expenses increased by approximately $34 million or 35% to approximately $133 million for the year ended December 31, 2011, from approximately $99 million for the year ended December 31, 2010. The increase was primarily due to an increase in salaries and benefits related expenses of approximately $26 million, driven primarily by increased employee headcount, an increase in professional services expense of approximately $3 million and an increase in acquisition integration expenses of approximately $3 million. General and administrative expenses per Mcfe decreased to $0.99 per Mcfe for the year ended December 31, 2011, from $1.02 per Mcfe for the year ended December 31, 2010, due to higher production volumes.

47
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Exploration Costs
Exploration costs decreased by approximately $3 million or 54% to approximately $2 million for the year ended December 31, 2011, from approximately $5 million for the year ended December 31, 2010. The decrease was primarily due to lower leasehold impairment expenses on unproved properties.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization increased by approximately $95 million or 40% to approximately $334 million for the year ended December 31, 2011, from approximately $239 million for the year ended December 31, 2010. Higher total production volumes were the primary reason for the increased expense. Depreciation, depletion and amortization per Mcfe also increased to $2.48 per Mcfe for the year ended December 31, 2011, from $2.46 per Mcfe for the year ended December 31, 2010.
Impairment of Long-Lived Assets
The Company recorded no impairment charge for the year ended December 31, 2011. During the year ended December 31, 2010, the Company recorded a noncash impairment charge of approximately $39 million primarily associated with the impairment of proved oil and natural gas properties related to an unfavorable marketing contract. See Note 1 and “Critical Accounting Policies and Estimates” below for additional information.
Taxes, Other Than Income Taxes
Taxes, other than income taxes, which consist primarily of severance and ad valorem taxes, increased by approximately $34 million or 74% to approximately $79 million for the year ended December 31, 2011, from approximately $45 million for the year ended December 31, 2010. Severance taxes, which are a function of revenues generated from production, increased approximately $31 million compared to the year ended December 31, 2010, primarily due to higher commodity prices and higher production volumes. Ad valorem taxes, which are based on the value of reserves and production equipment and vary by location, increased by approximately $3 million compared to the year ended December 31, 2010, primarily due to property acquisitions in 2011.
Other Income and (Expenses)
 
 
Year Ended December 31,
 
 
 
 
2011
 
2010
 
Variance
 
 
(in thousands)
 
 
 
 
 
 
 
Loss on extinguishment of debt
 
$
(94,612
)
 
$
—

 
$
(94,612
)
Interest expense, net of amounts capitalized
 
(259,725
)
 
(193,510
)
 
(66,215
)
Realized losses on interest rate swaps
 
—

 
(8,021
)
 
8,021

Realized losses on canceled interest rate swaps
 
—

 
(123,865
)
 
123,865

Unrealized gains on interest rate swaps
 
—

 
63,978

 
(63,978
)
Other, net
 
(7,792
)
 
(7,167
)
 
(625
)
 
 
$
(362,129
)
 
$
(268,585
)
 
$
(93,544
)
Other income and (expenses) increased by approximately $94 million during the year ended December 31, 2011, compared to the year ended December 31, 2010. Interest expense increased primarily due to higher outstanding debt during the period and higher amortization of financing fees associated with the 2019 Senior Notes and the 2010 Issued Senior Notes, as defined in Note 6. In addition, in May 2011, the Company entered into a Fifth Amended and Restated Credit Facility, which also resulted in higher amortization of financing fees. For the year ended December 31, 2011, the Company also recorded a loss on extinguishment of debt of approximately $95 million as a result of the redemptions of and cash tender offers for a portion of the Original Senior Notes, as defined in Note 6. See “Debt” in “Liquidity and Capital Resources” below for additional details. The year ended December 31, 2010, included approximately $68 million in net losses on interest rate swaps.
Income Tax Expense
The Company is a limited liability company treated as a partnership for federal and state income tax purposes, with the exception of the state of Texas, in which income tax liabilities and/or benefits of the Company are passed through to

48
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

unitholders. Limited liability companies are subject to Texas margin tax. Limited liability companies were also subject to state income taxes in the state of Michigan during 2011 and 2010. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. The Company recognized income tax expense of approximately $5 million for the year ended December 31, 2011, compared to approximately $4 million for the same period in 2010. Income tax expense increased primarily due to higher income in 2011 from the Company’s taxable subsidiaries.
Net Income (Loss)
Net income increased by approximately $552 million or 484% to approximately $438 million for the year ended December 31, 2011, from a net loss of approximately $114 million for the year ended December 31, 2010. The increase was primarily due higher revenues, partially offset by higher expenses, including interest. See discussions above for explanations of variances.
Adjusted EBITDA
Adjusted EBITDA (a non-GAAP financial measure) increased by approximately $266 million or 36% to approximately $998 million for the year ended December 31, 2011, from approximately $732 million for the year ended December 31, 2010. The increase was primarily due to higher production revenues, partially offset by higher expenses and lower realized gains on oil and natural gas derivatives. See “Non-GAAP Financial Measures” on page 56 for a reconciliation of adjusted EBITDA to its most directly comparable financial measure calculated and presented in accordance with GAAP.
Adjusted Net Income
Adjusted net income (a non-GAAP financial measure) increased by approximately $94 million or 43% to approximately $313 million for the year ended December 31, 2011, from approximately $219 million for the year ended December 31, 2010. The increase was primarily due to higher production revenues, partially offset by higher expenses, including interest and lower realized gains on oil and natural gas derivatives. The year ended December 31, 2010, also included realized losses on interest rate swaps and there was no comparable amount reported for the year ended December 31, 2011. See discussions above for explanations of variances.
Reserve Replacement Metrics
The Company calculates two primary reserve metrics: (i) reserve replacement cost and (ii) reserve replacement ratio, to measure its ability to establish a long-term trend of adding reserves at a reasonable cost. The reserve replacement cost calculation provides an assessment of the cost of adding reserves that is ultimately included in depreciation, depletion and amortization expense. The reserve replacement ratio is an indicator of the Company’s ability to replenish annual production volumes and grow reserves. The metrics are calculated as follow:
Reserve replacement cost per Mcfe
=
Oil and natural gas capital costs expended (1)
 
 
Sum of reserve additions (2)
 
 
 
Reserve replacement ratio
=
Sum of reserve additions (2)
 
 
Annual production
(1)  
Oil and natural gas capital costs expended include the costs of property acquisition, exploration and development activities conducted to add reserves and exclude asset retirement costs. The Company expects to incur development costs in the future for proved undeveloped reserves; such future costs are excluded from costs expended and are not considered in the reserve replacement metrics presented herein.
(2)  
Reserve additions include proved reserves (developed and undeveloped) and reflect reserve revisions for prices and performance, extensions, discoveries and other additions and acquisitions, and do not include unproved reserve quantities.
The reserve replacement metrics are presented separately, both: (i) including and excluding the impact of price revisions on reserves, to demonstrate the effectiveness of the Company’s drilling program exclusive of economic factors (such as price) outside of its control and (ii) including and excluding acquisitions, to demonstrate the Company’s ability to add reserves through its drilling program and through acquisitions. Reserve replacement cost and reserve replacement ratio are non-

49
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

GAAP financial measures. The methods used by the Company to calculate these measures may differ from methods used by other companies to compute similar measures. As a result, the Company’s measures may not be comparable to similar measures provided by other companies. The Company believes that providing such measures is useful in evaluating the cost to add proved reserves; however, these measures should not be considered in isolation or as a substitute for GAAP measures. The reserve replacement cost per Mcfe and reserve replacement ratio are statistical indicators that have limitations, including their predictive and comparative value. The reserve replacement ratio is limited because it may vary widely based on the extent and timing of new discoveries, project sanctioning and property acquisitions. In addition, since the reserve replacement ratio does not consider the development cost or timing of future production of new reserves, it should not be used as a measure of value creation.
The following presents reserve replacement cost and reserve replacement ratio including and excluding the effect of price revisions on reserves:
 
 
Including Price Revisions
 
Excluding Price Revisions
 
 
Year Ended December 31,
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
2012
 
2011
 
2010
Costs per Mcfe:
 
 
 
 
 
 
 
 
 
 
 
 
Reserve replacement cost, including acquisitions
 
$
2.26

 
$
2.37

 
$
1.63

 
$
1.97

 
$
2.46

 
$
1.94

Reserve replacement cost, excluding acquisitions (finding and development cost)
 
NM (1)

 
$
1.94

 
$
0.79

 
$
6.92

 
$
2.15

 
$
1.57

Percentage of production:
 
 
 
 
 
 
 
 
 
 
 
 
Reserve replacement ratio, including acquisitions
 
680
%
 
674
%
 
1,014
%
 
781
%
 
651
%
 
854
%
Reserve replacement ratio, excluding acquisitions
 
NM (1)

 
244
%
 
321
%
 
63
%
 
221
%
 
161
%
(1)  
Not meaningful due to the impact of a significant decrease in year-end natural gas prices at December 31, 2012, compared to December 31, 2011.
The Company considers the premiums it pays for derivatives as part of the investment in its business and includes the cost of acquisition-related derivatives in the transaction economics. For the years ended December 31, 2012, December 31, 2011, and December 31, 2010, the Company paid premiums of approximately $583 million, $134 million and $120 million, respectively, for derivatives designed to reduce its exposure to fluctuations in commodity prices. The amounts paid were for derivative instruments that hedged production for multiple years. Of these amounts, approximately $320 million, $52 million and $21 million was paid for derivatives specifically related to the acquisitions consummated by the Company during the respective years.
If the premiums paid for derivatives were included in the reserve replacement cost calculations for the year ended December 31, 2012, the reserve replacement cost per Mcfe including price revisions and acquisitions would have been approximately $2.61. The reserve replacement cost including price revisions and excluding acquisitions is not meaningful for the year ended December 31, 2012, due to the impact of a significant decrease in year-end natural gas prices at December 31, 2012, compared to December 31, 2011. For the year ended December 31, 2012, the reserve replacement cost per Mcfe excluding price revisions and including acquisitions would have been approximately $2.27 and approximately $8.63 excluding price revisions and acquisitions. If the premiums paid for derivatives were included in the reserve replacement cost calculations for the years ended December 31, 2011, and December 31, 2010, the reserve replacement cost per Mcfe including price revisions and acquisitions would have been approximately $2.52 and $1.75, respectively, and approximately $2.19 and $1.11, respectively, including price revisions and excluding acquisitions. For the same periods, the reserve replacement cost per Mcfe excluding price revisions and including acquisitions would have been approximately $2.62 and $2.08, respectively, and approximately $2.43 and $2.21, respectively, excluding price revisions and acquisitions.

50
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Amounts used for the calculations in the tables above are derived directly from the data presented in “Supplemental Oil and Natural Gas Data (Unaudited)” in Item 8. “Financial Statements and Supplementary Data.” The following provides a reconciliation of oil and natural gas capital costs used in these calculations to its most directly comparable financial measure calculated and presented in accordance with GAAP:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
 
 
 
 
 
 
 
Costs incurred in oil and natural gas property acquisition, exploration and development
 
$
3,779,713

 
$
2,158,639

 
$
1,602,086

Less:
 
 

 
 

 
 

Asset retirement costs
 
(4,675
)
 
(2,427
)
 
(748
)
Property acquisition costs
 
(2,712,543
)
 
(1,516,737
)
 
(1,356,430
)
Oil and natural gas capital costs expended, excluding acquisitions
 
$
1,062,495

 
$
639,475

 
$
244,908

Liquidity and Capital Resources
The Company utilizes funds from equity and debt offerings, bank borrowings and cash flow from operations for capital resources and liquidity. To date, the primary use of capital has been for acquisitions and the development of oil and natural gas properties. For the year ended December 31, 2012, the Company’s total capital expenditures, excluding acquisitions, were approximately $1.1 billion. For 2013, the Company estimates its total capital expenditures, excluding acquisitions, will be approximately $1.2 billion, including $1.1 billion related to its oil and natural gas capital program and $67 million related to its plant and pipeline capital. This estimate reflects amounts for the development of properties associated with acquisitions (see Note 2), is under continuous review and subject to ongoing adjustments. The Company expects to fund these capital expenditures primarily with cash flow from operations and bank borrowings.
As the Company pursues growth, it continually monitors the capital resources available to meet future financial obligations and planned capital expenditures. The Company’s future success in growing reserves and production volumes will be highly dependent on the capital resources available and its success in drilling for or acquiring additional reserves. The Company actively reviews acquisition opportunities on an ongoing basis. If the Company were to make significant additional acquisitions for cash, it would need to borrow additional amounts under its Credit Facility, if available, or obtain additional debt or equity financing. The Company’s Credit Facility and Indentures governing its November 2019 Senior Notes, May 2019 Senior Notes, 2010 Issued Senior Notes, and Original Senior Notes impose certain restrictions on the Company’s ability to obtain additional debt financing. Based upon current expectations, the Company believes liquidity and capital resources will be sufficient to conduct its business and operations.
Statements of Cash Flows
The following is a comparative cash flow summary:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
Net cash:
 
 
 
 
 
 
Provided by operating activities (1)
 
$
350,907

 
$
518,706

 
$
270,918

Used in investing activities
 
(3,684,829
)
 
(2,130,360
)
 
(1,581,408
)
Provided by financing activities
 
3,334,051

 
1,376,767

 
1,524,260

Net increase (decrease) in cash and cash equivalents
 
$
129

 
$
(234,887
)
 
$
213,770

(1)  
The years ended December 31, 2012, December 31, 2011, and December 31, 2010, include premiums paid for derivatives of approximately $583 million, $134 million and $120 million, respectively.

51
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Operating Activities
Cash provided by operating activities for the year ended December 31, 2012, was approximately $351 million, compared to approximately $519 million for the year ended December 31, 2011. The decrease was primarily due to approximately $583 million in premiums paid for commodity derivatives during the year ended December 31, 2012, compared to $134 million in premiums paid in 2011. Higher premiums and expenses were partially offset by increased revenues primarily due to higher production volumes.
Cash provided by operating activities was approximately $519 million for the year ended December 31, 2011, compared to approximately $271 million for the year ended December 31, 2010. The increase was primarily due to higher production volumes and commodity prices partially offset by higher expenses.
Premiums paid during 2012, 2011 and 2010 were for commodity derivative contracts that hedge future production. These derivative contracts provide the Company long-term cash flow predictability to manage its business, service debt and pay distributions and the premiums are primarily funded through the Company’s Credit Facility. The amount of derivative contracts the Company enters into in the future will be directly related to expected future production. See Note 7 and Note 8 for additional details about the Company’s commodity derivatives.
Investing Activities
The following provides a comparative summary of cash flow from investing activities:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
Cash flow from investing activities:
 
 
 
 
 
 
Acquisition of oil and natural gas properties, net of cash acquired
 
$
(2,640,475
)
 
$
(1,500,193
)
 
$
(1,351,033
)
Capital expenditures
 
(1,045,079
)
 
(629,864
)
 
(223,013
)
Proceeds from sale of properties and equipment and other
 
725

 
(303
)
 
(7,362
)
 
 
$
(3,684,829
)
 
$
(2,130,360
)
 
$
(1,581,408
)
The primary use of cash in investing activities is for capital spending, including acquisitions and the development of the Company’s oil and natural gas properties. Cash used in investing activities for the year ended December 31, 2012, primarily relates to acquisitions of properties in the Hugoton Basin, Williston/Powder River Basin, East Texas and Green River Basin regions. See Note 2 for additional details of acquisitions. Development expenditures are higher primarily due to increased drilling activities in the Granite Wash formation.
Cash used in investing activities for the year ended December 31, 2011, primarily relates to acquisitions of properties in the Williston/Powder River Basin, Permian Basin and Mid-Continent regions. See Note 2 for additional details of acquisitions. The year ended December 31, 2011, also includes a deposit of approximately $9 million returned to the Company by the other party to a purchase and sale agreement (“PSA”) terminated by the Company in 2010.
Cash used in investing activities for the year ended December 31, 2010, primarily relates to acquisitions and the development of properties in the Permian Basin, Mid-Continent and Michigan/Illinois regions (see Note 2). The year ended December 31, 2010, also includes a deposit made by the Company of approximately $9 million and held by the other party to a PSA terminated by the Company (see Note 2).
Financing Activities
Cash provided by financing activities for the year ended December 31, 2012, was approximately $3.3 billion compared to approximately $1.4 billion for the year ended December 31, 2011. The increase in financing cash flow needs was primarily attributable to increased acquisitions and development activity during the year ended December 31, 2012. In comparison, cash provided by financing activities was approximately $1.5 billion for the year ended December 31, 2010.

52
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

The following provides a comparative summary of proceeds from borrowings and repayments of debt:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
Proceeds from borrowings:
 
 
 
 
 
 
Credit facility
 
$
3,640,000

 
$
1,790,000

 
$
1,050,000

Senior notes
 
1,799,802

 
744,240

 
2,250,816

 
 
$
5,439,802

 
$
2,534,240

 
$
3,300,816

Repayments of debt:
 
 
 
 
 
 
Credit facility
 
$
(3,400,000
)
 
$
(850,000
)
 
$
(2,150,000
)
Senior notes
 
—

 
(451,029
)
 
—

 
 
$
(3,400,000
)
 
$
(1,301,029
)
 
$
(2,150,000
)
Debt
The Company’s Fifth Amended and Restated Credit Agreement (“Credit Facility”) provides for a revolving credit facility up to the lesser of: (i) the then-effective borrowing base and (ii) the maximum commitment amount. The Credit Facility has a borrowing base of $4.5 billion with a maximum commitment amount of $3.0 billion. The maturity date is April 2017. At January 31, 2013, the borrowing capacity under the Credit Facility was approximately $1.8 billion, which includes a $5 million reduction in availability for outstanding letters of credit.
On March 2, 2012, the Company issued $1.8 billion in aggregate principal amount of 6.25% senior notes due November 2019 (see Note 6) and used the net proceeds of approximately $1.77 billion to fund the Hugoton acquisition (see Note 2). The remaining proceeds were used to repay indebtedness under the Company’s Credit Facility and for general corporate purposes.
On May 8, 2012, the Company filed a registration statement on Form S-4 to register exchange notes that are identical in all material respects to those of the outstanding May 2019 Senior Notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the outstanding notes do not apply to the exchange notes. On September 24, 2012, the registration statement was declared effective and the Company commenced an offer to exchange any and all of its $750 million outstanding principal amount of May 2019 Senior Notes for an equal amount of new May 2019 Senior Notes. The offer expired on October 23, 2012.
The Company depends, in part, on its Credit Facility for future capital needs. In addition, the Company has drawn on the Credit Facility to fund or partially fund quarterly cash distribution payments, since it uses operating cash flow primarily for investing activities and borrows as cash is needed. Absent such borrowings, the Company would have at times experienced a shortfall in cash available to pay the declared quarterly cash distribution amount. If an event of default occurs and is continuing under the Credit Facility, the Company would be unable to make borrowings to fund distributions. For additional information about this matter and other risk factors that could affect the Company, see Item 1A. “Risk Factors.”
Counterparty Credit Risk
The Company accounts for its commodity derivatives and, when applicable, its interest rate derivatives at fair value. The Company’s counterparties are current participants or affiliates of participants in its Credit Facility or were participants or affiliates of participants in its Credit Facility at the time it originally entered into the derivatives. The Credit Facility is secured by the Company’s oil, natural gas and NGL reserves; therefore, the Company is not required to post any collateral. The Company does not receive collateral from its counterparties. The Company minimizes the credit risk in derivative instruments by: (i) limiting its exposure to any single counterparty; (ii) entering into derivative instruments only with counterparties that meet the Company’s minimum credit quality standard, or have a guarantee from an affiliate that meets the Company’s minimum credit quality standard; and (iii) monitoring the creditworthiness of the Company’s counterparties on an ongoing basis. In accordance with the Company’s standard practice, its commodity derivatives and, when applicable, its interest rate derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of loss due to counterparty nonperformance is somewhat mitigated.

53
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

LinnCo Initial Public Offering
On October 17, 2012, LinnCo, an affiliate of LINN Energy, completed the LinnCo IPO of 34,787,500 common shares representing limited liability company interests to the public at a price of $36.50 per share ($34.858 per share, net of underwriting discount and structuring fee) for net proceeds of approximately $1.2 billion (after underwriting discount and structuring fee of approximately $57 million). The net proceeds LinnCo received from the offering were used to acquire 34,787,500 LINN Energy units which are equal to the number of LinnCo shares sold in the offering. The Company used the proceeds from the sale of the units to LinnCo to pay the expenses of the offering and repay a portion of the outstanding indebtedness under its Credit Facility.
Public Offering of Units
In January 2012, the Company sold 19,550,000 units representing limited liability company interests at $35.95 per unit ($34.512 per unit, net of underwriting discount) for net proceeds of approximately $674 million (after underwriting discount and offering expenses of approximately $28 million). The Company used the net proceeds from the sale of these units to repay a portion of the indebtedness outstanding under its Credit Facility.
In March 2011, the Company sold 16,726,067 units representing limited liability company interests at $38.80 per unit ($37.248 per unit, net of underwriting discount) for net proceeds of approximately $623 million (after underwriting discount and offering expenses of approximately $26 million). The Company used a portion of the net proceeds from the sale of these units to fund the March 2011 redemptions of a portion of the outstanding 2017 Senior Notes and 2018 Senior Notes and to fund the cash tender offers and related expenses for a portion of the remaining 2017 Senior Notes and 2018 Senior Notes (see Note 6). The Company used the remaining net proceeds from the sale of units to finance a portion of the March 31, 2011, acquisition in the Williston/Powder Basin region.
Equity Distribution Agreement
In August 2011, the Company entered into an equity distribution agreement, pursuant to which it may from time to time issue and sell units representing limited liability company interests having an aggregate offering price of up to $500 million. Sales of units, if any, will be made through a sales agent by means of ordinary brokers’ transactions, in block transactions, or as otherwise agreed with the agent. The Company expects to use the net proceeds from any sale of the units for general corporate purposes, which may include, among other things, capital expenditures, acquisitions and the repayment of debt.
In January 2012, the Company, under its equity distribution agreement, issued and sold 1,539,651 units representing limited liability company interests at an average unit price of $38.02 for proceeds of approximately $57 million (net of approximately $1 million in commissions). In connection with the issue and sale of these units, the Company also incurred professional service expenses of approximately $700,000. The Company used the net proceeds for general corporate purposes, including the repayment of a portion of the indebtedness outstanding under its Credit Facility. At December 31, 2012, units equaling approximately $411 million in aggregate offering price remained available to be issued and sold under the agreement.
In September 2011, the Company issued and sold 16,060 units representing limited liability company interests at an average unit price of $38.25 for proceeds of approximately $602,000 (net of approximately $12,000 in commissions). In December 2011, the Company issued and sold 772,104 units representing limited liability company interests at an average unit price of $38.03 for proceeds of approximately $29 million (net of approximately $587,000 in commissions). In connection with the issue and sale of these units, the Company also incurred professional service expenses of approximately $139,000. The Company used the net proceeds for general corporate purposes, including the repayment of a portion of the indebtedness outstanding under its Credit Facility.
Unit Repurchase Plan
In October 2008, the Board of Directors of the Company authorized the repurchase of up to $100 million of the Company’s outstanding units from time to time on the open market or in negotiated purchases. In August 2011, the Company repurchased 400,000 units at an average unit price of $32.98 for a total cost of approximately $13 million. In addition, in October 2011, the Company repurchased 129,734 units at an average unit price of $32.08 for a total cost of approximately $4 million. At December 31, 2012, approximately $56 million was available for unit repurchase under the program.

54
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Distributions
Under the Company’s limited liability company agreement, unitholders are entitled to receive a quarterly distribution of available cash to the extent there is sufficient cash from operations after establishment of cash reserves and payment of fees and expenses. The following provides a summary of distributions paid by the Company during the year ended December 31, 2012:
Date Paid
 
Period Covered by Distribution
 
Distributions
Per Unit
 
Total
Distributions
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
November 2012
 
July 1 - September 30, 2012
 
$
0.725

 
$
170

August 2012
 
April 1 - June 30, 2012
 
$
0.725

 
$
145

May 2012
 
January 1 - March 31, 2012
 
$
0.725

 
$
144

February 2012
 
October 1 - December 31, 2011
 
$
0.69

 
$
138

On April 24, 2012, the Company’s Board of Directors approved an increase in the quarterly cash distribution from $0.69 per unit to $0.725 per unit, representing an increase of 5%. On January 24, 2013, the Company’s Board of Directors declared a cash distribution of $0.725 per unit, or $2.90 per unit on an annualized basis, with respect to the fourth quarter of 2012. The distribution, totaling approximately $170 million, was paid on February 14, 2013, to unitholders of record as of the close of business on February 7, 2013.
Contingencies
The Company has been named as a defendant in a number of lawsuits, including claims from royalty owners related to disputed royalty payments and royalty valuations. The Company has established reserves that management currently believes are adequate to provide for potential liabilities based upon its evaluation of these matters. For a certain statewide class action royalty payment dispute where a reserve has not yet been established, the Company has denied that it has any liability on the claims and has raised arguments and defenses that, if accepted by the court, will result in no loss to the Company. Discovery related to class certification has concluded. Briefing and the hearing on class certification have been deferred by court order pending the Tenth Circuit Court of Appeals’ resolution of interlocutory appeals of two unrelated class certification orders. As a result, the Company is unable to estimate a possible loss, or range of possible loss, if any. In addition, the Company is involved in various other disputes arising in the ordinary course of business. The Company is not currently a party to any litigation or pending claims that it believes would have a material adverse effect on its overall business, financial position, results of operations or liquidity; however, cash flow could be significantly impacted in the reporting periods in which such matters are resolved.
During the years ended December 31, 2012, December 31, 2011, and December 31, 2010, the Company made no significant payments to settle any legal, environmental or tax proceedings. The Company regularly analyzes current information and accrues for probable liabilities on the disposition of certain matters as necessary. Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated.

55
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Commitments and Contractual Obligations
The following summarizes, as of December 31, 2012, certain long-term contractual obligations that are reflected in the consolidated balance sheets and/or disclosed in the accompanying notes thereto:
 
 
Payments Due
Contractual Obligations
 
Total
 
2013
 
2014 - 2015
 
2016 - 2017
 
2018 and Beyond
 
 
(in thousands)
Long-term debt obligations:
 
 
 
 
 
 
 
 
 
 
Credit facility
 
$
1,180,000

 
$
—

 
$
—

 
$
1,180,000

 
$
—

Senior notes
 
4,904,898

 
—

 
—

 
40,737

 
4,864,161

Interest (1)
 
2,666,850

 
380,306

 
760,612

 
740,784

 
785,148

Operating lease obligations:
 
 

 
 

 
 

 
 

 
 

Office, property and equipment leases
 
37,375

 
6,459

 
13,378

 
8,777

 
8,761

Other noncurrent liabilities:
 
 

 
 

 
 

 
 

 
 

Asset retirement obligations
 
151,974

 
5,221

 
6,483

 
5,724

 
134,546

Other:
 
 

 
 

 
 

 
 

 
 

Commodity derivatives
 
5,027

 
26

 
1,639

 
3,362

 
—

 
 
$
8,946,124

 
$
392,012

 
$
782,112

 
$
1,979,384

 
$
5,792,616

(1)  
Represents interest on the Credit Facility computed at the weighted average LIBOR of 1.97% through maturity in April 2017 and interest on the Original Senior Notes, May 2019 Senior Notes, November 2019 Senior Notes, and the 2010 Issued Senior Notes, as defined in Note 6, computed at fixed rates of 11.75%, 9.875%, 6.50%, 6.25%, 8.625% and 7.75% through maturities in May 2017, July 2018, May 2019, November 2019, April 2020 and February 2021, respectively.
Capital Structure
The Company’s capitalization is presented below:
 
 
December 31,
 
 
2012
 
2011
 
 
(in thousands)
 
 
 
 
 
Cash and cash equivalents
 
$
1,243

 
$
1,114

 
 
 
 
 
Credit facility
 
$
1,180,000

 
$
940,000

Senior notes due 2017, net
 
39,399

 
39,183

Senior notes due 2018, net
 
13,941

 
13,913

Senior notes due May 2019, net
 
745,172

 
744,593

Senior notes due November 2019, net
 
1,799,818

 
—

Senior notes due 2020, net
 
1,274,169

 
1,271,856

Senior notes due 2021, net
 
985,318

 
984,112

 
 
6,037,817

 
3,993,657

Total unitholders’ capital
 
4,427,180

 
3,428,910

 
 
$
10,464,997

 
$
7,422,567


56
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

Non-GAAP Financial Measures
The non-GAAP financial measures of adjusted EBITDA and adjusted net income, as defined by the Company, may not be comparable to similarly titled measures used by other companies. Therefore, these non-GAAP measures should be considered in conjunction with income and other performance measures prepared in accordance with GAAP, such as operating income or cash flow from operating activities. Adjusted EBITDA and adjusted net income should not be considered in isolation or as a substitute for GAAP measures, such as net income, operating income or any other GAAP measure of liquidity or financial performance.
Adjusted EBITDA (Non-GAAP Measure)
Adjusted EBITDA is a measure used by Company management to indicate (prior to the establishment of any reserves by its Board of Directors) the cash distributions the Company expects to make to its unitholders. Adjusted EBITDA is also a quantitative measure used throughout the investment community with respect to publicly-traded partnerships and limited liability companies.
The Company defines adjusted EBITDA as net income (loss) plus the following adjustments:
•
Net operating cash flow from acquisitions and divestitures, effective date through closing date;
•
Interest expense;
•
Depreciation, depletion and amortization;
•
Impairment of long-lived assets;
•
Write-off of deferred financing fees;
•
(Gains) losses on sale of assets and other, net;
•
Provision for legal matters;
•
Loss on extinguishment of debt;
•
Unrealized (gains) losses on commodity derivatives;
•
Unrealized (gains) losses on interest rate derivatives;
•
Realized (gains) losses on interest rate derivatives;
•
Realized (gains) losses on canceled derivatives;
•
Realized gains on recovery of bankruptcy claim;
•
Unit-based compensation expenses;
•
Exploration costs; and
•
Income tax expense (benefit).

57
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

The following presents a reconciliation of net income (loss) to adjusted EBITDA:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
 
 
 
 
 
 
 
Net income (loss)
 
$
(386,616
)
 
$
438,439

 
$
(114,288
)
Plus:
 
 
 
 
 
 
Net operating cash flow from acquisitions and divestitures, effective date through closing date (1)
 
80,502

 
57,966

 
42,846

Interest expense
 
379,937

 
259,725

 
193,510

Depreciation, depletion and amortization
 
606,150

 
334,084

 
238,532

Impairment of long-lived assets
 
422,499

 
—

 
38,600

Write-off of deferred financing fees
 
7,889

 
1,189

 
2,076

Losses on sale of assets and other, net (2)
 
1,302

 
124

 
3,008

Provision for legal matters (3)
 
414

 
1,086

 
4,362

Loss on extinguishment of debt
 
—

 
94,612

 
—

Unrealized (gains) losses on commodity derivatives (4)
 
277,882

 
(192,951
)
 
232,376

Unrealized gains on interest rate derivatives (4)
 
—

 
—

 
(63,978
)
Realized losses on interest rate derivatives (5)
 
—

 
—

 
8,021

Realized (gains) losses on canceled derivatives (6)
 
—

 
(26,752
)
 
123,865

Realized gains on recovery of bankruptcy claim (7)
 
(21,503
)
 
—

 
—

Unit-based compensation expenses
 
29,533

 
22,243

 
13,792

Exploration costs
 
1,915

 
2,390

 
5,168

Income tax expense
 
2,790

 
5,466

 
4,241

Adjusted EBITDA
 
$
1,402,694

 
$
997,621

 
$
732,131

(1)  
Represents cash, based on contractual arrangements, the Company received or paid from the effective date to the closing date of the transaction. The effective date is the first date the buyer is entitled to receive the economic benefit from properties included in the transaction.
(2)  
Represent gains or losses on the sale of assets, gains or losses on inventory valuation and amortization of basis difference for equity method investments.
(3)  
Represents reserves and settlements related to legal matters.
(4)  
Represent adjustments in market valuations of derivatives from period to period and include the premiums associated with put option contracts over time.
(5)  
Represent interest-related derivatives settled based on contract terms and are excluded because adjusted EBITDA excludes the impact of interest expense and these derivatives are designed to mitigate interest rate risk.
(6)  
Represent derivatives canceled prior to the contract settlement date. In 2011, commodity derivatives were canceled and the proceeds were reallocated within the Company’s derivatives portfolio. In 2010, interest rate swaps were canceled in connection with the issuances of certain fixed-rate senior notes.
(7)  
Represent the recoveries of a bankruptcy claim against Lehman Brothers which was not a transaction occurring in the ordinary course of the Company’s business.
Adjusted Net Income (Non-GAAP Measure)
Adjusted net income is a performance measure used by Company management to evaluate its operational performance from oil and natural gas properties, prior to unrealized (gains) losses on derivatives, realized (gains) losses on canceled derivatives, realized gains on recovery of bankruptcy claim, impairment of long-lived assets, loss on extinguishment of debt and (gains) losses on sale of assets, net .

58
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

The following presents a reconciliation of net income (loss) to adjusted net income:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands, except per unit amounts)
 
 
 
 
 
 
 
Net income (loss)
 
$
(386,616
)
 
$
438,439

 
$
(114,288
)
Plus:
 
 
 
 
 
 
Unrealized (gains) losses on commodity derivatives
 
277,882

 
(192,951
)
 
232,376

Unrealized gains on interest rate derivatives
 
—

 
—

 
(63,978
)
Realized (gains) losses on canceled derivatives
 
—

 
(26,752
)
 
123,865

Realized gains on recovery of bankruptcy claim
 
(21,503
)
 
—

 
—

Impairment of long-lived assets
 
422,499

 
—

 
38,600

Loss on extinguishment of debt
 
—

 
94,612

 
—

(Gains) losses on sale of assets, net
 
1,161

 
(17
)
 
2,914

Adjusted net income
 
$
293,423

 
$
313,331

 
$
219,489

 
 
 
 
 
 
 
Net income (loss) per unit - basic
 
$
(1.92
)
 
$
2.52

 
$
(0.80
)
Plus, per unit:
 
 
 
 
 
 
Unrealized (gains) losses on commodity derivatives
 
1.39

 
(1.11
)
 
1.63

Unrealized gains on interest rate derivatives
 
—

 
—

 
(0.45
)
Realized (gains) losses on canceled derivatives
 
—

 
(0.15
)
 
0.87

Realized gains on recovery of bankruptcy claim
 
(0.11
)
 
—

 
—

Impairment of long-lived assets
 
2.07

 
—

 
0.27

Loss on extinguishment of debt
 
—

 
0.54

 
—

(Gains) losses on sale of assets, net
 
0.01

 
—

 
0.02

Adjusted net income per unit - basic
 
$
1.44

 
$
1.80

 
$
1.54

Critical Accounting Policies and Estimates
The discussion and analysis of the Company’s financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. The Company evaluates its estimates and assumptions on a regular basis. The Company bases estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in the preparation of financial statements.
Below are expanded discussions of the Company’s more significant accounting policies, estimates and judgments, i.e., those that reflect more significant estimates and assumptions used in the preparation of its financial statements. See Note 1 for details about additional accounting policies and estimates made by Company management.
Recently Issued Accounting Standards
In December 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU requires disclosure of both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The ASU will be

59
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

applied retrospectively and is effective for periods beginning on or after January 1, 2013. The Company is currently evaluating the impact, if any, of the adoption of this ASU on its consolidated financial statements and related disclosures.
In May 2011, the FASB issued an ASU that further addresses fair value measurement accounting and related disclosure requirements. The ASU clarifies the FASB’s intent regarding the application of existing fair value measurement and disclosure requirements, changes the fair value measurement requirements for certain financial instruments, and sets forth additional disclosure requirements for other fair value measurements. The ASU is to be applied prospectively and is effective for periods beginning after December 15, 2011. The Company adopted the ASU effective January 1, 2012. The adoption of the requirements of the ASU, which expanded disclosures, had no effect on the Company's results of operations or financial position.
Oil and Natural Gas Reserves
Proved reserves are based on the quantities of oil, natural gas and NGL that by analysis of geoscience and engineering data can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain. The independent engineering firm, DeGolyer and MacNaughton, prepared a reserve and economic evaluation of all of the Company properties on a well-by-well basis as of December 31, 2012, and the reserve estimates reported herein were prepared by DeGolyer and MacNaughton. The reserve estimates were reviewed and approved by the Company’s senior engineering staff and management, with final approval by its Executive Vice President and Chief Operating Officer.
Reserves and their relation to estimated future net cash flows impact the Company’s depletion and impairment calculations. As a result, adjustments to depletion and impairment are made concurrently with changes to reserve estimates. The process performed by the independent engineers to prepare reserve amounts included their estimation of reserve quantities, future producing rates, future net revenue and the present value of such future net revenue, based in part on data provided by the Company. The estimates of reserves conform to the guidelines of the Securities and Exchange Commission (“SEC”), including the criteria of “reasonable certainty,” as it pertains to expectations about the recoverability of reserves in future years.
The accuracy of reserve estimates is a function of many factors including the following: the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions and the judgments of the individuals preparing the estimates. In addition, reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. As such, reserve estimates may materially vary from the ultimate quantities of oil, natural gas and NGL eventually recovered. For additional information regarding estimates of reserves, including the standardized measure of discounted future net cash flows, see “Supplemental Oil and Natural Gas Data (Unaudited)” in Item 8. “Financial Statements and Supplementary Data” and see also Item 1. “Business.”
Oil and Natural Gas Properties
Proved Properties
The Company accounts for oil and natural gas properties in accordance with the successful efforts method. In accordance with this method, all leasehold and development costs of proved properties are capitalized and amortized on a unit-of-production basis over the remaining life of the proved reserves and proved developed reserves, respectively.
The Company evaluates the impairment of its proved oil and natural gas properties on a field-by-field basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying values of proved properties are reduced to fair value when the expected undiscounted future cash flows are less than net book value. The fair values of proved properties are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. The underlying commodity prices embedded in the Company’s estimated cash flows are the product of a process that begins with New York Mercantile Exchange (“NYMEX”) forward curve pricing, adjusted for estimated location and quality differentials, as well as other factors that Company management believes will impact realizable prices. Costs of retired, sold or abandoned properties that constitute a part of an amortization base are charged or credited, net of proceeds, to accumulated depreciation, depletion and amortization unless doing so significantly affects the

60
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

unit-of-production amortization rate, in which case a gain or loss is recognized currently. Gains or losses from the disposal of other properties are recognized currently. Expenditures for maintenance and repairs necessary to maintain properties in operating condition are expensed as incurred. Estimated dismantlement and abandonment costs are capitalized, net of salvage, at their estimated net present value and amortized on a unit-of-production basis over the remaining life of the related proved developed reserves. The Company capitalizes interest on borrowed funds related to its share of costs associated with the drilling and completion of new oil and natural gas wells. Interest is capitalized only during the periods in which these assets are brought to their intended use. The Company capitalized interest costs of approximately $2 million for the years ended December 31, 2012, and December 31, 2011, and approximately $1 million for the year ended December 31, 2010.
Impairment of Proved Properties
Based on the analysis described above, the Company recorded noncash impairment charges, before and after tax, of approximately $422 million associated with proved oil and natural gas properties related to lower commodity prices for the year ended December 31, 2012, and a noncash impairment charge, before and after tax, of approximately $39 million primarily associated with proved oil and natural gas properties related to an unfavorable marketing contract for the year ended December 31, 2010. The Company recorded no impairment charge for the year ended December 31, 2011. The carrying values of the impaired proved properties were reduced to fair value, estimated using inputs characteristic of a Level 3 fair-value measurement. The charges are included in “impairment of long-lived assets” on the consolidated statements of operations.
Unproved Properties
Costs related to unproved properties include costs incurred to acquire unproved reserves. Because these reserves do not meet the definition of proved reserves, the related costs are not classified as proved properties. The fair values of unproved properties are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of unproved properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. The market-based weighted average cost of capital rate is subjected to additional project-specific risking factors. Unproved leasehold costs are capitalized and amortized on a composite basis if individually insignificant, based on past success, experience and average lease-term lives. Individually significant leases are reclassified to proved properties if successful and expensed on a lease by lease basis if unsuccessful or the lease term expires. Unamortized leasehold costs related to successful exploratory drilling are reclassified to proved properties and depleted on a unit-of-production basis. The Company assesses unproved properties for impairment quarterly on the basis of its experience in similar situations and other factors such as the primary lease terms of the properties, the average holding period of unproved properties, and the relative proportion of such properties on which proved reserves have been found in the past.
Exploration Costs
Geological and geophysical costs, delay rentals, amortization and impairment of unproved leasehold costs and costs to drill exploratory wells that do not find proved reserves are expensed as exploration costs. The costs of any exploratory wells are carried as an asset if the well finds a sufficient quantity of reserves to justify its capitalization as a producing well and as long as the Company is making sufficient progress towards assessing the reserves and the economic and operating viability of the project. The Company recorded noncash leasehold impairment expenses related to unproved properties of approximately $2 million for the years ended December 31, 2012, and December 31, 2011, and approximately $5 million for the year ended December 31, 2010, which are included in “exploration costs” on the consolidated statements of operations.
Revenue Recognition
Sales of oil, natural gas and NGL are recognized when the product has been delivered to a custody transfer point, persuasive evidence of a sales arrangement exists, the rights and responsibility of ownership pass to the purchaser upon delivery, collection of revenue from the sale is reasonably assured, and the sales price is fixed or determinable.
The Company has elected the entitlements method to account for natural gas production imbalances. Imbalances occur when the Company sells more or less than its entitled ownership percentage of total natural gas production. In accordance with the entitlements method, any amount received in excess of the Company’s share is treated as a liability. If the Company receives less than its entitled share, the underproduction is recorded as a receivable. At December 31, 2012, and December 31, 2011, the Company had natural gas production imbalance receivables of approximately $28 million and $19 million, respectively, which are included in “accounts receivable - trade, net” on the consolidated balance sheets and natural gas production

61
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

imbalance payables of approximately $18 million and $9 million, respectively, which are included in “accounts payable and accrued expenses” on the consolidated balance sheets.
The Company engages in the purchase, gathering and transportation of third-party natural gas and subsequently markets such natural gas to independent purchasers under separate arrangements. As such, the Company separately reports third-party marketing sales and natural gas marketing expenses.
Asset Retirement Obligations
The Company has the obligation to plug and abandon oil and natural gas wells and related equipment at the end of production operations. Estimated asset retirement costs are recognized when the obligation is incurred, and are amortized over proved developed reserves using the unit-of-production method. Accretion expense is included in “depreciation, depletion and amortization” on the consolidated statements of operations. The fair values of additions to the asset retirement obligations are estimated using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) plug and abandon costs per well based on existing regulatory requirements; (ii) remaining life per well; (iii) future inflation factors; and (iv) a credit-adjusted risk-free interest rate. Revisions in estimated liabilities can result from revisions of estimated inflation rates, escalating retirement costs and changes in the estimated timing of settling asset retirement obligations (see Note 10).
Derivative Instruments
The Company uses derivative financial instruments to reduce exposure to fluctuations in the prices of oil and natural gas. By removing a significant portion of the price volatility associated with future production, the Company expects to mitigate, but not eliminate, the potential effects of variability in cash flow from operations due to fluctuations in commodity prices. These transactions are primarily in the form of swap contracts and put options. A swap contract specifies a fixed price that the Company will receive from the counterparty as compared to floating market prices, and on the settlement date the Company will receive or pay the difference between the swap price and the market price. A put option requires the Company to pay the counterparty a premium equal to the fair value of the option at the purchase date and receive from the counterparty the excess, if any, of the fixed price floor over the market price at the settlement date. In addition, the Company may from time to time enter into derivative contracts in the form of interest rate swaps to minimize the effects of fluctuations in interest rates. Currently, the Company has no outstanding derivative contracts in the form of interest rate swaps.
Derivative instruments (including certain derivative instruments embedded in other contracts that require bifurcation) are recorded at fair value and included on the consolidated balance sheets as assets or liabilities. The Company did not designate these contracts as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings. The Company uses certain pricing models to determine the fair value of its derivative financial instruments. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active markets. See Note 7 and Note 8 for additional details about the Company’s derivative financial instruments. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for sensitivity analysis regarding the Company’s derivative financial instruments.
Acquisition Accounting
The Company accounts for business combinations under the acquisition method of accounting (see Note 2). Accordingly, the Company recognizes amounts for identifiable assets acquired and liabilities assumed equal to their estimated acquisition date fair values. Transaction and integration costs associated with business combinations are expensed as incurred.
The Company makes various assumptions in estimating the fair values of assets acquired and liabilities assumed. As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. The most significant assumptions relate to the estimated fair values of proved and unproved oil and natural gas properties. The fair values of these properties are measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. The market-based weighted average cost of capital rate is subjected to additional project-specific risking factors. To compensate for the inherent risk of

62
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations - Continued

estimating and valuing unproved properties, the discounted future net revenues of probable and possible reserves are reduced by additional risk-weighting factors. In addition, when appropriate, the Company reviews comparable purchases and sales of oil and natural gas properties within the same regions, and uses that data as a proxy for fair market value; i.e., the amount a willing buyer and seller would enter into in exchange for such properties.
Any excess of the acquisition price over the estimated fair value of net assets acquired is recorded as goodwill while any excess of the estimated fair value of net assets acquired over the acquisition price is recorded in current earnings as a gain. Deferred taxes are recorded for any differences between the assigned values and the tax basis of assets and liabilities. Estimated deferred taxes are based on available information concerning the tax basis of assets acquired and liabilities assumed and loss carryforwards at the acquisition date, although such estimates may change in the future as additional information becomes known.
While the estimated fair values of the assets acquired and liabilities assumed have no effect on cash flow, they can have an effect on future results of operations. Generally, higher fair values assigned to oil and natural gas properties result in higher future depreciation, depletion and amortization expense, which results in decreased future net earnings. Also, a higher fair value assigned to oil and natural gas properties, based on higher future estimates of commodity prices, could increase the likelihood of impairment in the event of lower commodity prices or higher operating costs than those originally used to determine fair value. The recording of impairment expense has no effect on cash flow but results in a decrease in net income for the period in which the impairment is recorded.
Legal, Environmental and Other Contingencies
A provision for legal, environmental and other contingencies is charged to expense when the loss is probable and the cost can be reasonably estimated. Determining when expenses should be recorded for these contingencies and the appropriate amounts of the accrual is subject to an estimation process that requires subjective judgment of management. In many cases, management’s judgment is based on the advice and opinions of legal counsel and other advisers, the interpretation of laws and regulations which can be interpreted differently by regulators and/or courts of law, the experience of the Company and other companies dealing with similar matters, and management’s decision on how it intends to respond to a particular matter; for example, a decision to contest it vigorously or a decision to seek a negotiated settlement. The Company’s management closely monitors known and potential legal, environmental and other contingencies and periodically determines when it should record losses for these items based on information available to the Company.
Unit-Based Compensation
The Company recognizes expense for unit-based compensation over the requisite service period in an amount equal to the fair value of unit-based payments granted to employees and nonemployee directors. See Note 1 and Note 5 for additional details about the Company’s accounting for unit-based compensation.

63

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in commodity prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how the Company views and manages its ongoing market risk exposures. All of the Company’s market risk sensitive instruments were entered into for purposes other than trading.
The following should be read in conjunction with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. A reference to a “Note” herein refers to the accompanying Notes to Consolidated Financial Statements contained in Item 8. “Financial Statements and Supplementary Data.”
Commodity Price Risk
The Company enters into derivative contracts with respect to a portion of its projected production through various transactions that provide an economic hedge of the risk related to the future commodity prices received. The Company does not enter into derivative contracts for trading purposes (see Note 7). At December 31, 2012, the fair value of fixed price swaps and put contracts that settle during the next 12 months was a net asset of approximately $344 million. A 10% increase in the index oil and natural gas prices above the December 31, 2012, prices for the next 12 months would result in a net asset of approximately $163 million, which represents a decrease in the fair value of approximately $181 million; conversely, a 10% decrease in the index oil and natural gas prices would result in a net asset of approximately $533 million, which represents an increase in the fair value of approximately $189 million.
Interest Rate Risk
At December 31, 2012, the Company had long-term debt outstanding under its Credit Facility of $1.2 billion, which incurred interest at floating rates (see Note 6). A 1% increase in the London Interbank Offered Rate (“LIBOR”) would result in an estimated $12 million increase in annual interest expense.
Counterparty Credit Risk
The Company accounts for its commodity derivatives and, when applicable, its interest rate derivatives at fair value on a recurring basis (see Note 8). The fair value of these derivative financial instruments includes the impact of assumed credit risk adjustments, which are based on the Company’s and counterparties’ published credit ratings, public bond yield spreads and credit default swap spreads, as applicable.
At December 31, 2012, the average public bond yield spread utilized to estimate the impact of the Company’s credit risk on derivative liabilities was approximately 2.47%. A 1% increase in the average public bond yield spread would result in an estimated $131,000 increase in net income for the year ended December 31, 2012. At December 31, 2012, the credit default swap spreads utilized to estimate the impact of counterparties’ credit risk on derivative assets ranged between 0% and 3.22%. A 1% increase in each of the counterparties’ credit default swap spreads would result in an estimated $9 million decrease in net income for the year ended December 31, 2012.

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Item 8.    Financial Statements and Supplementary Data


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 
Page
 
 


65
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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended.  Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements.  Projections of any evaluation of the effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or processes may deteriorate.
As of December 31, 2012, our management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework , issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on the assessment, management determined that we maintained effective internal control over financial reporting as of December 31, 2012, based on those criteria.  KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012, which is included herein.
/s/ Linn Energy, LLC

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Unitholders
Linn Energy, LLC:
We have audited the accompanying consolidated balance sheets of Linn Energy, LLC and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, unitholders’ capital, and cash flows for each of the years in the three-year period ended December 31, 2012.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Linn Energy, LLC and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Linn Energy, LLC’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 21, 2013, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP

Houston, Texas
February 21, 2013

67

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Unitholders
Linn Energy, LLC:
We have audited Linn Energy, LLC’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Linn Energy, LLC’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of 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.
In our opinion, Linn Energy, LLC maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Linn Energy, LLC and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, unitholders’ capital, and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated February 21, 2013, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP

Houston, Texas
February 21, 2013

68

LINN ENERGY, LLC
CONSOLIDATED BALANCE SHEETS
 
 
December 31,
 
 
2012
 
2011
 
 
(in thousands,
except unit amounts)
ASSETS
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,243

 
$
1,114

Accounts receivable - trade, net
 
371,333

 
213,282

Derivative instruments
 
350,695

 
255,063

Other current assets
 
88,157

 
80,734

Total current assets
 
811,428

 
550,193

 
 
 
 
 
Noncurrent assets:
 
 
 
 
Oil and natural gas properties (successful efforts method)
 
11,611,330

 
7,835,650

Less accumulated depletion and amortization
 
(2,025,656
)
 
(1,033,617
)
 
 
9,585,674

 
6,802,033

 
 
 
 
 
Other property and equipment
 
469,188

 
197,235

Less accumulated depreciation
 
(73,721
)
 
(48,024
)
 
 
395,467

 
149,211

 
 
 
 
 
Derivative instruments
 
530,216

 
321,840

Other noncurrent assets
 
128,453

 
105,577

 
 
658,669

 
427,417

Total noncurrent assets
 
10,639,810

 
7,378,661

Total assets
 
$
11,451,238

 
$
7,928,854

 
 
 
 
 
LIABILITIES AND UNITHOLDERS’ CAPITAL
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and accrued expenses
 
$
707,861

 
$
332,167

Derivative instruments
 
26

 
14,060

Other accrued liabilities
 
115,245

 
75,898

Total current liabilities
 
823,132

 
422,125

 
 
 
 
 
Noncurrent liabilities:
 
 

 
 

Credit facility
 
1,180,000

 
940,000

Senior notes, net
 
4,857,817

 
3,053,657

Derivative instruments
 
4,114

 
3,503

Other noncurrent liabilities
 
158,995

 
80,659

Total noncurrent liabilities
 
6,200,926

 
4,077,819

 
 
 
 
 
Commitments and contingencies (Note 11)
 


 


 
 
 
 
 
Unitholders’ capital:
 
 
 
 
234,513,243 units and 177,364,558 units issued and outstanding at December 31, 2012, and December 31, 2011, respectively
 
4,136,240

 
2,751,354

Accumulated income
 
290,940

 
677,556

 
 
4,427,180

 
3,428,910

Total liabilities and unitholders’ capital
 
$
11,451,238

 
$
7,928,854

The accompanying notes are an integral part of these consolidated financial statements.

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LINN ENERGY, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS

 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands, except per unit amounts)
Revenues and other:
 
 
 
 
 
 
Oil, natural gas and natural gas liquids sales
 
$
1,601,180

 
$
1,162,037

 
$
690,054

Gains on oil and natural gas derivatives
 
124,762

 
449,940

 
75,211

Marketing revenues
 
37,393

 
5,868

 
3,966

Other revenues
 
10,905

 
4,609

 
3,049

 
 
1,774,240

 
1,622,454

 
772,280

Expenses:
 
 
 
 
 
 
Lease operating expenses
 
317,699

 
232,619

 
158,382

Transportation expenses
 
77,322

 
28,358

 
19,594

Marketing expenses
 
31,821

 
3,681

 
2,716

General and administrative expenses
 
173,206

 
133,272

 
99,078

Exploration costs
 
1,915

 
2,390

 
5,168

Depreciation, depletion and amortization
 
606,150

 
334,084

 
238,532

Impairment of long-lived assets
 
422,499

 
—

 
38,600

Taxes, other than income taxes
 
131,679

 
78,522

 
45,182

Losses on sale of assets and other, net
 
1,539

 
3,494

 
6,490

 
 
1,763,830

 
816,420

 
613,742

Other income and (expenses):
 
 

 
 

 
 

Loss on extinguishment of debt
 
—

 
(94,612
)
 
—

Interest expense, net of amounts capitalized
 
(379,937
)
 
(259,725
)
 
(193,510
)
Losses on interest rate swaps
 
—

 
—

 
(67,908
)
Other, net
 
(14,299
)
 
(7,792
)
 
(7,167
)
 
 
(394,236
)
 
(362,129
)
 
(268,585
)
Income (loss) before income taxes
 
(383,826
)
 
443,905

 
(110,047
)
Income tax expense
 
2,790

 
5,466

 
4,241

Net income (loss)
 
$
(386,616
)
 
$
438,439

 
$
(114,288
)
 
 
 
 
 
 
 
Net income (loss) per unit:
 
 
 
 
 
 
Basic
 
$
(1.92
)
 
$
2.52

 
$
(0.80
)
Diluted
 
$
(1.92
)
 
$
2.51

 
$
(0.80
)
Weighted average units outstanding:
 
 
 
 
 
 
Basic
 
203,775

 
172,004

 
142,535

Diluted
 
203,775

 
172,729

 
142,535

 
 
 
 
 
 
 
Distributions declared per unit
 
$
2.865

 
$
2.70

 
$
2.55

The accompanying notes are an integral part of these consolidated financial statements.

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LINN ENERGY, LLC
CONSOLIDATED STATEMENTS OF UNITHOLDERS’ CAPITAL

 
 
Units
 
Unitholders’
Capital
 
Accumulated
Income (Deficit)
 
Treasury
Units
(at Cost)
 
Total Unitholders’
Capital
 
 
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2009
 
129,941

 
$
2,098,599

 
$
353,405

 
$
—

 
$
2,452,004

Sale of units, net of underwriting discounts and expenses of $34,556
 
28,750

 
809,774

 
—

 
—

 
809,774

Issuance of units
 
815

 
4,418

 
—

 
—

 
4,418

Cancellation of units
 
(496
)
 
(11,832
)
 
—

 
11,832

 
—

Purchase of units
 
 
 
—

 
—

 
(11,832
)
 
(11,832
)
Distributions to unitholders
 
 
 
(365,711
)
 
—

 
—

 
(365,711
)
Unit-based compensation expenses
 
 
 
13,792

 
—

 
—

 
13,792

Reclassification of distributions paid on forfeited restricted units
 
 
 
59

 
—

 
—

 
59

Net loss
 
 
 
—

 
(114,288
)
 
—

 
(114,288
)
December 31, 2010
 
159,010

 
2,549,099

 
239,117

 
—

 
2,788,216

Sale of units, net of underwriting discounts and expenses of $27,427
 
17,514

 
651,522

 
—

 
—

 
651,522

Issuance of units
 
1,371

 
7,446

 
—

 
—

 
7,446

Cancellation of units
 
(530
)
 
(17,352
)
 
—

 
17,352

 
—

Purchase of units
 
 
 
—

 
—

 
(17,352
)
 
(17,352
)
Distributions to unitholders
 
 
 
(466,488
)
 
—

 
—

 
(466,488
)
Unit-based compensation expenses
 
 
 
22,243

 
—

 
—

 
22,243

Reclassification of distributions paid on forfeited restricted units
 
 
 
79

 
—

 
—

 
79

Excess tax benefit from unit-based compensation
 
 
 
4,805

 
—

 
—

 
4,805

Net income
 


 
—

 
438,439

 
—

 
438,439

December 31, 2011
 
177,365

 
2,751,354

 
677,556

 
—

 
3,428,910

Sale of units, net of underwriting discounts and expenses of  $32,044
 
55,877

 
1,942,045

 
—

 
—

 
1,942,045

Issuance of units
 
1,271

 
7,061

 
—

 
—

 
7,061

Distributions to unitholders
 
 
 
(596,935
)
 
—

 
—

 
(596,935
)
Unit-based compensation expenses
 
 
 
29,533

 
—

 
—

 
29,533

Reclassification of distributions paid on forfeited restricted units
 
 
 
92

 
—

 
—

 
92

Excess tax benefit from unit-based compensation
 
 
 
3,090

 
—

 
—

 
3,090

N et loss
 
 
 
—

 
(386,616
)
 
—

 
(386,616
)
December 31, 2012
 
234,513

 
$
4,136,240

 
$
290,940

 
$
—

 
$
4,427,180

The accompanying notes are an integral part of these consolidated financial statements.

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LINN ENERGY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
Cash flow from operating activities:
 
 
 
 
 
 
Net income (loss)
 
$
(386,616
)
 
$
438,439

 
$
(114,288
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation, depletion and amortization
 
606,150

 
334,084

 
238,532

Impairment of long-lived assets
 
422,499

 
—

 
38,600

Unit-based compensation expenses
 
29,533

 
22,243

 
13,792

Loss on extinguishment of debt
 
—

 
94,612

 
—

Amortization and write-off of deferred financing fees
 
25,598

 
21,526

 
22,113

Losses on sale of assets and other, net
 
92

 
2,021

 
6,619

Deferred income tax
 
(360
)
 
310

 
3,088

Mark-to-market on derivatives:
 
 
 
 
 
 
Total gains
 
(124,762
)
 
(449,940
)
 
(7,303
)
Cash settlements
 
390,765

 
237,134

 
302,875

Cash settlements on canceled derivatives
 
—

 
26,752

 
(123,865
)
Premiums paid for derivatives
 
(583,434
)
 
(134,352
)
 
(120,376
)
Changes in assets and liabilities:
 
 
 
 
 
 
Increase in accounts receivable - trade, net
 
(77,573
)
 
(191,338
)
 
(66,283
)
(Increase) decrease in other assets
 
(5,451
)
 
(2,951
)
 
2,926

Increase in accounts payable and accrued expenses
 
26,372

 
129,499

 
25,457

Increase (decrease) in other liabilities
 
28,094

 
(9,333
)
 
49,031

Net cash provided by operating activities
 
350,907

 
518,706

 
270,918

 
 
 
 
 
 
 
Cash flow from investing activities:
 
 
 
 
 
 
Acquisition of oil and natural gas properties, net of cash acquired
 
(2,640,475
)
 
(1,500,193
)
 
(1,351,033
)
Development of oil and natural gas properties
 
(984,530
)
 
(574,635
)
 
(204,832
)
Purchases of other property and equipment
 
(60,549
)
 
(55,229
)
 
(18,181
)
Proceeds from sale of properties and equipment and other
 
725

 
(303
)
 
(7,362
)
Net cash used in investing activities
 
(3,684,829
)
 
(2,130,360
)
 
(1,581,408
)
 
 
 
 
 
 
 
Cash flow from financing activities:
 
 
 
 
 
 
Proceeds from sale of units
 
1,973,989

 
678,949

 
844,330

Proceeds from borrowings
 
5,439,802

 
2,534,240

 
3,300,816

Repayments of debt
 
(3,400,000
)
 
(1,301,029
)
 
(2,150,000
)
Distributions to unitholders
 
(596,935
)
 
(466,488
)
 
(365,711
)
Financing fees, offering expenses and other, net
 
(85,895
)
 
(56,358
)
 
(93,343
)
Excess tax benefit from unit-based compensation
 
3,090

 
4,805

 
—

Purchase of units
 
—

 
(17,352
)
 
(11,832
)
Net cash provided by financing activities
 
3,334,051

 
1,376,767

 
1,524,260

 
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
129

 
(234,887
)
 
213,770

Cash and cash equivalents:
 
 
 
 
 
 
Beginning
 
1,114

 
236,001

 
22,231

Ending
 
$
1,243

 
$
1,114

 
$
236,001

The accompanying notes are an integral part of these consolidated financial statements.

72
Table of Contents

LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation and Significant Accounting Policies
Nature of Business
Linn Energy, LLC (“LINN Energy” or the “Company”) is an independent oil and natural gas company that began operations in March 2003 and was formed as a Delaware limited liability company in April 2005. The Company completed its initial public offering (“IPO”) in January 2006 and its units representing limited liability company interests (“units”) are listed on the NASDAQ Global Select Market under the symbol “LINE.” LINN Energy’s mission is to acquire, develop and maximize cash flow from a growing portfolio of long-life oil and natural gas assets.
The Company’s properties are located in the United States (“U.S.”), in the Mid-Continent, the Hugoton Basin, the Green River Basin, the Permian Basin, Michigan, Illinois, the Williston/Powder River Basin, California and east Texas. Effective January 1, 2012, the Company realigned its existing regions. The realignment had no effect on the Company’s operations. The Company added the East Texas region in May 2012 and the Green River Basin region in July 2012, and currently has eight operating regions in the U.S.: Mid-Continent, which includes properties in Oklahoma, Louisiana and the eastern portion of the Texas Panhandle (including the Granite Wash and Cleveland horizontal plays); Hugoton Basin, which includes properties located primarily in Kansas and the Shallow Texas Panhandle; Green River Basin, which includes properties located in southwest Wyoming; Permian Basin, which includes areas in west Texas and southeast New Mexico; Michigan/Illinois, which includes the Antrim Shale formation in the northern part of Michigan and oil properties in southern Illinois; Williston/Powder River Basin, which includes the Bakken formation in North Dakota and the Powder River Basin in Wyoming; California, which includes the Brea Olinda Field of the Los Angeles Basin; and East Texas, which includes properties located in east Texas.
The operations of the Company are governed by the provisions of a limited liability company agreement executed by and among its members. The agreement includes specific provisions with respect to the maintenance of the capital accounts of each of the Company’s unitholders. Pursuant to applicable provisions of the Delaware Limited Liability Company Act (the “Delaware Act”) and the Third Amended and Restated Limited Liability Company Agreement of Linn Energy, LLC (the “LLC Agreement”), unitholders have no liability for the debts, obligations and liabilities of the Company, except as expressly required in the LLC Agreement or the Delaware Act. The Company will remain in existence unless and until dissolved in accordance with the terms of the LLC Agreement.
Principles of Consolidation and Reporting
The Company presents its financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon consolidation. Investments in noncontrolled entities over which the Company exercises significant influence are accounted for under the equity method. The Company’s other investment is carried at cost.
The consolidated financial statements for previous periods include certain reclassifications that were made to conform to current presentation. Such reclassifications have no impact on previously reported net income (loss), unitholders’ capital or cash flows.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management of the Company to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amount of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. The estimates that are particularly significant to the financial statements include estimates of the Company’s reserves of oil, natural gas and natural gas liquids (“NGL”), future cash flows from oil and natural gas properties, depreciation, depletion and amortization, asset retirement obligations, certain revenues and operating expenses, fair values of commodity and interest rate derivatives, if any, and fair values of assets acquired and liabilities assumed. As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Such estimates and assumptions are adjusted when

73
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


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.
Recently Issued Accounting Standards
In December 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) that requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU requires disclosure of both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The ASU will be applied retrospectively and is effective for periods beginning on or after January 1, 2013. The Company is currently evaluating the impact, if any, of the adoption of this ASU on its consolidated financial statements and related disclosures.
In May 2011, the FASB issued an ASU that further addresses fair value measurement accounting and related disclosure requirements. The ASU clarifies the FASB’s intent regarding the application of existing fair value measurement and disclosure requirements, changes the fair value measurement requirements for certain financial instruments, and sets forth additional disclosure requirements for other fair value measurements. The ASU is to be applied prospectively and is effective for periods beginning after December 15, 2011. The Company adopted the ASU effective January 1, 2012. The adoption of the requirements of the ASU, which expanded disclosures, had no effect on the Company’s results of operations or financial position.
Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. Outstanding checks in excess of funds on deposit are included in “accounts payable and accrued expenses” on the consolidated balance sheets and are classified as financing activities on the consolidated statements of cash flows.
Accounts Receivable - Trade, Net
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current receivables aging, and existing industry and national economic data. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential recovery is remote. The balance in the Company’s allowance for doubtful accounts related to trade accounts receivable was approximately $450,000 at December 31, 2012, and $1 million at December 31, 2011.
Inventories
Materials, supplies and commodity inventories are valued at the lower of average cost or market.
Oil and Natural Gas Properties
Proved Properties
The Company accounts for oil and natural gas properties in accordance with the successful efforts method. In accordance with this method, all leasehold and development costs of proved properties are capitalized and amortized on a unit-of-production basis over the remaining life of the proved reserves and proved developed reserves, respectively.
The Company evaluates the impairment of its proved oil and natural gas properties on a field-by-field basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying values of proved properties are reduced to fair value when the expected undiscounted future cash flows are less than net book value. The fair values of proved properties are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of proved properties include

74
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. The underlying commodity prices embedded in the Company’s estimated cash flows are the product of a process that begins with New York Mercantile Exchange (“NYMEX”) forward curve pricing, adjusted for estimated location and quality differentials, as well as other factors that Company management believes will impact realizable prices. Costs of retired, sold or abandoned properties that constitute a part of an amortization base are charged or credited, net of proceeds, to accumulated depreciation, depletion and amortization unless doing so significantly affects the unit-of-production amortization rate, in which case a gain or loss is recognized currently. Gains or losses from the disposal of other properties are recognized currently. Expenditures for maintenance and repairs necessary to maintain properties in operating condition are expensed as incurred. Estimated dismantlement and abandonment costs are capitalized, net of salvage, at their estimated net present value and amortized on a unit-of-production basis over the remaining life of the related proved developed reserves. The Company capitalizes interest on borrowed funds related to its share of costs associated with the drilling and completion of new oil and natural gas wells. Interest is capitalized only during the periods in which these assets are brought to their intended use. The Company capitalized interest costs of approximately $2 million for the years ended December 31, 2012, and December 31, 2011, and approximately $1 million for the year ended December 31, 2010.
Impairment of Proved Properties
Based on the analysis described above, the Company recorded noncash impairment charges, before and after tax, of approximately $422 million associated with proved oil and natural gas properties related to lower commodity prices for the year ended December 31, 2012, and a noncash impairment charge, before and after tax, of approximately $39 million primarily associated with proved oil and natural gas properties related to an unfavorable marketing contract for the year ended December 31, 2010. The Company recorded no impairment charge for the year ended December 31, 2011. The carrying values of the impaired proved properties were reduced to fair value, estimated using inputs characteristic of a Level 3 fair-value measurement. The charges are included in “impairment of long-lived assets” on the consolidated statements of operations.
Unproved Properties
Costs related to unproved properties include costs incurred to acquire unproved reserves. Because these reserves do not meet the definition of proved reserves, the related costs are not classified as proved properties. The fair values of unproved properties are measured using valuation techniques consistent with the income approach, converting future cash flows to a single discounted amount. Significant inputs used to determine the fair values of unproved properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. The market-based weighted average cost of capital rate is subjected to additional project-specific risking factors. Unproved leasehold costs are capitalized and amortized on a composite basis if individually insignificant, based on past success, experience and average lease-term lives. Individually significant leases are reclassified to proved properties if successful and expensed on a lease by lease basis if unsuccessful or the lease term expires. Unamortized leasehold costs related to successful exploratory drilling are reclassified to proved properties and depleted on a unit-of-production basis. The Company assesses unproved properties for impairment quarterly on the basis of its experience in similar situations and other factors such as the primary lease terms of the properties, the average holding period of unproved properties, and the relative proportion of such properties on which proved reserves have been found in the past.
Exploration Costs
Geological and geophysical costs, delay rentals, amortization and impairment of unproved leasehold costs and costs to drill exploratory wells that do not find proved reserves are expensed as exploration costs. The costs of any exploratory wells are carried as an asset if the well finds a sufficient quantity of reserves to justify its capitalization as a producing well and as long as the Company is making sufficient progress towards assessing the reserves and the economic and operating viability of the project. The Company recorded noncash leasehold impairment expenses related to unproved properties of approximately $2 million for the years ended December 31, 2012 , and December 31, 2011 , and approximately $5 million for the year ended December 31, 2010 , which are included in “exploration costs” on the consolidated statements of operations.
Other Property and Equipment
Other property and equipment includes natural gas gathering systems, pipelines, buildings, software, data processing and telecommunications equipment, office furniture and equipment, and other fixed assets. These items are recorded at cost and are depreciated using the straight-line method based on expected lives ranging from three to 39 years for the individual asset or group of assets.

75
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


Revenue Recognition
Revenues representative of the Company’s ownership interest in its properties are presented on a gross basis on the consolidated statements of operations. Sales of oil, natural gas and NGL are recognized when the product has been delivered to a custody transfer point, persuasive evidence of a sales arrangement exists, the rights and responsibility of ownership pass to the purchaser upon delivery, collection of revenue from the sale is reasonably assured, and the sales price is fixed or determinable.
The Company has elected the entitlements method to account for natural gas production imbalances. Imbalances occur when the Company sells more or less than its entitled ownership percentage of total natural gas production. In accordance with the entitlements method, any amount received in excess of the Company’s share is treated as a liability. If the Company receives less than its entitled share, the underproduction is recorded as a receivable. At December 31, 2012 , and December 31, 2011 , the Company had natural gas production imbalance receivables of approximately $28 million and $19 million , respectively, which are included in “accounts receivable - trade, net” on the consolidated balance sheets and natural gas production imbalance payables of approximately $18 million and $9 million , respectively, which are included in “accounts payable and accrued expenses” on the consolidated balance sheets.
The Company engages in the purchase, gathering and transportation of third-party natural gas and subsequently markets such natural gas to independent purchasers under separate arrangements. As such, the Company separately reports third-party marketing sales and marketing expenses.
The Company generates electricity with excess natural gas, which it uses to serve certain of its operating facilities in Brea, California. Any excess electricity is sold to the California wholesale power market. This revenue is included in “other revenues” on the consolidated statements of operations.
Restricted Cash
Restricted cash of approximately $5 million and $4 million is included in “other noncurrent assets” on the consolidated balance sheets at December 31, 2012, and December 31, 2011, respectively, and represents cash the Company has deposited into a separate account and designated for asset retirement obligations in accordance with contractual agreements.
Derivative Instruments
The Company uses derivative financial instruments to reduce exposure to fluctuations in the prices of oil and natural gas. By removing a significant portion of the price volatility associated with future production, the Company expects to mitigate, but not eliminate, the potential effects of variability in cash flow from operations due to fluctuations in commodity prices. These transactions are primarily in the form of swap contracts and put options. In addition, the Company may from time to time enter into derivative contracts in the form of interest rate swaps to minimize the effects of fluctuations in interest rates. At December 31, 2012 , the Company had no outstanding interest rate swap agreements.
Derivative instruments (including certain derivative instruments embedded in other contracts that require bifurcation) are recorded at fair value and included on the consolidated balance sheets as assets or liabilities. The Company did not designate these contracts as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings. The Company uses certain pricing models to determine the fair value of its derivative financial instruments. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active markets. See Note 7 and Note 8 for additional details about the Company’s derivative financial instruments.
Unit-Based Compensation
The Company recognizes expense for unit-based compensation over the requisite service period in an amount equal to the fair value of unit-based payments granted to employees and nonemployee directors. The fair value of unit-based payments, excluding liability awards, is computed at the date of grant and is not remeasured. The fair value of liability awards is

76
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


remeasured at each reporting date through the settlement date with the change in fair value recognized as compensation expense over that period. The Company currently does not have any awards accounted for as liability awards.
The Company has made a policy decision to recognize compensation expense for service-based awards on a straight-line basis over the requisite service period for the entire award. See Note 5 for additional details about the Company’s accounting for unit-based compensation.
The benefit of tax deductions in excess of recognized compensation costs is required to be reported as financing cash flow rather than operating cash flow. This requirement reduces net operating cash flow and increases net financing cash flow in periods in which such tax benefit exists. The amount of the Company’s excess tax benefit is reported in “excess tax benefit from unit-based compensation” on the consolidated statements of unitholders’ capital.
Deferred Financing Fees
The Company incurred legal and bank fees related to the issuance of debt (see Note 6). At December 31, 2012, and December 31, 2011, net deferred financing fees of approximately $114 million and $94 million , respectively, are included in “other noncurrent assets” on the consolidated balance sheets. These debt issuance costs are amortized over the life of the debt agreement. Upon early retirement or amendment to the debt agreement, certain fees are written off to expense. For the years ended December 31, 2012, December 31, 2011, and December 31, 2010, amortization expense of approximately $13 million , $16 million and $17 million , respectively, is included in “interest expense, net of amounts capitalized” and approximately $8 million , $1 million and $2 million , respectively, was written off to “other, net” on the consolidated statements of operations.
Fair Value of Financial Instruments
The carrying values of the Company’s receivables, payables and Credit Facility (as defined in Note 6) are estimated to be substantially the same as their fair values at December 31, 2012, and December 31, 2011. See Note 6 for fair value disclosures related to the Company’s other outstanding debt. As noted above, the Company carries its derivative financial instruments at fair value. See Note 8 for details about the fair value of the Company’s derivative financial instruments.
Income Taxes
The Company is a limited liability company treated as a partnership for federal and state income tax purposes, with the exception of the state of Texas, in which income tax liabilities and/or benefits of the Company are passed through to unitholders. As such, with the exception of the state of Texas, the Company is not a taxable entity, it does not directly pay federal and state income tax and recognition has not been given to federal and state income taxes for the operations of the Company except as described below.
Limited liability companies are subject to Texas margin tax. Limited liability companies were also subject to state income taxes in the state of Michigan during 2011 and 2010. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes, which are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. See Note 14 for detail of amounts recorded in the consolidated financial statements.
Note 2 - Acquisitions
Acquisitions - 2012
On July 31, 2012, the Company completed the acquisition of certain oil and natural gas properties in the Jonah Field located in the Green River Basin of southwest Wyoming from BP America Production Company (“BP”). The Company paid approximately $990 million in total consideration for these properties. The transaction was financed with borrowings under the Company’s Credit Facility, as defined in Note 6.

77
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


On May 1, 2012, the Company completed the acquisition of certain oil and natural gas properties located in east Texas. The Company paid approximately $168 million in total consideration for these properties. The transaction was financed with borrowings under the Company’s Credit Facility.
On April 3, 2012, the Company entered into a joint-venture agreement (“JV Agreement”) with an affiliate of Anadarko Petroleum Corporation (“Anadarko”) whereby the Company participates as a partner in the CO2 enhanced oil recovery development of the Salt Creek Field, located in the Powder River Basin of Wyoming. Anadarko assigned the Company 23% of its interest in the field in exchange for future funding of $400 million of Anadarko’s development costs. The Company assigned approximately $392 million to the net assets acquired as of the JV Agreement date, which reflects an imputed discount of approximately $8 million on the future funding of this transaction. As of December 31, 2012, the Company has paid approximately $201 million towards the future funding commitment.
On March 30, 2012, the Company completed the acquisition of certain oil and natural gas properties and the Jayhawk natural gas processing plant located in the Hugoton Basin in Kansas from BP. The Company paid approximately $1.16 billion in total consideration for these properties. The transaction was financed primarily with proceeds from the March 2012 debt offering (see Note 6).
During 2012, the Company completed other smaller acquisitions of oil and natural gas properties located in its various operating regions. The Company, in the aggregate, paid approximately $122 million in total consideration for these properties.
These acquisitions were accounted for under the acquisition method of accounting. Accordingly, the Company conducted assessments of net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisitions were expensed as incurred. The initial accounting for the business combinations is not complete and adjustments to provisional amounts, or recognition of additional assets acquired or liabilities assumed, may occur as more detailed analyses are completed and additional information is obtained about the facts and circumstances that existed as of the acquisition dates. The results of operations of all acquisitions have been included in the consolidated financial statements since the acquisition or JV Agreement dates.
The following presents the values assigned to the net assets acquired as of the acquisition dates (in thousands):
Assets:
 
Current
$
12,215

Noncurrent
210,390

Oil and natural gas properties
2,701,385

Total assets acquired
$
2,923,990

 
 
Liabilities:
 
Current
$
223,114

Asset retirement obligations
63,663

Noncurrent
196,601

Total liabilities assumed
$
483,378

 
 
Net assets acquired
$
2,440,612

Current assets include receivables and inventory and noncurrent assets include other property and equipment. Current liabilities include payables, ad valorem taxes payable and environmental liabilities. Current liabilities and noncurrent liabilities, as of the JV Agreement date, consist of payables of approximately $195 million and $197 million , respectively, related to the future funding commitment associated with the Anadarko transaction discussed above. As of December 31, 2012, the Company has paid approximately $201 million towards this commitment.
The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement

78
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties include estimates of: (i) reserves; (ii) future operating and development costs; (iii) future commodity prices; (iv) estimated future cash flows; and (v) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Company’s management at the time of the valuation and are the most sensitive and subject to change.
The revenues and expenses related to certain properties acquired from BP, Plains Exploration & Production Company (“Plains”), Panther Energy Company, LLC and Red Willow Mid-Continent, LLC (collectively referred to as “Panther”), SandRidge Exploration and Production, LLC (“SandRidge”) and an affiliate of Concho Resources Inc. (“Concho”) are included in the consolidated results of operations of the Company as of July 31, 2012 (BP Green River Basin acquisition), March 30, 2012 (BP Hugoton Basin acquisition), December 15, 2011 (Plains acquisition), June 1, 2011 (Panther acquisition), April 1, 2011 (SandRidge acquisition), and March 31, 2011 (Concho acquisition). The following unaudited pro forma financial information presents a summary of the Company’s consolidated results of operations for the years ended December 31, 2012, and December 31, 2011, assuming the acquisitions from BP had been completed as of January 1, 2011, and the acquisitions from Plains, Panther, SandRidge and Concho had been completed as of January 1, 2010, including adjustments to reflect the values assigned to the net assets acquired. The pro forma financial information is not necessarily indicative of the results of operations if the acquisitions had been effective as of these dates.
 
 
Year Ended
December 31,
 
 
2012
 
2011
 
 
(in thousands, except
per unit amounts)
 
 
 
 
 
Total revenues and other
 
$
1,937,620

 
$
2,422,381

Total operating expenses
 
$
1,900,231

 
$
1,293,283

Net income (loss)
 
$
(391,868
)
 
$
639,664

 
 
 
 
 
Net income (loss) per unit:
 
 
 
 
Basic
 
$
(1.95
)
 
$
3.65

Diluted
 
$
(1.95
)
 
$
3.64

Acquisitions - 2011 and 2010
The following is a summary of certain significant acquisitions completed by the Company during the years ended December 31, 2011, and December 31, 2010:
•
On December 15, 2011, the Company completed the acquisition of certain oil and natural gas properties located primarily in the Granite Wash of Texas and Oklahoma from Plains Exploration & Production Company for approximately $542 million .
•
On November 1, 2011, and November 18, 2011, the Company completed two acquisitions of certain oil and natural gas properties located in the Permian Basin for approximately $110 million .
•
On June 1, 2011, the Company completed the acquisition of certain oil and natural gas properties in the Cleveland play, located in the Texas Panhandle, from Panther Energy Company, LLC and Red Willow Mid-Continent, LLC for approximately $224 million .
•
On May 2, 2011, and May 11, 2011, the Company completed two acquisitions of certain oil and natural gas properties located in the Williston Basin for approximately $153 million .
•
On April 1, 2011, and April 5, 2011, the Company completed two acquisitions of certain oil and natural gas properties located in the Permian Basin, including properties from SandRidge Exploration and Production, LLC for approximately $239 million .
•
On March 31, 2011, the Company completed the acquisition of certain oil and natural gas properties located in the Williston Basin from an affiliate of Concho Resources Inc. for approximately $192 million .

79
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


•
On November 16, 2010, the Company completed the acquisition of certain oil and natural gas properties located in the Wolfberry trend of the Permian Basin from Element Petroleum, LP for approximately $118 million .
•
On October 14, 2010, the Company completed two acquisitions of certain oil and natural gas properties located in the Wolfberry trend of the Permian Basin from Crownrock, LP and Patriot Resources Partners LLC for approximately $260 million .
•
On August 16, 2010, the Company completed the acquisition of certain oil and natural gas properties located in the Permian Basin from Crownrock, LP and Element Petroleum, LP for approximately $95 million .
•
On May 27, 2010, the Company completed the acquisition of interests in Henry Savings LP and Henry Savings Management LLC that primarily hold oil and natural gas properties located in the Permian Basin for approximately $323 million .
•
On April 30, 2010, the Company completed the acquisition of interests in two wholly owned subsidiaries of HighMount Exploration & Production LLC that hold oil and natural gas properties in the Antrim Shale located in northern Michigan for approximately $327 million .
•
On January 29, 2010, the Company completed the acquisition of certain oil and natural gas properties located in the Anadarko Basin in Oklahoma and Kansas and the Permian Basin in Texas and New Mexico from certain affiliates of Merit Energy Company for approximately $151 million .
Note 3 - Unitholders’ Capital
LinnCo Initial Public Offering
On October 17, 2012, LinnCo, LLC (“LinnCo”), an affiliate of LINN Energy, completed its initial public offering (the “LinnCo IPO”) of 34,787,500 common shares representing limited liability company interests to the public at a price of $36.50 per share ( $34.858 per share, net of underwriting discount and structuring fee) for net proceeds of approximately $1.2 billion (after underwriting discount and structuring fee of approximately $57 million ). The net proceeds LinnCo received from the offering were used to acquire 34,787,500 LINN Energy units which are equal to the number of LinnCo shares sold in the offering. The Company used the proceeds from the sale of the units to LinnCo to pay the expenses of the offering and repay a portion of the outstanding indebtedness under its Credit Facility.
Public Offering of Units
In January 2012, the Company sold 19,550,000 units representing limited liability company interests at $35.95 per unit ( $34.512 per unit, net of underwriting discount) for net proceeds of approximately $674 million (after underwriting discount and offering expenses of approximately $28 million ). The Company used the net proceeds from the sale of these units to repay a portion of the outstanding indebtedness under its Credit Facility.
In March 2011, the Company sold 16,726,067 units representing limited liability company interests at $38.80 per unit ( $37.248 per unit, net of underwriting discount) for net proceeds of approximately $623 million (after underwriting discount and offering expenses of approximately $26 million ). The Company used a portion of the net proceeds from the sale of these units to fund the March 2011 redemptions of a portion of the outstanding 2017 Senior Notes and 2018 Senior Notes and to fund the cash tender offers and related expenses for a portion of the remaining 2017 Senior Notes and 2018 Senior Notes (see Note 6). The Company used the remaining net proceeds from the sale of units to finance a portion of the March 31, 2011, acquisition in the Williston/Powder Basin region.
In December 2010, the Company sold 11,500,000 units representing limited liability company interests at $35.92 per unit ( $34.48 per unit, net of underwriting discount) for net proceeds of approximately $396 million (after underwriting discount and offering expenses of approximately $17 million ). The Company used the net proceeds from the sale of these units to repay all outstanding indebtedness under its Credit Facility and for other general corporate purposes, including the partial notes redemption (see Note 6).
In March 2010, the Company sold 17,250,000 units representing limited liability company interests at $25.00 per unit ( $24.00 per unit, net of underwriting discount) for net proceeds of approximately $414 million (after underwriting discount and offering expenses of approximately $17 million ). The Company used a portion of the net proceeds from the sale of these units to finance the HighMount acquisition.

80
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


Equity Distribution Agreement
In August 2011, the Company entered into an equity distribution agreement, pursuant to which it may from time to time issue and sell units representing limited liability company interests having an aggregate offering price of up to $500 million . In connection with entering into the agreement, the Company incurred expenses of approximately $423,000 . Sales of units, if any, will be made through a sales agent by means of ordinary brokers’ transactions, in block transactions, or as otherwise agreed with the agent. The Company expects to use the net proceeds from any sale of the units for general corporate purposes, which may include, among other things, capital expenditures, acquisitions and the repayment of debt.
In January 2012, the Company, under its equity distribution agreement, issued and sold 1,539,651 units representing limited liability company interests at an average unit price of $38.02 for proceeds of approximately $57 million (net of approximately $1 million in commissions). In connection with the issue and sale of these units, the Company also incurred professional service expenses of approximately $700,000 . The Company used the net proceeds for general corporate purposes, including the repayment of a portion of the indebtedness outstanding under its Credit Facility. At December 31, 2012, units equaling approximately $411 million in aggregate offering price remained available to be issued and sold under the agreement.
In September 2011, the Company, under its equity distribution agreement, issued and sold 16,060 units representing limited liability company interests at an average unit price of $38.25 for proceeds of approximately $602,000 (net of approximately $12,000 in commissions). In December 2011, the Company issued and sold 772,104 units representing limited liability company interests at an average unit price of $38.03 for proceeds of approximately $29 million (net of approximately $587,000 in commissions). In connection with the issue and sale of these units, the Company also incurred professional service expenses of approximately $139,000 . The Company used the net proceeds for general corporate purposes, including the repayment of a portion of the indebtedness outstanding under its Credit Facility.
Unit Repurchase Plan
In October 2008, the Board of Directors of the Company authorized the repurchase of up to $100 million of the Company’s outstanding units from time to time on the open market or in negotiated purchases. During the year ended December 31, 2011, 529,734 units were repurchased at an average unit price of $32.76 for a total cost of approximately $17 million . During the year ended December 31, 2010, 486,700 units were repurchased at an average unit price of $23.79 for a total cost of approximately $12 million . All units were subsequently canceled.
No units were repurchased by the Company during the year ended December 31, 2012. At December 31, 2012, approximately $56 million was available for unit repurchase under the program. The timing and amounts of any such repurchases are at the discretion of management, subject to market conditions and other factors, and in accordance with applicable securities laws and other legal requirements. The repurchase plan does not obligate the Company to acquire any specific number of units and may be discontinued at any time. Units are repurchased at fair market value on the date of repurchase.
Other Issuance and Cancellation of Units
During the year ended December 31, 2010, the Company purchased 9,055 units for approximately $300,000 in conjunction with units received by the Company for the payment of minimum withholding taxes due on units issued under its equity compensation plan (see Note 5). All units were subsequently canceled. The Company purchased no units for this purpose during the years ended December 31, 2012, and December 31, 2011.
Distributions
Under the LLC Agreement, Company unitholders are entitled to receive a quarterly distribution of available cash to the extent there is sufficient cash from operations after establishment of cash reserves and payment of fees and expenses. Distributions paid by the Company are presented on the consolidated statements of unitholders’ capital. On January 24, 2013, the Company’s Board of Directors declared a cash distribution of $0.725 per unit with respect to the fourth quarter of 2012. The distribution, totaling approximately $170 million , was paid on February 14, 2013, to unitholders of record as of the close of business on February 7, 2013.

81
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


Note 4 - Business and Credit Concentrations
Cash
The Company maintains its cash in bank deposit accounts which at times may exceed federally insured amounts. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on its cash.
Revenue and Trade Receivables
The Company has a concentration of customers who are engaged in oil and natural gas purchasing, transportation and/or refining within the U.S. This concentration of customers may impact the Company’s overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic or other conditions. The Company’s customers consist primarily of major oil and natural gas purchasers and the Company generally does not require collateral since it has not experienced significant credit losses on such sales. The Company routinely assesses the recoverability of all material trade and other receivables to determine collectibility (see Note 1).
For the year ended December 31, 2012, the Company’s two largest customers represented approximately 12% and 11% , respectively, of the Company’s sales. For the year ended December 31, 2011, the Company’s three largest customers represented approximately 13% , 10% and 10% , respectively, of the Company’s sales. For the year ended December 31, 2010, the Company’s three largest customers represented approximately 17% , 14% and 13% , respectively, of the Company’s sales.
At December 31, 2012, trade accounts receivable from two customers represented approximately 21% and 11% , respectively, of the Company’s receivables. At December 31, 2011, trade accounts receivable from three customers represented approximately 12% , 10% and 10% , respectively, of the Company’s receivables.
Note 5 - Unit-Based Compensation and Other Benefit Plans
Incentive Plan Summary
The Linn Energy, LLC Amended and Restated Long-Term Incentive Plan, as amended (the “Plan”), originally became effective in December 2005. The Plan, which is administered by the Compensation Committee of the Board of Directors (“Compensation Committee”), permits granting unit grants, unit options, restricted units, phantom units and unit appreciation rights to employees, consultants and nonemployee directors under the terms of the Plan. The unit options and restricted units vest ratably over three years. The contractual life of unit options is 10 years.
The Plan limits the number of units that may be delivered pursuant to awards to 12.2 million units. The Board of Directors and the Compensation Committee have the right to alter or amend the Plan or any part of the Plan from time to time, including increasing the number of units that may be granted, subject to unitholder approval as required by the exchange upon which the units are listed at that time. However, no change in any outstanding grant may be made that would materially reduce the benefits to the participant without the consent of the participant.
Upon exercise or vesting of an award of units, or an award settled in units, the Company will issue new units, acquire units on the open market or directly from any person, or use any combination of the foregoing, at the Compensation Committee’s discretion. If the Company issues new units upon exercise or vesting of an award, the total number of units outstanding will increase. To date, the Company has issued awards of unit grants, unit options, restricted units and phantom units. The Plan provides for all of the following types of awards:
Unit Grants - A unit grant is a unit that vests immediately upon issuance.
Unit Options - A unit option is a right to purchase a unit at a specified price at terms determined by the Compensation Committee. Unit options will have an exercise price that will not be less than the fair market value of the units on the date of grant, and in general, will become exercisable over a vesting period but may accelerate upon a change in control of the Company. If a grantee’s employment or service relationship terminates for any reason

82
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


other than death, the grantee’s unvested unit options will be automatically forfeited unless the option agreement or the Compensation Committee provides otherwise.
Restricted Units - A restricted unit is a unit that vests over a period of time and that during such time is subject to forfeiture, and may contain such terms as the Compensation Committee shall determine. The Company intends the restricted units under the Plan to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation of its units. Therefore, Plan participants will not pay any consideration for the restricted units they receive. If a grantee’s employment or service relationship terminates for any reason other than death, the grantee’s unvested restricted units will be automatically forfeited unless the Compensation Committee or the terms of the award agreement provide otherwise.
Phantom Units/Unit Appreciation Rights - These awards may be settled in units, cash or a combination thereof. Such grants contain terms as determined by the Compensation Committee, including the period or terms over which phantom units vest. If a grantee’s employment or service relationship terminates for any reason other than death or retirement, the grantee’s phantom units or unit appreciation rights will be automatically forfeited unless, and to the extent, the Compensation Committee or the terms of the award agreement provide otherwise. Upon death or retirement, as defined in the Plan, a participant’s phantom units vest in full unless the terms of the award agreement provide otherwise. While phantom units require no payment from the grantee, unit appreciation rights will have an exercise price that will not be less than the fair market value of the units on the date of grant. At December 31, 2012, the Company had 36,784 phantom units issued and outstanding. To date, the Company has not issued unit appreciation rights.
Securities Authorized for Issuance Under the Plan
As of December 31, 2012, approximately 4.6 million units were issuable under the Plan pursuant to outstanding award or other agreements, and 769,316 additional units were reserved for future issuance under the Plan.
Accounting for Unit-Based Compensation
The Company recognizes as expense, beginning at the grant date, the fair value of unit options and other equity-based compensation issued to employees and nonemployee directors. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period using the straight-line method in the Company’s consolidated statements of operations. A summary of unit-based compensation expenses included on the consolidated statements of operations is presented below:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
 
 
 
 
 
 
 
General and administrative expenses
 
$
27,641

 
$
21,131

 
$
13,450

Lease operating expenses
 
1,892

 
1,112

 
342

Total unit-based compensation expenses
 
$
29,533

 
$
22,243

 
$
13,792

 
 
 
 
 
 
 
Income tax benefit
 
$
10,912

 
$
8,219

 
$
5,096


83
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


Restricted/Unrestricted Units
The fair value of unrestricted unit grants and restricted units issued is determined based on the fair market value of the Company units on the date of grant. A summary of the status of the nonvested units as of December 31, 2012, is presented below:
 
 
Number of
Nonvested
Units
 
Weighted Average
Grant-Date
Fair Value
 
 
 
 
 
Nonvested units at December 31, 2011
 
1,859,662

 
$
31.54

Granted
 
1,046,590

 
$
37.42

Vested
 
(875,877
)
 
$
27.20

Forfeited
 
(77,244
)
 
$
34.34

Nonvested units at December 31, 2012
 
1,953,131

 
$
36.16

The weighted average grant-date fair value of unrestricted unit grants and restricted units granted was $38.54 and $25.89 during the years ended December 31, 2011, and December 31, 2010, respectively. The total fair value of units that vested was approximately $24 million , $13 million and $14 million for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively. As of December 31, 2012, there was approximately $35 million of unrecognized compensation cost related to nonvested restricted units. The cost is expected to be recognized over a weighted average period of approximately 1.6 years .
In January 2013, the Company granted 612,240 restricted units and 105,530 phantom units as part of its annual review of its nonexecutive employees’ compensation.
Changes in Unit Options and Unit Options Outstanding
The following provides information related to unit option activity for the year ended December 31, 2012:
 
 
Number of
Units Underlying Options
 
Weighted Average
Exercise Price Per Unit
 
Weighted Average Remaining Contractual Life in Years
 
Aggregate Intrinsic Value in Millions
 
 
 
 
 
 
 
 
 
Outstanding at December 31, 2011
 
1,409,993

 
$
22.14

 
5.83
 
$
22

Granted
 
3,400,000

 
$
40.01

 
 
 
 
Exercised
 
(167,188
)
 
$
21.65

 
 
 
 
Outstanding at December 31, 2012
 
4,642,805

 
$
35.25

 
6.28
 
$
16

 
 
 
 
 
 
 
 
 
Exercisable at December 31, 2012
 
1,242,805

 
$
22.21

 
4.93
 
$
16

During the year ended December 31, 2012, the weighted average grant-date fair value of unit options granted was $5.31 . No unit options were granted during the years ended December 31, 2011, or December 31, 2010. The total intrinsic value of unit options exercised was approximately $3 million , $5 million and $2 million , during the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively. The Company received approximately $4 million from the exercise of unit options during the year ended December 31, 2012. No unit options expired during the years ended December 31, 2012, December 31, 2011, or December 31, 2010. As of December 31, 2012, total unrecognized compensation cost related to nonvested unit options was approximately $15 million . The cost is expected to be recognized over a weighted average period of approximately 3.1 years .

84
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


The fair value of unit-based compensation for unit options was estimated on the date of grant using a Black-Scholes pricing model based on certain assumptions. That value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. The Company’s determination of the fair value of unit-based payment awards is affected by the Company’s unit price as well as assumptions regarding a number of complex and subjective variables. The Company’s employee unit options have various restrictions including vesting provisions and restrictions on transfers and hedging, among others, and often are expected to be exercised prior to their contractual maturity.
Expected volatilities used in the estimation of fair value of the 2012 unit option grants have been determined using available volatility data for the Company. Expected volatilities used in the estimation of fair value of unit options granted in previous years were determined using available volatility data for the Company as well as an average of volatility computations of other identified peer companies in the oil and natural gas industry. Expected distributions are estimated based on the Company’s distribution rate at the date of grant. Forfeitures are estimated using historical Company data and are revised, if necessary, in subsequent periods if actual forfeitures differ from estimates. The risk-free rate for periods within the expected term of the unit option is based on the U.S. Treasury yield curve in effect at the time of grant. Historical data of the Company is used to estimate expected term. All employees granted awards have been determined to have similar behaviors for purposes of determining the expected term used to estimate fair value. The fair values of the 2012 unit option grants were based upon the following assumptions:
 
 
2012
 
 
 
Expected volatility
 
34.10
%
Expected distributions
 
7.25
%
Risk-free rate
 
0.67
%
Expected term
 
5 years

Nonemployee Grants
In 2007, the Company granted an aggregate 150,000 unit warrants to certain individuals in connection with an acquisition transition services agreement. The unit warrants, 15,000 of which remain outstanding, have an exercise price of $25.50 per unit warrant, are fully exercisable at December 31, 2012, and expire 10 years from the date of issuance. During the year ended December 31, 2012, 135,000 unit warrants were exercised, and the Company received approximately $3 million from these exercises.
Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan for eligible employees. Company contributions to the 401(k) plan consist of a discretionary matching contribution equal to 100% of the first 6% of eligible compensation contributed by the employee on a before-tax basis. The Company contributed approximately $5 million , $4 million and $3 million during the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively, to the 401(k) plan’s trustee account. The 401(k) plan funds are held in a trustee account on behalf of the plan participants.

85
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


Note 6 - Debt
The following summarizes debt outstanding:
 
 
December 31, 2012
 
December 31, 2011
 
 
Carrying
Value
 
Fair Value   (1)
 
Carrying
Value
 
Fair Value   (1)
 
 
(in millions, except percentages)
 
 
 
 
 
 
 
 
 
Credit facility (2)
 
$
1,180

 
$
1,180

 
$
940

 
$
940

11.75% senior notes due 2017
 
41

 
44

 
41

 
46

9.875% senior notes due 2018
 
14

 
15

 
14

 
16

6.50% senior notes due May 2019
 
750

 
755

 
750

 
742

6.25% senior notes due November 2019
 
1,800

 
1,802

 
—

 
—

8.625% senior notes due 2020
 
1,300

 
1,414

 
1,300

 
1,406

7.75% senior notes due 2021
 
1,000

 
1,061

 
1,000

 
1,036

Less current maturities
 
—

 
—

 
—

 
—

 
 
6,085

 
$
6,271

 
4,045

 
$
4,186

Unamortized discount
 
(47
)
 
 
 
(51
)
 
 
Total debt, net of discount
 
$
6,038

 
 
 
$
3,994

 
 
(1)  
The carrying value of the Credit Facility is estimated to be substantially the same as its fair value. Fair values of the senior notes were estimated based on prices quoted from third-party financial institutions.
(2)  
Variable interest rates of 1.97% and 2.57% at December 31, 2012, and December 31, 2011, respectively.
Credit Facility
The Company’s Fifth Amended and Restated Credit Agreement (“Credit Facility”) provides for a revolving credit facility up to the lesser of: (i) the then-effective borrowing base and (ii) the maximum commitment amount. The Credit Facility has a borrowing base of $4.5 billion with a maximum commitment amount of $3.0 billion . The maturity date is April 2017. At December 31, 2012, the borrowing capacity under the Credit Facility was approximately $1.8 billion , which includes a $5 million reduction in availability for outstanding letters of credit.
During 2012, in connection with amendments to its Credit Facility, the Company incurred financing fees and expenses of approximately $12 million , which will be amortized over the life of the Credit Facility. Such amortized expenses are recorded in “interest expense, net of amounts capitalized” on the consolidated statements of operations.
Redetermination of the borrowing base under the Credit Facility, based primarily on reserve reports that reflect commodity prices at such time, occurs semi-annually, in April and October, as well as upon requested interim redeterminations, by the lenders at their sole discretion. The Company also has the right to request one additional borrowing base redetermination per year at its discretion, as well as the right to an additional redetermination each year in connection with certain acquisitions. Significant declines in commodity prices may result in a decrease in the borrowing base. The Company’s obligations under the Credit Facility are secured by mortgages on its and certain of its material subsidiaries’ oil and natural gas properties and other personal property as well as a pledge of all ownership interests in its direct and indirect material subsidiaries. The Company is required to maintain either: 1) mortgages on properties representing at least 80% of the total value of oil and natural gas properties included on the most recent reserve report, or 2) a Collateral Coverage Ratio of at least 2.5 to 1. Collateral Coverage Ratio is defined as the ratio of the present value of future cash flows from proved reserves from the currently mortgaged properties to the lesser of: (i) the then-effective borrowing base and (ii) the maximum commitment amount. Additionally, the obligations under the Credit Facility are guaranteed by all of the Company’s material subsidiaries and are required to be guaranteed by any future material subsidiaries.

86
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


At the Company’s election, interest on borrowings under the Credit Facility is determined by reference to either the London Interbank Offered Rate (“LIBOR”) plus an applicable margin between 1.5% and 2.5% per annum (depending on the then-current level of borrowings under the Credit Facility) or the alternate base rate (“ABR”) plus an applicable margin between 0.5% and 1.5% per annum (depending on the then-current level of borrowings under the Credit Facility). Interest is generally payable quarterly for loans bearing interest based on the ABR and at the end of the applicable interest period for loans bearing interest at LIBOR. The Company is required to pay a commitment fee to the lenders under the Credit Facility, which accrues at a rate per annum between 0.375% and 0.5% on the average daily unused amount of the lesser of: (i) the maximum commitment amount of the lenders and (ii) the then-effective borrowing base. The Company is in compliance with all financial and other covenants of the Credit Facility.
Senior Notes Due November 2019
On March 2, 2012, the Company issued $1.8 billion in aggregate principal amount of 6.25% senior notes due November 2019 (“November 2019 Senior Notes”) at a price of 99.989% . The November 2019 Senior Notes were sold to a group of initial purchasers and then resold to qualified institutional buyers, each in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Company received net proceeds of approximately $1.77 billion (after deducting the initial purchasers’ discount of $198,000 and offering expenses of approximately $29 million ). The Company used the net proceeds to fund the BP acquisition (see Note 2). The remaining proceeds were used to repay indebtedness under the Company’s Credit Facility and for general corporate purposes. The financing fees and expenses of approximately $29 million incurred in connection with the November 2019 Senior Notes will be amortized over the life of the notes. Such amortized financing fees and expenses are recorded in “interest expense, net of amounts capitalized” on the consolidated statements of operations.
The November 2019 Senior Notes were issued under an indenture dated March 2, 2012 (“November 2019 Indenture”), mature November 1, 2019, and bear interest at 6.25% . Interest is payable semi-annually on May 1 and November 1, beginning November 1, 2012. The November 2019 Senior Notes are general unsecured senior obligations of the Company and are effectively junior in right of payment to any secured indebtedness of the Company to the extent of the collateral securing such indebtedness. Each of the Company’s material subsidiaries has guaranteed the November 2019 Senior Notes on a senior unsecured basis. The November 2019 Indenture provides that the Company may redeem: (i) on or prior to November 1, 2015, up to 35% of the aggregate principal amount of the November 2019 Senior Notes at a redemption price of 106.25% of the principal amount redeemed, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings; (ii) prior to November 1, 2015, all or part of the November 2019 Senior Notes at a redemption price equal to the principal amount redeemed, plus a make-whole premium (as defined in the November 2019 Indenture) and accrued and unpaid interest; and (iii) on or after November 1, 2015, all or part of the November 2019 Senior Notes at a redemption price equal to 103.125% , and decreasing percentages thereafter, of the principal amount redeemed, plus accrued and unpaid interest. The November 2019 Indenture also provides that, if a change of control (as defined in the November 2019 Indenture) occurs, the holders have a right to require the Company to repurchase all or part of the November 2019 Senior Notes at a redemption price equal to 101% , plus accrued and unpaid interest.
The November 2019 Indenture contains covenants substantially similar to those under the Company’s May 2019 Senior Notes, 2010 Issued Senior Notes and Original Senior Notes, as defined below, that, among other things, limit the Company’s ability to: (i) pay distributions on, purchase or redeem the Company’s units or redeem its subordinated debt; (ii) make investments; (iii) incur or guarantee additional indebtedness or issue certain types of equity securities; (iv) create certain liens; (v) sell assets; (vi) consolidate, merge or transfer all or substantially all of the Company’s assets; (vii) enter into agreements that restrict distributions or other payments from the Company’s restricted subsidiaries to the Company; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. The Company is in compliance with all financial and other covenants of the November 2019 Senior Notes.
In connection with the issuance and sale of the November 2019 Senior Notes, the Company entered into a Registration Rights Agreement (“November 2019 Registration Rights Agreement”) with the initial purchasers. Under the November 2019 Registration Rights Agreement, the Company agreed to use its reasonable efforts to file with the Securities and Exchange Commission (“SEC”) and cause to become effective a registration statement relating to an offer to issue new notes having terms substantially identical to the November 2019 Senior Notes in exchange for outstanding November 2019 Senior Notes within 400 days after the notes were issued. In certain circumstances, the Company may be required to file a shelf registration statement to cover resales of the November 2019 Senior Notes. If the Company fails to satisfy these obligations, the Company may be required to pay additional interest to holders of the November 2019 Senior Notes under certain circumstances.

87
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


Senior Notes Due May 2019
On May 13, 2011, the Company issued $750 million in aggregate principal amount of 6.5% senior notes due 2019 (the “May 2019 Senior Notes”). The indentures related to the May 2019 Senior Notes contain redemption provisions and covenants that are substantially similar to those of the November 2019 Senior Notes. On May 8, 2012, the Company filed a registration statement on Form S-4 to register exchange notes that are also substantially similar to the November 2019 Senior Notes. On September 24, 2012, the registration statement was declared effective and the Company commenced an offer to exchange any and all of its $750 million outstanding principal amount of May 2019 Senior Notes for an equal amount of new May 2019 Senior Notes.
The terms of the new May 2019 Senior Notes are identical in all material respects to those of the outstanding May 2019 Senior Notes, except that the transfer restrictions, registration rights and additional interest provisions relating to the outstanding May 2019 Senior Notes do not apply to the new May 2019 Senior Notes. The exchange offer expired on October 23, 2012. Pursuant to the terms of the registration rights agreement entered into in connection with the May 2019 Senior Notes, the Company agreed to use its reasonable efforts to cause the registration statement relating to the new May 2019 Senior Notes to become effective within 400 days after the notes were issued. The effective date of the registration statement was past the deadline in the registration rights agreement, and therefore, the Company was required to pay additional interest of approximately $850,000 to holders of the May 2019 Senior Notes in November 2012.
Senior Notes Due 2020 and Senior Notes Due 2021
The Company has $1.3 billion in aggregate principal amount of 8.625% senior notes due 2020 (the “2020 Senior Notes”) and $1.0 billion in aggregate principal amount of 7.75% senior notes due 2021 (the “2021 Senior Notes,” and together with the 2020 Senior Notes, the “2010 Issued Senior Notes”). The indentures related to the 2010 Issued Senior Notes contain redemption provisions and covenants that are substantially similar to those of the November 2019 Senior Notes. However, in 2011, the Company caused the trustee to remove the restrictive legends from each of the 2010 Issued Senior Notes making them freely tradable (other than with respect to persons that are affiliates of the Company), thereby terminating the Company’s obligations under each of the registration rights agreements entered into in connection with the issuance of the 2010 Issued Senior Notes.
Senior Notes Due 2017 and Senior Notes Due 2018
The Company also has $41 million (originally $250 million ) in aggregate principal amount of 11.75% senior notes due 2017 (the “2017 Senior Notes”) and $14 million (originally $256 million ) in aggregate principal amount of 9.875% senior notes due 2018 (the “2018 Senior Notes” and together with the 2017 Senior Notes, the “Original Senior Notes”). The indentures related to the Original Senior Notes initially contained redemption provisions and covenants that were substantially similar to those of the November 2019 Senior Notes; however, in conjunction with the tender offers in 2011, the indentures were amended and most of the covenants and certain default provisions were eliminated. The amendments became effective upon the execution of the supplemental indentures to the indentures governing the Original Senior Notes.
In March 2011 and June 2011, in accordance with the indentures related to the Original Senior Notes, the Company redeemed and also repurchased through cash tender offers, a portion of the Original Senior Notes. In connection with the redemptions and cash tender offers of a portion of the Original Senior Notes, the Company recorded a loss on extinguishment of debt of approximately $95 million for the year ended December 31, 2011.
Note 7 - Derivatives
Commodity Derivatives
The Company utilizes derivative instruments to minimize the variability in cash flow due to commodity price movements. The Company has historically entered into derivative instruments such as swap contracts, put options and collars to economically hedge its forecasted oil, natural gas and NGL sales. The Company did not designate any of these contracts as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings. See Note 8 for fair value disclosures about oil and natural gas commodity derivatives.

88
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


The following table summarizes derivative positions for the periods indicated as of December 31, 2012:
 
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
Natural gas positions:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed price swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
 
87,290

 
97,401

 
118,041

 
121,841

 
120,122

 
36,500

Average price ($/MMBtu)
 
$
5.22

 
$
5.25

 
$
5.19

 
$
4.20

 
$
4.26

 
$
5.00

Puts: (1)
 
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
 
86,198

 
79,628

 
71,854

 
76,269

 
66,886

 
—

Average price ($/MMBtu)
 
$
5.37

 
$
5.00

 
$
5.00

 
$
5.00

 
$
4.88

 
$
—

Total:
 
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
 
173,488

 
177,029

 
189,895

 
198,110

 
187,008

 
36,500

Average price ($/MMBtu)
 
$
5.29

 
$
5.14

 
$
5.12

 
$
4.51

 
$
4.48

 
$
5.00

 
 
 
 
 
 
 
 
 
 
 
 
 
Oil positions:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed price swaps: (2)
 
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MBbls)
 
11,871

 
11,903

 
11,599

 
11,464

 
4,755

 
—

Average price ($/Bbl)
 
$
94.97

 
$
92.92

 
$
96.23

 
$
90.56

 
$
89.02

 
$
—

Puts:
 
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MBbls)
 
3,105

 
3,960

 
3,426

 
3,271

 
384

 
—

Average price ($/Bbl)
 
$
97.86

 
$
91.30

 
$
90.00

 
$
90.00

 
$
90.00

 
$
—

Total:
 
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MBbls)
 
14,976

 
15,863

 
15,025

 
14,735

 
5,139

 
—

Average price ($/Bbl)
 
$
95.57

 
$
92.52

 
$
94.81

 
$
90.44

 
$
89.10

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas basis differential positions:   (3)
 
 
 
 
 
 
 
 
 
 
 
 
Panhandle basis swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
 
77,800

 
79,388

 
87,162

 
19,764

 
—

 
—

Hedged differential ($/MMBtu)
 
$
(0.56
)
 
$
(0.33
)
 
$
(0.33
)
 
$
(0.31
)
 
$
—

 
$
—

NWPL - Rockies basis swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
 
34,785

 
36,026

 
38,362

 
39,199

 
—

 
—

Hedge differential ($/MMBtu)
 
$
(0.20
)
 
$
(0.20
)
 
$
(0.20
)
 
$
(0.20
)
 
$
—

 
$
—

MichCon basis swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
 
9,600

 
9,490

 
9,344

 
—

 
—

 
—

Hedged differential ($/MMBtu)
 
$
0.10

 
$
0.08

 
$
0.06

 
$
—

 
$
—

 
$
—

Houston Ship Channel basis swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
 
5,731

 
5,256

 
4,891

 
4,575

 
—

 
—

Hedged differential ($/MMBtu)
 
$
(0.10
)
 
$
(0.10
)
 
$
(0.10
)
 
$
(0.10
)
 
$
—

 
$
—

Permian basis swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MMMBtu)
 
4,636

 
4,891

 
5,074

 
—

 
—

 
—

Hedged differential ($/MMBtu)
 
$
(0.20
)
 
$
(0.21
)
 
$
(0.21
)
 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Oil timing differential positions:
 
 
 
 
 
 
 
 
 
 
 
 
Trade month roll swaps: (4)
 
 
 
 
 
 
 
 
 
 
 
 
Hedged volume (MBbls)
 
6,944

 
7,254

 
7,251

 
7,446

 
6,486

 
—

Hedged differential ($/Bbl)
 
$
0.22

 
$
0.22

 
$
0.24

 
$
0.25

 
$
0.25

 
$
—

(1)  
Includes certain outstanding natural gas puts of approximately 10,570 MMMBtu for each of the years ending December 31, 2013, December 31, 2014, and December 31, 2015, and 10,599 MMMBtu for the year ending December 31, 2016, used to hedge revenues associated with NGL production.

89
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


(2)  
Includes certain outstanding fixed price oil swaps of approximately 5,384 MBbls which may be extended annually at a price of $100.00 per Bbl for each of the years ending December 31, 2017, and December 31, 2018, and $90.00 per Bbl for the year ending December 31, 2019, if the counterparties determine that the strike prices are in-the-money on a designated date in each respective preceding year. The extension for each year is exercisable without respect to the other years.
(3)  
Settle on the respective pricing index to hedge basis differential associated with natural gas production.
(4)  
The Company hedges the timing risk associated with the sales price of oil in the Mid-Continent, Hugoton Basin and Permian Basin regions. In these regions, the Company generally sells oil for the delivery month at a sales price based on the average NYMEX price of light crude oil during that month, plus an adjustment calculated as a spread between the weighted average prices of the delivery month, the next month and the following month during the period when the delivery month is prompt (the “trade month roll”).
During the year ended December 31, 2012, the Company entered into commodity derivative contracts consisting of oil swaps for 2012 through 2017, natural gas swaps for 2012 through 2018, and oil and natural gas puts for 2012 through 2017 and paid premiums for put options of approximately $583 million . The Company also entered into natural gas basis swaps for 2012 through 2016 and trade month roll swaps for 2012 through 2017.
Settled derivatives on natural gas production for the year ended December 31, 2012, included volumes of 140,884 MMMBtu at an average contract price of $5.41 per MMBtu. Settled derivatives on oil production for the year ended December 31, 2012, included volumes of 11,289 MBbls at an average contract price of $97.61 per Bbl. Settled derivatives on natural gas production for the year ended December 31, 2011, included volumes of 64,457 MMMBtu at an average contract price of $8.24 per MMBtu. Settled derivatives on oil production for the year ended December 31, 2011, included volumes of 7,917 MBbls at an average contract price of $85.70 per Bbl. The natural gas derivatives are settled based on the closing price of NYMEX natural gas on the last trading day for the delivery month, which occurs on the third business day preceding the delivery month, or the relevant index prices of natural gas published in Inside FERC’s Gas Market Report on the first business day of the delivery month. The oil derivatives are settled based on the average closing price of NYMEX light crude oil for each day of the delivery month.
Interest Rate Swaps
The Company may from time to time enter into interest rate swap agreements based on LIBOR to minimize the effect of fluctuations in interest rates. If LIBOR is lower than the fixed rate in the contract, the Company is required to pay the counterparty the difference, and conversely, the counterparty is required to pay the Company if LIBOR is higher than the fixed rate in the contract. The Company does not designate interest rate swap agreements as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings.
In 2010, the Company restructured its interest rate swap portfolio in conjunction with the repayments of all of the outstanding indebtedness under its Credit Facility with net proceeds from the issuances of the 2020 and 2021 Senior Notes (see Note 6). In connection with the repayments of borrowings under its Credit Facility with net proceeds from the issuances of the 2020 and 2021 Senior Notes, the Company canceled (before the contract settlement date) all of its interest rate swap agreements resulting in realized losses of approximately $124 million . At December 31, 2012, and December 31, 2011, the Company had no outstanding interest rate swap agreements.

90
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


Balance Sheet Presentation
The Company’s commodity derivatives and, when applicable, its interest rate swap derivatives are presented on a net basis in “derivative instruments” on the consolidated balance sheets. The following summarizes the fair value of derivatives outstanding on a gross basis:
 
 
December 31,
 
 
2012
 
2011
 
 
(in thousands)
Assets:
 
 
 
 
Commodity derivatives
 
$
1,282,390

 
$
880,175

Liabilities:
 
 
 
 
Commodity derivatives
 
$
405,619

 
$
320,835

By using derivative instruments to economically hedge exposures to changes in commodity prices and interest rates, when applicable, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk. The Company’s counterparties are current participants or affiliates of participants in its Credit Facility or were participants or affiliates of participants in its Credit Facility at the time it originally entered into the derivatives. The Credit Facility is secured by the Company’s oil and natural gas reserves; therefore, the Company is not required to post any collateral. The Company does not receive collateral from its counterparties. The maximum amount of loss due to credit risk that the Company would incur if its counterparties failed completely to perform according to the terms of the contracts, based on the gross fair value of financial instruments, was approximately $1.3 billion at December 31, 2012. The Company minimizes the credit risk in derivative instruments by: (i) limiting its exposure to any single counterparty; (ii) entering into derivative instruments only with counterparties that meet the Company’s minimum credit quality standard, or have a guarantee from an affiliate that meets the Company’s minimum credit quality standard; and (iii) monitoring the creditworthiness of the Company’s counterparties on an ongoing basis. In accordance with the Company’s standard practice, its commodity derivatives and, when applicable, its interest rate derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of loss is somewhat mitigated.
Gains (Losses) on Derivatives
Total gains and losses on derivatives, including realized and unrealized gains and losses, were approximately $125 million , $450 million and $7 million for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively, and are reported on the consolidated statements of operations in “gains on oil and natural gas derivatives” and “losses on interest rate swaps.”
Note 8 - Fair Value Measurements on a Recurring Basis
The Company accounts for its commodity derivatives and, when applicable, its interest rate derivatives at fair value (see Note  7) on a recurring basis. The Company uses certain pricing models to determine the fair value of its derivative financial instruments. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties. Company management validates the data provided by third parties by understanding the pricing models used, obtaining market values from other pricing sources, analyzing pricing data in certain situations and confirming that those securities trade in active markets. Assumed credit risk adjustments, based on published credit ratings, public bond yield spreads and credit default swap spreads, are applied to the Company’s commodity derivatives and, when applicable, its interest rate derivatives.

91
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


Fair Value Hierarchy
In accordance with applicable accounting standards, the Company has categorized its financial instruments, based on the priority of inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Financial assets and liabilities recorded on the consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1
Financial assets and liabilities for which values are based on unadjusted quoted prices for identical assets or liabilities in an active market that management has the ability to access.
Level 2
Financial assets and liabilities for which values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability (commodity derivatives and interest rate swaps).
Level 3
Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
When the inputs used to measure fair value fall within different levels of the hierarchy in a liquid environment, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company conducts a review of fair value hierarchy classifications on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities.
The following presents the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:
 
 
Fair Value Measurements on a Recurring Basis
December 31, 2012
 
 
Level 2
 
Netting   (1)
 
Total
 
 
(in thousands)
Assets:
 
 
 
 
 
 
Commodity derivatives
 
$
1,282,390

 
$
(401,479
)
 
$
880,911

Liabilities:
 
 
 
 
 
 
Commodity derivatives
 
$
405,619

 
$
(401,479
)
 
$
4,140

(1)  
Represents counterparty netting under agreements governing such derivatives.

92
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


Note 9 - Other Property and Equipment
Other property and equipment consists of the following:
 
 
December 31,
 
 
2012
 
2011
 
 
(in thousands)
 
 
 
 
 
Natural gas plant and pipeline
 
$
371,292

 
$
129,863

Buildings and leasehold improvements
 
19,999

 
16,158

Vehicles
 
19,731

 
13,653

Drilling and other equipment
 
6,265

 
3,645

Furniture and office equipment
 
47,623

 
29,972

Land
 
4,278

 
3,944

 
 
469,188

 
197,235

Less accumulated depreciation
 
(73,721
)
 
(48,024
)
 
 
$
395,467

 
$
149,211

Note 10 - Asset Retirement Obligations
Asset retirement obligations associated with retiring tangible long-lived assets are recognized as a liability in the period in which a legal obligation is incurred and becomes determinable and are included in “other noncurrent liabilities” on the consolidated balance sheets. Accretion expense is included in “depreciation, depletion and amortization” on the consolidated statements of operations. The fair value of additions to the asset retirement obligations is estimated using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) plug and abandon costs per well based on existing regulatory requirements; (ii) remaining life per well; (iii) future inflation factors ( 2.0% for each of the years in the three-year period ended December 31, 2012); and (iv) a credit-adjusted risk-free interest rate (average of 6.8% , 7.5% and 8.6% for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively). These inputs require significant judgments and estimates by the Company’s management at the time of the valuation and are the most sensitive and subject to change.
The following presents a reconciliation of the Company’s asset retirement obligations:
 
 
December 31,
 
 
2012
 
2011
 
 
(in thousands)
 
 
 
 
 
Asset retirement obligations at beginning of year
 
$
71,142

 
$
42,945

Liabilities added from acquisitions
 
63,663

 
19,853

Liabilities added from drilling
 
1,799

 
1,277

Current year accretion expense
 
8,550

 
4,140

Settlements
 
(3,640
)
 
(2,218
)
Revision of estimates
 
10,460

 
5,145

Asset retirement obligations at end of year
 
$
151,974

 
$
71,142

Note 11 - Commitments and Contingencies
The Company has been named as a defendant in a number of lawsuits, including claims from royalty owners related to disputed royalty payments and royalty valuations. The Company has established reserves that management currently believes are adequate to provide for potential liabilities based upon its evaluation of these matters. For a certain statewide class action royalty payment dispute where a reserve has not yet been established, the Company has denied that it has any liability on the claims and has raised arguments and defenses that, if accepted by the court, will result in no loss to the Company. Discovery related to class certification has concluded. Briefing and the hearing on class certification have been

93


deferred by court order pending the Tenth Circuit Court of Appeals’ resolution of interlocutory appeals of two unrelated class certification orders. As a result, the Company is unable to estimate a possible loss, or range of possible loss, if any. In addition, the Company is involved in various other disputes arising in the ordinary course of business. The Company is not currently a party to any litigation or pending claims that it believes would have a material adverse effect on its overall business, financial position, results of operations or liquidity; however, cash flow could be significantly impacted in the reporting periods in which such matters are resolved.
In 2008, Lehman Brothers Holdings Inc. and Lehman Brothers Commodity Services Inc. (together “Lehman”), filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court for the Southern District of New York. In March 2011, the Company and Lehman entered into Termination Agreements under which the Company was granted general unsecured claims against Lehman in the amount of $51 million (the “Company Claim”). In December 2011, a Chapter 11 Plan (“Lehman Plan”) was approved by the Bankruptcy Court. Based on the recovery estimates described in the approved disclosure statement relating to the Lehman Plan, the Company expects to ultimately receive a substantial portion of the Company Claim. During 2012, the Company received approximately $28 million of the Company Claim under the Lehman Plan resulting in realized gains of approximately $22 million , which is included in “gains on oil and natural gas derivatives” on the consolidated statement of operations. Additional distributions may occur in the future.
Note 12 - Earnings Per Unit
Basic earnings per unit is computed by dividing net earnings attributable to unitholders by the weighted average number of units outstanding during each period. Diluted earnings per unit is computed by adjusting the average number of units outstanding for the dilutive effect, if any, of unit equivalents. The Company uses the treasury stock method to determine the dilutive effect.

94
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


The following table provides a reconciliation of the numerators and denominators of the basic and diluted per unit computations for net income (loss):
 
 
Net Income (Loss)
(Numerator)
 
Units
(Denominator)
 
Per Unit
Amount
 
 
(in thousands)
 
 
Year ended December 31, 2012:
 
 
 
 
Net loss:
 
 
 
 
Allocated to units
 
$
(386,616
)
 
 
 
 
Allocated to unvested restricted units
 
(4,575
)
 
 
 
 
 
 
$
(391,191
)
 
 
 
 
Net loss per unit:
 
 
 
 
 
 
Basic net loss per unit
 
 
 
203,775

 
$
(1.92
)
Dilutive effect of unit equivalents
 
 
 
—

 
—

Diluted net loss per unit
 
 
 
203,775

 
$
(1.92
)
 
 
 
 
 
 
 
Year ended December 31, 2011:
 
 
 
 
 
 
Net income:
 
 
 
 
 
 
Allocated to units
 
$
438,439

 
 
 
 
Allocated to unvested restricted units
 
(4,739
)
 
 
 
 
 
 
$
433,700

 
 
 
 
Net income per unit:
 
 
 
 
 
 
Basic net income per unit
 
 
 
172,004

 
$
2.52

Dilutive effect of unit equivalents
 
 
 
725

 
(0.01
)
Diluted net income per unit
 
 
 
172,729

 
$
2.51

 
 
 
 
 
 
 
Year ended December 31, 2010:
 
 
 
 
 
 
Net loss:
 
 
 
 
 
 
Allocated to units
 
$
(114,288
)
 
 
 
 
Allocated to unvested restricted units
 
—

 
 
 
 
 
 
$
(114,288
)
 
 
 
 
Net loss per unit:
 
 
 
 
 
 
Basic net loss per unit
 
 
 
142,535

 
$
(0.80
)
Dilutive effect of unit equivalents
 
 
 
—

 
—

Diluted net loss per unit
 
 
 
142,535

 
$
(0.80
)
Basic units outstanding excludes the effect of weighted average anti-dilutive unit equivalents related to approximately 2 million unit options and warrants for each of the years ended December 31, 2012, and December 31, 2010. All equivalent units were anti-dilutive for the years ended December 31, 2012, and December 31, 2010, respectively. There were no anti-dilutive unit equivalents for the year ended December 31, 2011.
Note 13 - Operating Leases
The Company leases office space and other property and equipment under lease agreements expiring on various dates through 2019. The Company recognized expense under operating leases of approximately $7 million , $5 million and $5 million , for the years ended December 31, 2012, December 31, 2011, and December 31, 2010, respectively.

95
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


As of December 31, 2012, future minimum lease payments were as follows (in thousands):
2013
$
6,459

2014
6,718

2015
6,660

2016
4,396

2017
4,381

Thereafter
8,761

 
$
37,375

Note 14 - Income Taxes
The Company is a limited liability company treated as a partnership for federal and state income tax purposes, with the exception of the state of Texas, in which income tax liabilities and/or benefits of the Company are passed through to its unitholders. Limited liability companies are subject to Texas margin tax. Limited liability companies were also subject to state income taxes in the state of Michigan during 2011 and 2010. In addition, certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. As such, with the exception of the state of Texas and certain subsidiaries, the Company is not a taxable entity, it does not directly pay federal and state income taxes and recognition has not been given to federal and state income taxes for the operations of the Company, except as set forth in the tables below. Amounts recognized for income taxes are reported in “income tax expense” on the consolidated statements of operations.
The Company’s taxable income or loss, which may vary substantially from the net income or net loss reported on the consolidated statements of operations, is includable in the federal and state income tax returns of each unitholder. The aggregate difference in the basis of net assets for financial and tax reporting purposes cannot be readily determined as the Company does not have access to information about each unitholder’s tax attributes.
Certain of the Company’s subsidiaries are Subchapter C-corporations subject to federal and state income taxes. Income tax expense (benefit) consisted of the following:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
Current taxes:
 
 
 
 
 
 
Federal
 
$
2,711

 
$
4,551

 
$
65

State
 
439

 
605

 
1,088

Deferred taxes:
 
 
 
 
 
 
Federal
 
323

 
(1,148
)
 
2,862

State
 
(683
)
 
1,458

 
226

 
 
$
2,790

 
$
5,466

 
$
4,241

As of December 31, 2012, the Company’s taxable entities had approximately $10 million of net operating loss carryforwards for federal income tax purposes which will begin expiring in 2031 .

96
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


A reconciliation of the federal statutory tax rate to the effective tax rate is as follows:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
 
 
 
 
 
Federal statutory rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
State, net of federal tax benefit
 
0.1

 
0.5

 
(1.2
)
Loss excluded from nontaxable entities
 
(35.6
)
 
(34.4
)
 
(37.5
)
Other items
 
(0.2
)
 
0.1

 
(0.1
)
Effective rate
 
(0.7
)%
 
1.2
 %
 
(3.8
)%

Significant components of the deferred tax assets and liabilities were as follows:
 
 
December 31,
 
 
2012
 
2011
 
 
(in thousands)
Deferred tax assets:
 
 
 
 
Net operating loss carryforwards
 
$
—

 
$
159

Unit-based compensation
 
10,579

 
9,146

Other
 
4,924

 
3,606

Total deferred tax assets
 
15,503

 
12,911

Deferred tax liabilities:
 
 
 
 
Property and equipment principally due to differences in depreciation
 
(11,049
)
 
(8,226
)
Other
 
(1,055
)
 
(1,646
)
Total deferred tax liabilities
 
(12,104
)
 
(9,872
)
Net deferred tax assets
 
$
3,399

 
$
3,039


Net deferred tax assets and liabilities were classified on the consolidated balance sheets as follows:
 
 
December 31,
 
 
2012
 
2011
 
 
(in thousands)
 
 
 
 
 
Deferred tax assets
 
$
10,318

 
$
8,279

Deferred tax liabilities
 
(612
)
 
(589
)
Other current assets
 
$
9,706

 
$
7,690

 
 
 
 
 
Deferred tax assets
 
$
5,186

 
$
4,632

Deferred tax liabilities
 
(11,493
)
 
(9,283
)
Other noncurrent liabilities
 
$
(6,307
)
 
$
(4,651
)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2012, based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. The amount of deferred tax assets considered realizable could be reduced in the future if estimates of future taxable income during the carryforward period are reduced.

97
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


In accordance with the applicable accounting standard, the Company recognizes only the impact of income tax positions that, based on their merits, are more likely than not to be sustained upon audit by a taxing authority. To evaluate its current tax positions in order to identify any material uncertain tax positions, the Company developed a policy of identifying and evaluating uncertain tax positions that considers support for each tax position, industry standards, tax return disclosures and schedules, and the significance of each position. It is the Company’s policy to recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The Company had no material uncertain tax positions at December 31, 2012, and December 31, 2011.
Note 15 - Supplemental Disclosures to the Consolidated Balance Sheets and Consolidated Statements of Cash Flows
“Other accrued liabilities” reported on the consolidated balance sheets include the following:
 
 
December 31,
 
 
2012
 
2011
 
 
(in thousands)
 
 
 
 
 
Accrued compensation
 
$
35,431

 
$
19,581

Accrued interest
 
72,668

 
55,170

Other
 
7,146

 
1,147

 
 
$
115,245

 
$
75,898

Supplemental disclosures to the consolidated statements of cash flows are presented below:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
 
 
 
 
 
 
 
Cash payments for interest, net of amounts capitalized
 
$
343,331

 
$
247,217

 
$
128,807

 
 
 
 
 
 
 
Cash payments for income taxes
 
$
366

 
$
487

 
$
1,797

 
 
 
 
 
 
 
Noncash investing activities:
 
 
 
 
 
 
In connection with the acquisition of oil and natural gas properties, liabilities were assumed as follow:
 
 
 
 
 
 
Fair value of assets acquired
 
$
2,923,990

 
$
1,523,466

 
$
1,375,010

Cash paid, net of cash acquired
 
(2,640,475
)
 
(1,500,193
)
 
(1,351,033
)
Receivable from seller
 
2,132

 
3,557

 
9,976

Payables to sellers
 
443

 
(4,847
)
 
—

Liabilities assumed
 
$
286,090

 
$
21,983

 
$
33,953

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid short-term investments with original maturities of three months or less to be cash equivalents. Restricted cash of approximately $5 million and $4 million is included in “other noncurrent assets” on the consolidated balance sheets at December 31, 2012, and December 31, 2011, respectively, and represents cash deposited by the Company into a separate account and designated for asset retirement obligations in accordance with contractual agreements.
The Company manages its working capital and cash requirements to borrow only as needed from its Credit Facility. At December 31, 2012, and December 31, 2011, approximately $35 million and $54 million , respectively, were included in “accounts payable and accrued expenses” on the consolidated balance sheets which represent reclassified net outstanding checks. The Company presents these net outstanding checks as cash flows from financing activities on the consolidated statements of cash flows.

98
LINN ENERGY, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


Note 16 - Related Party Transactions
LinnCo
LinnCo, an affiliate of LINN Energy, was formed on April 30, 2012, for the sole purpose of owning units in LINN Energy. LinnCo expects to have no significant assets or operations other than those related to its interest in LINN Energy. Upon the formation of LinnCo, LINN Energy paid $1,000 for 100% of LinnCo’s sole voting share. In October 2012, LinnCo completed its IPO and used the net proceeds of approximately $1.2 billion from the offering to acquire 34,787,500 of LINN Energy’s units which represent approximately 15% of LINN Energy’s outstanding units at December 31, 2012. All of LinnCo’s common shares are held by the public. See Note 3 for additional details about the LinnCo IPO.
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. In addition, the Company has agreed to indemnify LinnCo and its officers and directors for damages suffered or costs incurred (other than income taxes payable by LinnCo) in connection with carrying out LinnCo’s activities.
For the period from April 30, 2012 (LinnCo’s 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. LINN Energy also paid, on LinnCo’s behalf, approximately $3 million of offering costs in connection with the LinnCo IPO. All expenses and costs paid by LINN Energy on LinnCo’s behalf are recorded as investment at cost and included in “other noncurrent assets” on the consolidated balance sheet.
In November 2012, the Company paid approximately $25 million in distributions to LinnCo attributable to LinnCo’s interest in LINN Energy. On January 24, 2013, the Company’s Board of Directors 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.
Other
One of the Company’s directors, appointed to the Board in May 2012, is the President and Chief Executive Officer of Superior Energy Services, Inc. (“Superior”), which provides oilfield services to the Company. For the year ended December 31, 2012, the Company paid approximately $21 million to Superior and its subsidiaries for services rendered to the Company. These payments were consummated on terms equivalent to those that prevail in arm’s-length transactions.
Note 17 - Subsidiary Guarantors
The November 2019 Senior Notes, the May 2019 Senior Notes, the 2010 Issued Notes and the Original Senior Notes are guaranteed by all of the Company’s material subsidiaries. The Company is a holding company and has no independent assets or operations of its own, the guarantees under each series of notes are full and unconditional and joint and several, and any subsidiaries of the Company other than the subsidiary guarantors are minor. There are no restrictions on the Company’s ability to obtain cash dividends or other distributions of funds from the guarantor subsidiaries.
Note 18 - 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.

99

LINN ENERGY, LLC
SUPPLEMENTAL OIL AND NATURAL GAS DATA (Unaudited)

The following discussion and analysis should be read in conjunction with the “Consolidated Financial Statements” and “Notes to Consolidated Financial Statements,” which are included in this Annual Report on Form 10-K in Item 8. “Financial Statements and Supplementary Data.”
Costs Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development Activities
Costs incurred in oil and natural gas property acquisition, exploration and development, whether capitalized or expensed, are presented below:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
Property acquisition costs: (1)
 
 
 
 
 
 
Proved
 
$
2,531,419

 
$
1,328,328

 
$
1,290,826

Unproved
 
181,124

 
188,409

 
65,604

Exploration costs
 
452

 
80

 
74

Development costs
 
1,062,043

 
639,395

 
244,834

Asset retirement costs
 
4,675

 
2,427

 
748

Total costs incurred
 
$
3,779,713

 
$
2,158,639

 
$
1,602,086


(1)  
See Note 2 for details about the Company’s acquisitions.

Oil and Natural Gas Capitalized Costs
Aggregate capitalized costs related to oil, natural gas and NGL production activities with applicable accumulated depletion and amortization are presented below:
 
 
December 31,
 
 
2012
 
2011
 
 
(in thousands)
Proved properties:
 
 
 
 
Leasehold acquisition
 
$
8,603,888

 
$
6,040,239

Development
 
2,553,127

 
1,484,486

Unproved properties
 
454,315

 
310,925

 
 
11,611,330

 
7,835,650

Less accumulated depletion and amortization
 
(2,025,656
)
 
(1,033,617
)
 
 
$
9,585,674

 
$
6,802,033


100
LINN ENERGY, LLC
SUPPLEMENTAL OIL AND NATURAL GAS DATA (Unaudited) - Continued


Results of Oil and Natural Gas Producing Activities
The results of operations for oil, natural gas and NGL producing activities (excluding corporate overhead and interest costs) are presented below:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
Revenues and other:
 
 
 
 
 
 
Oil, natural gas and natural gas liquid sales
 
$
1,601,180

 
$
1,162,037

 
$
690,054

Gains on oil and natural gas derivatives
 
124,762

 
449,940

 
75,211

 
 
1,725,942

 
1,611,977

 
765,265

Production costs:
 
 

 
 

 
 

Lease operating expenses
 
317,699

 
232,619

 
158,382

Transportation expenses
 
77,322

 
28,358

 
19,594

Severance and ad valorem taxes
 
130,805

 
78,458

 
45,114

 
 
525,826

 
339,435

 
223,090

Other costs:
 
 
 
 
 
 
Exploration costs
 
1,915

 
2,390

 
5,168

Depletion and amortization
 
579,382

 
320,096

 
226,552

Impairment of long-lived assets
 
422,499

 
—

 
38,600

Gains on sale of assets and other, net
 
(1,369
)
 
(1,001
)
 
—

Texas margin tax (benefit) expense
 
(787
)
 
1,599

 
657

 
 
1,001,640

 
323,084

 
270,977

Results of operations
 
$
198,476

 
$
949,458

 
$
271,198

There is no federal tax provision included in the results above because the Company’s subsidiaries subject to federal tax do not own any of the Company’s oil and natural gas interests. Limited liability companies are subject to Texas margin tax. Limited liability companies were also subject to state income taxes in the state of Michigan during 2011 and 2010; however, no taxes were assessed in this state for producing activities during these years. See Note 14 for additional information about income taxes.

101
LINN ENERGY, LLC
SUPPLEMENTAL OIL AND NATURAL GAS DATA (Unaudited) - Continued


Proved Oil, Natural Gas and NGL Reserves
The proved reserves of oil, natural gas and NGL of the Company have been prepared by the independent engineering firm, DeGolyer and MacNaughton. In accordance with SEC regulations, reserves at December 31, 2012, December 31, 2011, and December 31, 2010, were estimated using the average price during the 12-month period, determined as an unweighted average of the first-day-of-the-month price for each month, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. An analysis of the change in estimated quantities of oil, natural gas and NGL reserves, all of which are located within the U.S., is shown below: 
 
 
Year Ended December 31, 2012
 
 
Natural Gas
(Bcf)
 
Oil
(MMBbls)
 
NGL
(MMBbls)
 
Total
(Bcfe)
Proved developed and undeveloped reserves:
 
 
 
 
 
 
 
 
Beginning of year
 
1,675

 
189.0

 
93.5

 
3,370

Revisions of previous estimates
 
(559
)
 
(26.5
)
 
(14.1
)
 
(803
)
Purchase of minerals in place
 
1,176

 
23.1

 
75.3

 
1,766

Extensions, discoveries and other additions
 
407

 
16.6

 
33.7

 
709

Production
 
(128
)
 
(10.7
)
 
(9.0
)
 
(246
)
End of year
 
2,571

 
191.5

 
179.4

 
4,796

Proved developed reserves:
 
 
 
 
 
 
 
 
Beginning of year
 
998

 
124.8

 
47.8

 
2,034

End of year
 
1,661

 
131.4

 
113.0

 
3,127

Proved undeveloped reserves:
 
 
 
 
 
 
 
 
Beginning of year
 
677

 
64.2

 
45.7

 
1,336

End of year
 
910

 
60.1

 
66.4

 
1,669

 
 
Year Ended December 31, 2011
 
 
Natural Gas (Bcf)
 
Oil
(MMBbls)
 
NGL (MMBbls)
 
Total
(Bcfe)
Proved developed and undeveloped reserves:
 
 
 
 
 
 
 
 
Beginning of year
 
1,233

 
156.4

 
70.9

 
2,597

Revisions of previous estimates
 
(71
)
 
(9.2
)
 
0.9

 
(121
)
Purchase of minerals in place
 
337

 
39.3

 
1.0

 
579

Extensions, discoveries and other additions
 
240

 
10.3

 
24.6

 
450

Production
 
(64
)
 
(7.8
)
 
(3.9
)
 
(135
)
End of year
 
1,675

 
189.0

 
93.5

 
3,370

Proved developed reserves:
 
 
 
 
 
 
 
 
Beginning of year
 
805

 
103.0

 
39.9

 
1,662

End of year
 
998

 
124.8

 
47.8

 
2,034

Proved undeveloped reserves:
 
 
 
 
 
 
 
 
Beginning of year
 
428

 
53.4

 
31.0

 
935

End of year
 
677

 
64.2

 
45.7

 
1,336


102
LINN ENERGY, LLC
SUPPLEMENTAL OIL AND NATURAL GAS DATA (Unaudited) - Continued


 
 
Year Ended December 31, 2010
 
 
Natural Gas (Bcf)
 
Oil
(MMBbls)
 
NGL (MMBbls)
 
Total
(Bcfe)
Proved developed and undeveloped reserves:
 
 
 
 
 
 
 
 
Beginning of year
 
774

 
102.1

 
54.2

 
1,712

Revisions of previous estimates
 
22

 
3.9

 
5.2

 
77

Purchase of minerals in place
 
369

 
49.1

 
1.2

 
671

Extensions, discoveries and other additions
 
118

 
6.1

 
13.3

 
234

Production
 
(50
)
 
(4.8
)
 
(3.0
)
 
(97
)
End of year
 
1,233

 
156.4

 
70.9

 
2,597

Proved developed reserves:
 
 
 
 
 
 
 
 
Beginning of year
 
549

 
77.9

 
33.9

 
1,220

End of year
 
805

 
103.0

 
39.9

 
1,662

Proved undeveloped reserves:
 
 
 
 
 
 
 
 
Beginning of year
 
225

 
24.2

 
20.3

 
492

End of year
 
428

 
53.4

 
31.0

 
935

The tables above include changes in estimated quantities of oil and NGL reserves shown in Mcf equivalents at a rate of one barrel per six Mcf.
Proved reserves increased by approximately 1,426 Bcfe to approximately 4,796 Bcfe for the year ended December 31, 2012, from 3,370 Bcfe for the year ended December 31, 2011. The year ended December 31, 2012, includes 803 Bcfe of negative revisions of previous estimates, due primarily to 340 Bcfe of negative revisions due to asset performance, 248 Bcfe of negative revisions primarily due to lower natural gas prices and 215 Bcfe of negative revisions due to the SEC five-year development limitation on PUDs. Seven acquisitions during the year ended December 31, 2012, increased proved reserves by approximately 1,766 Bcfe. In addition, extensions and discoveries, primarily from 436 productive wells drilled during the year, contributed approximately 709 Bcfe to the increase in proved reserves.
Proved reserves increased by approximately 773 Bcfe to approximately 3,370 Bcfe for the year ended December 31, 2011, from 2,597 Bcfe for the year ended December 31, 2010. The year ended December 31, 2011, includes 121 Bcfe of negative revisions of previous estimates, due primarily to 153 Bcfe of negative revisions due to asset performance. These negative revisions were partially offset by 32 Bcfe of positive revisions primarily due to higher oil prices. Twelve acquisitions during the year ended December 31, 2011, increased proved reserves by approximately 579 Bcfe. In addition, extensions and discoveries, primarily from 292 productive wells drilled during the year, contributed approximately 450 Bcfe to the increase in proved reserves.
Proved reserves increased by approximately 885 Bcfe to approximately 2,597 Bcfe for the year ended December 31, 2010, from 1,712 Bcfe for the year ended December 31, 2009. The year ended December 31, 2010, includes 77 Bcfe of positive revisions of previous estimates, due primarily to higher oil and natural gas prices, which contributed approximately 155 Bcfe. These positive revisions were partially offset by 78 Bcfe of negative revisions primarily due to asset performance. Eleven acquisitions during the year ended December 31, 2010, increased proved reserves by approximately 671 Bcfe. In addition, extensions and discoveries, primarily from 138 productive wells drilled during the year, contributed approximately 234 Bcfe to the increase in proved reserves.
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Reserves
Information with respect to the standardized measure of discounted future net cash flows relating to proved reserves is summarized below. Future cash inflows are computed by applying applicable prices relating to the Company’s proved reserves to the year-end quantities of those reserves. Future production, development, site restoration and abandonment costs are derived based on current costs assuming continuation of existing economic conditions. There are no future income tax expenses because the Company is not subject to federal income taxes. Limited liability companies are subject to Texas margin tax. Limited liabilities companies were also subject to state income taxes in the state of Michigan during 2011 and 2010; however, these amounts are not material. See Note 14 for additional information about income taxes.

103
LINN ENERGY, LLC
SUPPLEMENTAL OIL AND NATURAL GAS DATA (Unaudited) - Continued


 
 
December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
 
 
 
 
 
 
 
Future estimated revenues
 
$
30,374,380

 
$
29,319,369

 
$
20,160,275

Future estimated production costs
 
(11,460,854
)
 
(9,464,319
)
 
(6,825,147
)
Future estimated development costs
 
(3,574,058
)
 
(2,848,497
)
 
(1,733,929
)
Future net cash flows
 
15,339,468

 
17,006,553

 
11,601,199

10% annual discount for estimated timing of cash flows
 
(9,266,487
)
 
(10,391,693
)
 
(7,377,667
)
Standardized measure of discounted future net cash flows
 
$
6,072,981

 
$
6,614,860

 
$
4,223,532

 
 
 
 
 
 
 
Representative NYMEX prices: (1)
 
 
 
 
 
 
Natural gas (MMBtu)
 
$
2.76

 
$
4.12

 
$
4.38

Oil (Bbl)
 
$
94.64

 
$
95.84

 
$
79.29

(1)  
In accordance with SEC regulations, reserves at December 31, 2012, December 31, 2011, and December 31, 2010, were estimated using the average price during the 12-month period, determined as an unweighted average of the first-day-of-the-month price for each month, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions. The price used to estimate reserves is held constant over the life of the reserves.
The following summarizes the principal sources of change in the standardized measure of discounted future net cash flows:
 
 
Year Ended December 31,
 
 
2012
 
2011
 
2010
 
 
(in thousands)
Sales and transfers of oil, natural gas and NGL produced during the period
 
$
(1,075,354
)
 
$
(822,602
)
 
$
(466,964
)
Changes in estimated future development costs
 
289,762

 
27,236

 
(56,001
)
Net change in sales and transfer prices and production costs related to future production
 
(1,463,820
)
 
784,308

 
886,438

Purchase of minerals in place
 
2,153,651

 
1,452,169

 
1,277,134

Extensions, discoveries, and improved recovery
 
413,702

 
552,704

 
329,642

Previously estimated development costs incurred during the period
 
442,322

 
306,827

 
42,947

Net change due to revisions in quantity estimates
 
(1,595,302
)
 
(292,343
)
 
164,999

Accretion of discount
 
661,486

 
422,353

 
172,328

Changes in production rates and other
 
(368,326
)
 
(39,324
)
 
149,727

 
 
$
(541,879
)
 
$
2,391,328

 
$
2,500,250

The data presented should not be viewed as representing the expected cash flow from, or current value of, existing proved reserves since the computations are based on a large number of estimates and arbitrary assumptions. Reserve quantities cannot be measured with precision and their estimation requires many judgmental determinations and frequent revisions. The required projection of production and related expenditures over time requires further estimates with respect to pipeline availability, rates of demand and governmental control. Actual future prices and costs are likely to be substantially different from the current prices and costs utilized in the computation of reported amounts. Any analysis or evaluation of the reported amounts should give specific recognition to the computational methods utilized and the limitations inherent therein.

104

LINN ENERGY, LLC
SUPPLEMENTAL QUARTERLY DATA (Unaudited)

The following discussion and analysis should be read in conjunction with the “Consolidated Financial Statements” and “Notes to Consolidated Financial Statements,” which are included in this Annual Report on Form 10-K in Item 8. “Financial Statements and Supplementary Data.”
Quarterly Financial Data
 
 
Quarters Ended
 
 
March 31
 
June 30
 
September 30
 
December 31
 
 
(in thousands, except per unit amounts)
2012:
 
 
 
 
 
 
 
 
Oil, natural gas and natural gas liquid sales
 
$
348,895

 
$
347,227

 
$
444,082

 
$
460,976

Gains (losses) on oil and natural gas derivatives
 
2,031

 
439,647

 
(411,405
)
 
94,489

Total revenues and other
 
354,090

 
800,597

 
48,328

 
571,225

Total expenses (1)
 
269,108

 
460,617

 
376,353

 
656,111

(Gain) losses on sale of assets and other, net
 
1,478

 
36

 
(14
)
 
141

Net income (loss)
 
(6,202
)
 
237,086

 
(430,005
)
 
(187,495
)
 
 
 
 
 
 
 
 
 
Net income (loss) per unit:
 
 
 
 
 
 
 
 
Basic
 
$
(0.04
)
 
$
1.19

 
$
(2.18
)
 
$
(0.83
)
Diluted
 
$
(0.04
)
 
$
1.19

 
$
(2.18
)
 
$
(0.83
)
(1)  
Includes the following expenses: lease operating, transportation, marketing, general and administrative, exploration, bad debt, depreciation, depletion and amortization, impairment of long-lived assets and taxes, other than income taxes.
 
 
Quarters Ended
 
 
March 31
 
June 30
 
September 30
 
December 31
 
 
(in thousands, except per unit amounts)
2011:
 
 
 
 
 
 
 
 
Oil, natural gas and natural gas liquid sales
 
$
240,707

 
$
302,390

 
$
292,482

 
$
326,458

Gains (losses) on oil and natural gas derivatives
 
(369,476
)
 
205,515

 
824,240

 
(210,339
)
Total revenues and other
 
(126,473
)
 
510,571

 
1,119,483

 
118,873

Total expenses (1)
 
165,625

 
195,672

 
211,254

 
240,353

Losses on sale of assets and other, net
 
614

 
977

 
279

 
1,646

Net income (loss)
 
(446,682
)
 
237,109

 
837,627

 
(189,615
)
 
 
 
 
 
 
 
 
 
Net income (loss) per unit:
 
 
 
 
 
 
 
 
Basic
 
$
(2.75
)
 
$
1.34

 
$
4.74

 
$
(1.09
)
Diluted
 
$
(2.75
)
 
$
1.33

 
$
4.72

 
$
(1.09
)
(1)  
Includes the following expenses: lease operating, transportation, marketing, general and administrative, exploration, bad debt, depreciation, depletion and amortization and taxes, other than income taxes.

105

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
Item 9A.    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 December 31, 2012.
Management’s Annual Report on Internal Control Over Financial Reporting
See “Management’s Report on Internal Control Over Financial Reporting” in Item 8. “Financial Statements and Supplementary Data.”
Changes in the Company’s Internal Control Over Financial Reporting
The Company’s management is also responsible for establishing and maintaining adequate internal controls 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 consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the U.S.
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 controls over financial reporting during the fourth quarter of 2012 that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting. 
Item 9B.    Other Information
On October 17, 2012, LinnCo, LLC (“LinnCo”), an affiliate of LINN Energy, completed its initial public offering of 34,787,500 common shares representing limited liability company interests. LinnCo has elected to be taxed as a corporation, and accordingly, its shareholders will receive a Form 1099 in respect of any dividends paid by LinnCo. The net proceeds from the offering were used to acquire 34,787,500 LINN Energy units which are equal to the number of LinnCo shares sold in the offering. LinnCo will have no significant assets or operations other than those related to its ownership of LINN Energy units. The Company used the proceeds it received from the sale of its units to LinnCo to pay the expenses of the offering and repay a portion of the outstanding indebtedness under its Credit Facility. LinnCo’s common shares are listed on the NASDAQ Global Select Market under the symbol “LNCO.”

106
Table of Contents
Item 9B.    Other Information - Continued


The Company is a limited liability company and its units representing limited liability company interests (“units”) are listed on the NASDAQ Global Select Market. The SEC’s taxonomy for interactive data reporting does not contain tags that include the term “units” for all existing equity accounts; therefore, in certain instances, the Company has used tags that refer to “shares” or “stock” rather than “units” in its interactive data exhibit. These tags were selected to enhance comparability between the Company and its peers and it should not be inferred from the usage of these tags that an investment in the Company is in any form other than “units” as described above. The Company’s interactive data files are included as Exhibit 101 to this Annual Report on Form 10-K.

107
Table of Contents

Part III

Item 10.    Directors, Executive Officers and Corporate Governance
A list of the Company’s executive officers and biographical information appears in Part I in this Annual Report on Form 10-K under the caption “Executive Officers of the Company.” Information about Company Directors may be found under the caption “Election of Directors” of the Proxy Statement for the Annual Meeting of Unitholders to be held on April 23, 2013 (the “2013 Proxy Statement”). That information is incorporated herein by reference.
The information in the 2013 Proxy Statement set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.
The information required by this item regarding audit committee related matters, codes of ethics and committee charters is incorporated by reference from the 2013 Proxy Statement under the caption “Corporate Governance.”
Item 11.    Executive Compensation
Information required by this item is incorporated herein by reference to the 2013 Proxy Statement.
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters
Information required by this item is incorporated herein by reference to the 2013 Proxy Statement.
Securities Authorized for Issuance Under Equity Compensation Plans
The following summarizes information regarding the number of units that are available for issuance under all of the Company’s equity compensation plans as of December 31, 2012:
Plan Category
 
Number of Securities to be
Issued Upon Exercise of
Outstanding Unit Options,
Warrants and Rights
 
Weighted Average Exercise
Price of Outstanding Unit
Options, Warrants
and Rights
 
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
 
 
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders
 
4,642,805

 
$
35.25

 
769,316

Equity compensation plans not approved by security holders
 
—

 
—

 
—

 
 
4,642,805

 
$
35.25

 
769,316


Item 13.    Certain Relationships and Related Transactions, and Director Independence
Information required by this item is incorporated herein by reference to the 2013 Proxy Statement.
Item 14.    Principal Accounting Fees and Services
Information required by this item is incorporated herein by reference to the 2013 Proxy Statement.

108
Table of Contents

Part IV

Item 15.    Exhibits and Financial Statement Schedules
(a) - 2.  Financial Statement Schedules:
All schedules are omitted for the reason that they are not required or the information is otherwise supplied in Item 8. “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
(a) - 3.  Exhibits Filed:
The exhibits required to be filed by this Item 15 are set forth in the “Index to Exhibits” accompanying this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
    
 
LINN ENERGY, LLC
 
 
 
 
 
 
Date :  February 21, 2013
By:
/s/ Mark E. Ellis
 
 
Mark E. Ellis
 
 
Chairman, President and Chief Executive Officer
 
 
 
 
 
 
Date :  February 21, 2013
By:
/s/ David B. Rottino
 
 
David B. Rottino
 
 
Senior Vice President of Finance, Business Development and Chief Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
 
Title
 
Date
 
 
 
 
 
/s/ Mark E. Ellis
 
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
 
February 21, 2013
Mark E. Ellis
 
 
 
 
 
 
 
 
/s/ Kolja Rockov
 
Executive Vice President and Chief Financial Officer (Principal Financial Officer)
 
February 21, 2013
Kolja Rockov
 
 
 
 
 
 
 
 
/s/ David B. Rottino
 
Senior Vice President of Finance, Business
Development and Chief Accounting Officer
(Principal Accounting Officer)
 
February 21, 2013
David B. Rottino
 
 
 
 
 
 
 
 
/s/ Michael C. Linn
 
Founder and Director
 
February 21, 2013
Michael C. Linn
 
 
 
 
 
 
 
 
 
/s/ George A. Alcorn
 
Independent Director
 
February 21, 2013
George A. Alcorn
 
 
 
 
 
 
 
 
 
/s/ David D. Dunlap
 
Independent Director
 
February 21, 2013
David D. Dunlap
 
 
 
 
 
 
 
 
 
/s/ Terrence S. Jacobs
 
Independent Director
 
February 21, 2013
Terrence S. Jacobs
 
 
 
 
 
 
 
 
 
/s/ Joseph P. McCoy
 
Independent Director
 
February 21, 2013
Joseph P. McCoy
 
 
 
 
 
 
 
 
 
/s/ Linda M. Stephens
 
Independent Director
 
February 21, 2013
Linda M. Stephens
 
 
 
 
 
 
 
 
 
/s/ Jeffrey C. Swoveland
 
Independent Director
 
February 21, 2013
Jeffrey C. Swoveland
 
 
 
 

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INDEX TO EXHIBITS
Exhibit Number
 
Description
3.1
—
Certificate of Formation of Linn Energy Holdings, LLC (now Linn Energy, LLC) (incorporated herein by reference to Exhibit 3.1 to Registration Statement on Form S-1 (File No. 333-125501) filed by Linn Energy, LLC on June 3, 2005)
3.2
—
Certificate of Amendment to Certificate of Formation of Linn Energy Holdings, LLC (now Linn Energy, LLC) (incorporated herein by reference to Exhibit 3.2 to Registration Statement on Form S-1 (File No. 333-125501) filed by Linn Energy, LLC on June 3, 2005)
3.3
—
Third Amended and Restated Limited Liability Company Agreement of Linn Energy, LLC dated as of September 3, 2010, (incorporated herein by reference to Exhibit 3.1 to Current Report on Form 8-K, filed on September 7, 2010)
4.1
—
Form of specimen unit certificate for the units of Linn Energy, LLC (incorporated herein by reference to Exhibit 4.1 to Annual Report on Form 10-K for the year ended December 31, 2005, filed on May 31, 2006)
4.2
—
Indenture, dated as of June 27, 2008, among Linn Energy, LLC, Linn Energy Finance Corp., the Subsidiary Guarantors named therein and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to Current Report on Form 8-K filed on June 30, 2008)
4.3
—
Indenture, dated as of May 18, 2009, among Linn Energy, LLC, Linn Energy Finance Corp., the Subsidiary Guarantors named therein and U. S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to Current Report on Form 8-K filed on May 18, 2009)
4.4
—
Indenture, dated as of April 6, 2010, among Linn Energy, LLC, Linn Energy Finance Corp., the Subsidiary Guarantors named therein and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to Current Report on Form 8-K filed on April 9, 2010)
4.5
—
Indenture, dated as of September 13, 2010, among Linn Energy, LLC, Linn Energy Finance Corp., the Subsidiary Guarantors named therein and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to Current Report on Form 8-K filed on September 13, 2010)
4.6
—
Indenture, dated as of May 13, 2011, among Linn Energy, LLC, Linn Energy Finance Corp., the Subsidiary Guarantors named therein and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to Current Report on Form 8-K filed on May 16, 2011)
4.7
—
Indenture, dated as of March 2, 2012, among Linn Energy, LLC, Linn Energy Finance Corp., the Subsidiary Guarantors named therein and U. S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to Current Report on Form 8-K filed on March 2, 2012)
4.8
—
First Supplemental Indenture, dated as of July 2, 2010, to Indenture, dated as of June 27, 2008, between Linn Energy, LLC, Linn Energy Finance Corp., the Subsidiary Guarantors named therein and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to Quarterly Report on Form 10-Q filed on July 29, 2010)
4.9
—
First Supplemental Indenture, dated as of July 2, 2010, to Indenture, dated as of May 18, 2009, between Linn Energy, LLC, Linn Energy Finance Corp., the Subsidiary Guarantors named therein and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.2 to Quarterly Report on Form 10-Q filed on July 29, 2010)
4.10
—
First Supplemental Indenture, dated as of July 2, 2010, to Indenture, dated as of April 6, 2010, between Linn Energy, LLC, Linn Energy Finance Corp., the Subsidiary Guarantors named therein and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.3 to Quarterly Report on Form 10-Q filed on July 29, 2010)
4.11
—
Second Supplemental Indenture, dated as of March 16, 2011, to Indenture, dated as of May 18, 2009, by and among Linn Energy LLC, Linn Energy Finance Corp., the Guarantors party thereto and U.S. Bank National Association (incorporated herein by reference to Exhibit 4.1 to Current Report on Form 8-K filed on March 22, 2011)
4.12
—
Second Supplemental Indenture, dated as of March 16, 2011, to the Indenture dated as of June 27, 2008, by and among Linn Energy LLC, Linn Energy Finance Corp., the Guarantors party thereto and U.S. Bank National Association (incorporated herein by reference to Exhibit 4.1 to Current Report on Form 8-K filed on March 22, 2011)

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Exhibit Number
 
Description
4.13
—
Registration Rights Agreement, dated as of March 2, 2012, among Linn Energy, LLC, Linn Energy Finance Corp., the Subsidiary Guarantors named therein and the representatives of the Initial Purchasers named therein (incorporated herein by reference to Exhibit 4.2 to Current Report on Form 8-K filed on March 2, 2012)
10.1*
—
Linn Energy, LLC Amended and Restated Long-Term Incentive Plan (incorporated herein by reference to Annex A to the Proxy Statement for 2008 Annual Meeting, filed on April 21, 2008)
10.2*
—
Amendment No. 1 to Linn Energy, LLC Amended and Restated Long-Term Incentive Plan, dated February 4, 2009, (incorporated herein by reference to Exhibit 10.2 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.3*
—
Amendment No. 2 to Linn Energy, LLC Amended and Restated Long-Term Incentive Plan, dated July 19, 2010, (incorporated herein by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q filed on July 29, 2010)
10.4*
—
Form of Executive Unit Option Agreement pursuant to the Linn Energy, LLC Amended and Restated Long-Term Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.3 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.5*
—
Form of Executive Restricted Unit Agreement pursuant to the Linn Energy, LLC Amended and Restated Long-Term Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.4 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.6*
—
Form of Phantom Unit Grant Agreement for Independent Directors pursuant to the Linn Energy, LLC Amended and Restated Long-Term Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K filed on August 9, 2006)
10.7*
—
Form of Director Restricted Unit Grant Agreement pursuant to the Linn Energy, LLC Amended and Restated Long-Term Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.6 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.8* **
—
Form of Non-Executive Phantom Unit Agreement pursuant to the Linn Energy, LLC Amended and Restated Long-Term Incentive Plan, as amended
10.9* **
—
Form of Executive Phantom Unit Agreement pursuant to the Linn Energy, LLC Amended and Restated Long-Term Incentive Plan, as amended
10.10*
—
Retirement Agreement, dated as of November 29, 2011, by and among Linn Operating, Inc., Linn Energy, LLC and Michael C. Linn (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on December 1, 2011)
10.11*
—
Third Amended and Restated Employment Agreement, dated effective as of December 17, 2008, between Linn Operating, Inc. and Kolja Rockov (incorporated herein by reference to Exhibit 10.8 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.12*
—
Amended and Restated Employment Agreement, dated effective as of December 17, 2008, between Linn Operating, Inc. and Mark E. Ellis (incorporated herein by reference to Exhibit 10.9 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.13*
—
Amendment No. 1, dated effective as of January 1, 2010, to Amended and Restated Employment Agreement, dated effective as of December 17, 2008, between Linn Operating, Inc. and Mark E. Ellis (incorporated herein by reference to Exhibit 10.29 to Annual Report on Form 10-K for the year ended December 31, 2009, filed on February 25, 2010)
10.14*
—
Amended and Restated Employment Agreement, dated effective December 17, 2008, between Linn Operating, Inc. and Charlene A. Ripley (incorporated herein by reference to Exhibit 10.10 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.15*
—
Amended and Restated Employment Agreement, dated effective December 17, 2008, between Linn Operating, Inc. and Arden L. Walker, Jr. (incorporated herein by reference to Exhibit 10.11 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.16*
—
Amendment No. 1, dated April 26, 2011, to First Amended and Restated Employment Agreement, dated December 17, 2008, between Linn Operating, Inc. and Arden L. Walker, Jr. (incorporated herein by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, filed on April 28, 2011)

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Exhibit Number
 
Description
10.17*
—
Second Amended and Restated Employment Agreement, dated December 17, 2008, between Linn Operating, Inc. and David B. Rottino (incorporated herein by reference to Exhibit 10.12 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.18*
—
Indemnity Agreement, dated as of February 4, 2009, between Linn Energy, LLC and George A. Alcorn (incorporated herein by reference to Exhibit 10.15 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.19*
—
Indemnity Agreement, dated as of February 4, 2009, between Linn Energy, LLC and Joseph P. McCoy (incorporated herein by reference to Exhibit 10.16 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.20*
—
Indemnity Agreement, dated as of February 4, 2009, between Linn Energy, LLC and Terrence S. Jacobs (incorporated herein by reference to Exhibit 10.17 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.21*
—
Indemnity Agreement, dated as of February 4, 2009, between Linn Energy, LLC and Jeffrey C. Swoveland (incorporated herein by reference to Exhibit 10.18 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.22*
—
Indemnity Agreement, dated as of February 4, 2009, between Linn Energy, LLC and Michael C. Linn (incorporated herein by reference to Exhibit 10.19 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.23*
—
Indemnity Agreement, dated as of February 4, 2009, between Linn Energy, LLC and Mark E. Ellis (incorporated herein by reference to Exhibit 10.20 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.24*
—
Indemnity Agreement, dated as of February 4, 2009, between Linn Energy, LLC and Kolja Rockov (incorporated herein by reference to Exhibit 10.21 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.25*
—
Indemnity Agreement, dated as of February 4, 2009, between Linn Energy, LLC and Charlene A. Ripley (incorporated herein by reference to Exhibit 10.22 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.26*
—
Indemnity Agreement, dated as of February 4, 2009, between Linn Energy, LLC and David B. Rottino (incorporated herein by reference to Exhibit 10.23 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.27*
—
Indemnity Agreement, dated as of February 4, 2009, between Linn Energy, LLC and Arden L. Walker, Jr. (incorporated herein by reference to Exhibit 10.24 to Annual Report on Form 10-K for the year ended December 31, 2008, filed on February 26, 2009)
10.28**
—
Indemnity Agreement, dated as of July 10, 2012, between Linn Energy, LLC and David D. Dunlap
10.29**
—
Indemnity Agreement, dated as of February 4, 2013, between Linn Energy, LLC and Linda M. Stephens
10.30
—
Fifth Amended and Restated Credit Agreement dated as of May 2, 2011, among Linn Energy, LLC as Borrower, BNP Paribas, as Administrative Agent, and the Lenders and agents Party thereto (incorporated herein by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed on July 28, 2011)
10.31
—
First Amendment to Fifth Amended and Restated Credit Agreement, dated February 29, 2012, among Linn Energy, LLC, BNP Paribas, as administrative agent, and the other agents and lenders party thereto (incorporated herein by reference to Exhibit 1.2 to Current Report on Form 8-K filed on March 2, 2012)
10.32
—
Second Amendment to Fifth Amended and Restated Credit Agreement, dated May 10, 2012, among Linn Energy, LLC, Wells Fargo Bank, National Association, as administrative agent, and the other agents and lenders party thereto (incorporated herein by reference to Exhibit 10.1 to Current Report on Form 8-K filed on May 15, 2012)
10.33
—
Third Amendment to Fifth Amended and Restated Credit Agreement, dated July 25, 2012, among Linn Energy, LLC, Wells Fargo Bank, National Association, as administrative agent, and the other agents and lenders party thereto (incorporated herein by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q filed on July 26, 2012)
10.34
—
Fourth Amendment to the Fifth Amended and Restated Credit Agreement among Linn Energy, LLC, as borrower, Wells Fargo Bank, National Association, as administrative agent, and the lenders and agents party thereto (incorporated herein by reference to Exhibit 10.31 to Amendment No. 5 to Registration Statement on Form S-1/A filed on October 10, 2012)

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Exhibit Number
 
Description
10.35**
—
Fifth Amendment, dated February 20, 2013, to the Fifth Amended and Restated Credit Agreement among Linn Energy, LLC, as borrower, Wells Fargo Bank, National Association, as administrative agent, and the lenders and agents party thereto
10.36
—
Fifth Amended and Restated Guaranty and Pledge Agreement, dated as of May 2, 2011, made by Linn Energy, LLC and each of the other Obligors in favor of BNP Paribas, as Administrative Agent (incorporated herein by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed on July 28, 2011)
10.37
—
Linn Energy, LLC Change of Control Protection Plan, dated as of April 25, 2009, (incorporated herein by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q filed on May 7, 2009)
10.38
—
Salt Creek EOR Participation Agreement, dated April 3, 2012, by and between
Howell Petroleum Corporation and Linn Energy Holdings, LLC (incorporated herein by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q filed on April 26, 2012)
12.1**
—
Computation of Ratio of Earnings to Fixed Charges
21.1**
—
Significant Subsidiaries of Linn Energy, LLC
23.1**
—
Consent of KPMG LLP
23.2**
—
Consent of DeGolyer and MacNaughton
31.1**
—
Section 302 Certification of Mark E. Ellis, Chairman, President and Chief Executive Officer of Linn Energy, LLC
31.2**
—
Section 302 Certification of Kolja Rockov, Executive Vice President and Chief Financial Officer of Linn Energy, LLC
32.1**
—
Section 906 Certification of Mark E. Ellis, Chairman, President and Chief Executive Officer of Linn Energy, LLC
32.2**
—
Section 906 Certification of Kolja Rockov, Executive Vice President and Chief Financial Officer of Linn Energy, LLC
99.1**
—
2012 Report of DeGolyer and MacNaughton
101.INS†
—
XBRL Instance Document
101.SCH†
—
XBRL Taxonomy Extension Schema Document
101.CAL†
—
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF†
—
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB†
—
XBRL Taxonomy Extension Label Linkbase Document
101.PRE†
—
XBRL Taxonomy Extension Presentation Linkbase Document

*
Management Contract or Compensatory Plan or Arrangement required to be filed as an exhibit hereto pursuant to Item 601 of Regulation S-K.
**
Filed herewith.
†
Furnished herewith.

114

Exhibit 10.8

LINN ENERGY, LLC
LONG-TERM INCENTIVE PLAN
FORM OF NON-EXECUTIVE PHANTOM UNIT GRANT AGREEMENT
This Phantom Unit grant agreement (“Grant Agreement”) is made and entered into effective as of [Grant Date] , (the “Grant Date”) by and between LINN ENERGY, LLC, a Delaware limited liability company (together with its subsidiaries, the “Company”), and [Executive] (“Participant”).
WHEREAS , the Company considers it to be in its best interest that Participant be given a proprietary interest in the Company and an added incentive to advance the interests of the Company; and
WHEREAS , the Company desires to accomplish such objectives by granting Participant Phantom Units pursuant to the Linn Energy, LLC Amended and Restated Long-Term Incentive Plan, as amended which is attached hereto as Appendix A and incorporated by reference herein (the “Plan”);
NOW, THEREFORE , in consideration of the mutual agreements hereinafter set forth, the parties hereby agree as follows:
1.    Grant of Phantom Units. The Company hereby grants to Participant _________ Phantom Units, under and subject to the terms and conditions of this Grant Agreement and the Plan. This grant of Phantom Units also includes a tandem grant of DERs (a contingent right to receive an equivalent of any cash distributions made by the Company with respect to Units, as defined in the Plan) with respect to each Phantom Unit.
2.    Vesting and Restricted Period. Except as otherwise provided herein, the Restricted Period with respect to one third (1/3) of the Phantom Units granted hereby shall lapse on [the first anniversary of the Grant Date] , the Restricted Period with respect to an additional one third (1/3) of the Phantom Units granted hereby shall lapse on [the second anniversary of the Grant Date] , and the Restricted Period with respect to the final one third (1/3) of the Phantom Units granted hereby shall lapse on [the third anniversary of the Grant Date] .
3.    General Restrictions. The Phantom Units shall not be assignable or transferable except as expressly provided in the Plan or by the Committee in its sole discretion.
4.    Termination of Participant’s Service Relationship with the Company. In the event of termination of Participant’s service relationship with the Company for any reason, other than in respect of a Change of Control as provided in Section 5 or Retirement as provided in Section 6, all outstanding Phantom Units granted hereby shall be automatically and immediately forfeited, and Participant hereby agrees to undertake any action and execute any document, instrument or papers reasonably requested by the Company to effect such forfeiture of Phantom Units resulting from any such termination.
5.    Change of Control . Notwithstanding anything in the Plan to the contrary, in the event of a Change of Control (as defined in the Plan), all Restricted Periods established

HOU01:1230710.3

hereunder shall automatically and immediately terminate and all outstanding Phantom Units granted hereby shall automatically and immediately vest in full.
6.    Retirement. Upon Participant’s Retirement (as defined herein), all Restricted Periods established hereunder shall automatically and immediately terminate and all outstanding Phantom Units granted hereby shall automatically and immediately vest in full. “Retirement” shall mean termination of Participant’s service relationship with the Company on or after Participant’s attainment of age 60 with at least 5 years of employment with the Company or its Affiliates.
7.    Settlement of Phantom Units. Any Phantom Units that have become vested pursuant to this Grant Agreement (other than DER payments, as described below), shall be paid to Participant by the issuance by the Company of unrestricted Units to Participant (or to Participant’s estate in the case of death) as soon as administratively practicable after the date such vesting occurred; provided that any such settlement shall be made no later than March 15 of the calendar year following the calendar year in which the Phantom Units became vested.
8.    Payment of DERs. As soon as administratively practicable following the payment of any cash distribution on Units of the Company, with respect to each Phantom Unit granted hereunder, the Company will pay the Participant an amount in cash equal to the amount of such cash distribution made by the Company on one Unit; provided that any such payment in respect of the Participant’s DERs shall be made no later than March 15 of the calendar year following the calendar year in which such cash distribution on Units occurred.
9.    Plan Controlling Document. Unless otherwise defined herein, capitalized terms shall have the meaning given such terms in the Plan. Participant agrees that the Plan is the controlling instrument and that to the extent there is any conflict between the terms of the Plan and this Grant Agreement, the Plan shall control and be the governing document.
13.    Limited Liability Company Agreement. Participant agrees to be bound by all applicable provisions of the Company’s limited liability company agreement, as it may be amended from time to time.
14.    Taxes. The Company and any affiliate thereof are authorized to withhold from any payment relating to the Phantom Units granted hereby, or any payroll or other payment to Participant, amounts of withholding and other taxes due or potentially payable in connection with the Phantom Units granted hereby, and to take such other action as the Committee may deem advisable to enable the Company, any affiliate, and Participant to satisfy obligations for the payment of withholding taxes and other tax obligations relating to the Phantom Units granted hereby. This authority shall include authority to withhold or receive Units or other property and to make cash payments in respect thereof in satisfaction of Participant’s tax obligations, either on a mandatory or elective basis in the discretion of the Committee.
15.    Issuance of Units. The Company shall not be obligated to issue any Units in settlement of the Phantom Units granted hereby at any time when the Units have not been registered under the Securities Act of 1933, as amended, and such other state and federal laws, rules or regulations as the Company or the Committee deems applicable and, in the opinion of

HOU01:1230710.3

legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the issuance of such Units.
16.    Notices. Any notices given in connection with this Grant Agreement shall, if issued to Participant, be delivered to Participant’s current address on file with the Company, or if issued to the Company, be delivered to the Company’s principal offices.
17.    Execution of Receipts and Releases. Any payment of cash or any issuance or transfer of Units or other property to Participant, or to Participant’s legal representatives, heirs, legatees or distributees, in accordance with the provisions hereof, shall, to the extent thereof, be in full satisfaction of all claims of such persons hereunder. The Company may require Participant or Participant’s legal representatives, heirs, legatees or distributees, as a condition precedent to such payment or issuance, to execute a release and receipt therefor in such form as it shall determine.
18.    Successors. This Grant Agreement shall be binding upon Participant, Participant’s legal representatives, heirs, legatees and distributees, and upon the Company, its successors and assigns.
19.    Section 409A of the Code. It is intended that the Phantom Units granted hereby not be subject to the requirements of Section 409A of the Code pursuant to the short-term deferral exception in Treasury Regulation § 1.409A-1(b)(4), and this Grant Agreement shall be interpreted and administered accordingly. For purposes of this Grant Agreement, Participant will be considered to have a termination of Participant’s service relationship with the Company only upon Participant’s “separation from service” with the Company as such term is defined in Treasury Regulation Section 1.409A-1(h), and any successor provision thereto.
IN WITNESS WHEREOF , the parties hereto have executed this Grant Agreement to be effective as of the day and year first above written.
LINN ENERGY, LLC
By: ______________________________
Name:
Title:
PARTICIPANT:
_________________________________


HOU01:1230710.3

Exhibit 10.9


LINN ENERGY, LLC
LONG-TERM INCENTIVE PLAN
FORM OF EXECUTIVE OPTION AGREEMENT
FOR SPECIAL INCENTIVE GRANT

This option agreement (“ Option Agreement ”) is made and entered into effective as of October 11, 2012, (the “ Grant Date ”) by and between LINN ENERGY, LLC, a Delaware limited liability company (together with its subsidiaries, the “ Company ”), and [Executive] (“ Participant ”).
WHEREAS , the Company considers it to be in its best interest that Participant be given a proprietary interest in the Company and an added incentive to advance the interests of the Company; and
WHEREAS , the Company desires to accomplish such objectives by affording Participant an option to purchase Units pursuant to the Amended and Restated Linn Energy, LLC Long-Term Incentive Plan, as amended, which is incorporated by reference herein (the “ Plan ”). Unless otherwise defined herein, capitalized terms shall have the meaning given such terns in the Plan.
NOW, THEREFORE , in consideration of the mutual agreements hereinafter set forth, the parties hereby agree as follows:
1. Grant of Option. The Company hereby grants to Participant an option (the “ Option ”) to purchase all or any part of an aggregate of [________] Units, under and subject to the terms and conditions of this Option Agreement and the Plan.
2.      Purchase Price. The purchase price for each Unit to be purchased hereunder shall be $40.01 (the “ Exercise Price ”).
3.      Vesting and Option Period. Participant may exercise the Option in whole or in part. Except as otherwise provided herein, the Option shall become vested and exercisable in full on January 19, 2016. Prior to such time, no portion of the Option shall be exercisable unless its exercisability is accelerated as provided in this Option Agreement or the Plan. Except as provided otherwise in this Option Agreement or the Plan, the Option, to the extent not theretofore exercised, shall terminate on the expiration of seven (7) years from the date of grant of the Option; provided, however, that upon the termination Participant’s service relationship with the Company for any reason other than (a) the death or Disability of the Participant or (b) termination of the Participant’s service relationship with the Company as a result of a Change of Control, Participant may, until the earlier of (i) 90 days from the date of such termination or (ii) the expiration of the Option in accordance with this Section 3, exercise the Option, to the extent such Option had vested immediately prior to such termination and, thereafter, the Option shall, to the extent not previously exercised, automatically terminate and become null and void.
4.      Method of Exercise and Payment. To the extent that the Option has become exercisable, the Option may be exercised from time to time by written notice to General Counsel,




or such other form as may be approved from time to time by the Committee, accompanied by the aggregate Exercise Price for the Units to be purchased and any required tax withholding amount as may be determined in the discretion of General Counsel. The Exercise Price and any withholding shall be payable in cash, by certified check, by bank check or other means provided for in the Plan and approved by the Committee, including without limitation by cashless-broker exercise or the withholding of Units upon the exercise of the Option.
5.      General Restrictions. Subject to the terms of this Option Agreement and the Plan, the Option may be exercised at any time, and from time to time, in whole or in part, until the termination thereof as set forth herein, or until all Units covered by the Option shall have been purchased, whichever first occurs. The Option shall not be assignable or transferable except as expressly provided by the Committee.
6.      Termination of Service. Upon the termination of Participant’s service relationship with the Company, other than due to death or Disability, or as a result of a Change of Control (as defined in the Plan) Participant may, until the earlier of (a) 90 days from the date of such termination or (b) the expiration of the Option in accordance with Section 3, exercise the Option but only as to the number of Units Participant was entitled to purchase under this Option Agreement as of the date Participant’s service relationship with the Company so terminates and, thereafter, the Option shall, to the extent not previously exercised, automatically terminate and become null and void (except as may be determined by the Committee in its sole discretion).
7.      Death or Disability. In the case of termination of Participant’s service relationship with the Company due to death or Disability (as defined herein), the Option granted hereby shall automatically and immediately vest in full. “ Disability ” shall mean the determination by a physician selected by the Company that Participant has been unable to perform substantially Participant’s usual and customary duties for a period of at least one hundred twenty (120) consecutive days or a non-consecutive period of one hundred eighty (180) days during any twelve-month period as a result of incapacity due to mental or physical illness or disease. In the case of termination of Participant’s service relationship with the Company due to death or Disability, Participant or Participant’s estate (or any person who acquired the right to exercise such Option by bequest or inheritance or otherwise by reason of Participant’s death or by reason of Participant’s Disability) may, until the earlier of (a) one year after the date of death or (b) the expiration of the Option in accordance with Section 3, exercise the Option and, thereafter, the Option shall, to the extent not previously exercised, automatically terminate and become null and void.
8.      Change of Control. Notwithstanding anything in the Plan to the contrary, in the event of a Change of Control (as defined in the Plan), the Option granted hereby shall automatically and immediately vest in full. In the event of the termination of Participant’s service relationship with the Company as a result of a Change of Control, the Participant may, until the earlier of (a) one year after the date of such termination or (b) the expiration of the Option in accordance with Section 3, exercise the Option and, thereafter, the Option shall, to the extent not previously exercised, automatically terminate and become null and void.




9.      Rights as a Unitholder. Participant, or a transferee of the Option, shall have no rights as a holder of a membership interest in the Company except as to any Units actually purchased pursuant to the exercise of the Option.
10.      Plan Controlling Document. Participant agrees that the Plan is the controlling instrument and that to the extent there is any conflict between the terms of the Plan and this Option Agreement, the Plan shall control and be the governing document.
11.      Limited Liability Company Agreement. As a condition to the exercise of the Option, Participant agrees to be bound by all applicable provisions of the Company’s limited liability company agreement, as it may be amended from time to time.
12.      Taxes. The Company and any affiliate thereof are authorized to withhold from any payment relating to the Option, or any payroll or other payment to Participant, amounts of withholding and other taxes due or potentially payable in connection with the exercise of the Option, and to take such other action as the Committee may deem advisable to enable the Company, any affiliate, and Participant to satisfy obligations for the payment of withholding taxes and other tax obligations relating to the Option. This authority shall include authority to withhold or receive Units or other property and to make cash payments in respect thereof in satisfaction of Participant’s tax obligations, either on a mandatory or elective basis in the discretion of the Committee.
13.      Issuance of Units. The Company shall not be obligated to issue any Units pursuant to the Option at any time when the Units covered by such Option have not been registered under the Securities Act of 1933, as amended, and such other state and federal laws, rules or regulations as the Company or the Committee deems applicable and, in the opinion of legal counsel for the Company, there is no exemption from the registration requirements of such laws, rules or regulations available for the issuance and sale of such Units.
14.      Notices. Any notices given in connection with this Option Agreement shall, if issued to Participant, be delivered to Participant’s current address on file with the Company, or if issued to the Company, be delivered to the Company’s principal offices.
15.      Execution of Receipts and Releases. Any payment of cash or any issuance or transfer of Units or other property to Participant, or to Participant’s legal representatives, heirs, legatees or distributees, in accordance with the provisions hereof, shall, to the extent thereof, be in full satisfaction of all claims of such persons hereunder. The Company may require Participant or Participant’s legal representatives, heirs, legatees or distributees, as a condition precedent to such payment or issuance, to execute a release and receipt therefor in such form as it shall determine.
16.      Successors. This Option Agreement shall be binding upon Participant, Participant’s legal representatives, heirs, legatees and distributees, and upon the Company, its successors and assigns.











IN WITNESS WHEREOF , the parties hereto have executed this Option Agreement to be effective as of the day and year first above written.
LINN ENERGY, LLC

By:     ___________________________________
Name:    [ ___________________ ]
Title:     [ ___________________ ]



PARTICIPANT:

___________________________________



Exhibit 10.28

INDEMNITY AGREEMENT

THIS INDEMNITY AGREEMENT (the “ Agreement ”) is made and entered into as of July 10, 2012 (the “ Effective Date”) between Linn Energy, LLC , a Delaware limited liability company (the “ Company ”), and David D. Dunlap (the “ Indemnitee ”).
WITNESSETH THAT:
A. Experienced and competent persons have become more reluctant to serve companies as directors, managers or officers unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the entity;
B. The Board of Directors of the Company (the “ Board ”) has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities. The Third Amended and Restated Limited Liability Company Agreement of the Company (the “ LLC Agreement ”), requires indemnification of the officers, managers and directors of the Company. The LLC Agreement states that its indemnification provisions are in addition to any other indemnification rights of the Indemnitee under any other agreement;
C. It is reasonable, prudent and necessary for the Company to contractually obligate itself to indemnify, and to advance Expenses on behalf of, such persons so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified;
D. This Agreement is supplemental to the LLC Agreement of the Company and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of the Indemnitee thereunder;
E. The Indemnitee is willing to serve, or to continue to serve, or to take on additional service for, the Company or its affiliates or other Enterprise (as defined below) as Director on condition that the Indemnitee be indemnified, and in consideration for being indemnified, as provided for in this Agreement.
NOW, THEREFORE, in consideration of the Indemnitee’s agreement to serve or continue to serve as «Title» after the date hereof, the parties hereto agree as follows:
1. Definitions . For purposes of this Agreement:
(a)      “ Chancery Court ” means the Delaware Court of Chancery.
(b)      “ Disinterested Director ” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee.

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(c)      “ Enterprise ” shall mean the Company and any other limited liability company, corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that the Indemnitee is or was serving at the express written request of the Company as a director, manager, officer, employee, agent or fiduciary.
(d)      “ Enterprise Fiduciary ” means a person who is or was serving as a director, manager, officer, employee or agent of an Enterprise, or, while serving as a director, manager, officer, employee or agent of an Enterprise, is or was serving as a tax matters partner of the Company or, at the request of the Company, as a director, manager, officer, tax matters partner, employee, partner, manager, fiduciary or trustee of any affiliate of the Company or any other Enterprise.
(e)      “ Expenses ” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding. Expenses also shall include expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond, or other appeal bond or its equivalent.
(f)      “Final Adjudication” shall mean a final judicial decision from which there is no further right to appeal .
(g)      “ Independent Counsel ” means a law firm, or a member of a law firm, that is experienced in matters of public companies, fiduciary duties, indemnity matters and corporation and limited liability company law, and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or the Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee’s rights under this Agreement, unless the party with whom counsel had a conflict of interest agrees, in such party’s sole discretion, to waive such conflict. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above.
(h)      “ Proceeding ” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which the Indemnitee was, is or will be involved as a party, witness or otherwise, by reason of the fact that the Indemnitee is or was an Enterprise Fiduciary, by reason of any action taken by the Indemnitee or of any inaction on the Indemnitee’s part while acting as an Enterprise Fiduciary, or by reason of the fact that the Indemnitee is or was serving at the request of the Company as a

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director, manager, officer, employee, agent or fiduciary of another limited liability company, corporation, partnership, joint venture, trust or other Enterprise; in each case whether or not the Indemnitee is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement, but excluding one initiated by the Indemnitee pursuant to Section 8 of this Agreement to enforce the Indemnitee’s rights under this Agreement.
2.      Indemnification of the Indemnitee . The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by applicable Delaware law as it currently exists and to such greater extent as applicable law may hereafter permit, with respect to claims asserted from and after the Effective Date, which claims relate to any act or alleged act of Indemnitee, or other event, regardless of whether any such act, alleged act or event occurred prior to or after the Effective Date, but subject to the limitations expressly provided in this Agreement. The Company shall be deemed to have requested the Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by the Indemnitee to the Company also imposes duties on, or otherwise involves services by the Indemnitee to the plan or participants or beneficiaries of the plan. In such case, the Indemnitee shall be deemed to be an “Enterprise Fiduciary.” Excise taxes assessed on the Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute “fines” within the meaning of Sections 2(a) and 2(b) . In furtherance of the foregoing indemnification, and without limiting the generality thereof:
(a)      Proceedings Other Than Proceedings by or in the Right of the Company . The Indemnitee shall be entitled to the rights of indemnification provided in this Section 2(a) to the extent that the Indemnitee was or is a party or is threatened to be made a party to, or otherwise requires representation of counsel in connection with, any Proceeding (other than an action by or in the right of the Company which is governed by Section 2(b) below) by reason of the fact that the Indemnitee is or was an Enterprise Fiduciary or by reason of any action alleged to have been taken or omitted in such capacity, against losses, Expenses, judgments, fines, damages, penalties, interest, liabilities and amounts paid in settlement actually and reasonably incurred by the Indemnitee in connection with such Proceeding if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that the Indemnitee’s conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the Indemnitee’s conduct was unlawful.
(b)      Proceedings by or in the Right of the Company . The Indemnitee shall be entitled to the rights of indemnification provided in this Section 2(b) to the extent that the Indemnitee was or is a party or is threatened to be made a party to, or otherwise requires representation of counsel in connection with, any threatened, pending or completed action, suit or proceeding, by or in the right of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee was or is an Enterprise Fiduciary, or by reason of any action alleged to have been taken or omitted in such capacity, against losses, Expenses, judgments, fines, damages, penalties, interest, liabilities and amounts paid in settlement actually and reasonably

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incurred by the Indemnitee in connection with such action, suit or proceeding if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which the Indemnitee shall have been adjudged to be liable to the Company unless and only to the extent that the Indemnitee obtains a Final Adjudication that, despite the adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such Expenses. Action taken or omitted by the Indemnitee with respect to any employee benefit plan in the performance of the Indemnitee’s duties for a purpose reasonably believed by the Indemnitee to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose that is in, or not opposed to, the best interests of the Company.
(c)      Indemnification for Expenses of a Party Who is Wholly or Partly Successful . To the extent that the Indemnitee is successful, on the merits or otherwise, in any Proceeding, the Indemnitee shall be indemnified with respect to Expenses to the maximum extent permitted by this Agreement and by Delaware law if greater, against all Expenses actually and reasonably incurred by the Indemnitee or on the Indemnitee’s behalf in connection with the successful resolution of a Proceeding. If the Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify the Indemnitee against all Expenses actually and reasonably incurred by the Indemnitee or on the Indemnitee’s behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
3.      Insurance . If available, the Company shall maintain an insurance policy or policies providing liability insurance for Enterprise Fiduciaries which is at least as favorable to the Indemnitee as the policy in effect on the Effective Date and for so long as the Indemnitee's services are covered pursuant to this Agreement, regardless of whether the Company would have the power to indemnify such Enterprise Fiduciaries against such liability under the provisions of this Agreement; provided and to the extent that such insurance is available on a reasonable commercial basis, as determined by the Board. To the extent that the Company maintains an insurance policy or policies providing liability insurance for its Enterprise Fiduciaries, the Indemnitee shall be covered by such policy or policies to the maximum extent permitted under its or their terms. However, the Indemnitee shall continue to be entitled to the indemnification rights provided pursuant to this Agreement regardless of whether liability or other insurance coverage is at any time obtained or retained by the Company.
4.      Contribution .
(a)      Whether or not the indemnification provided in Sections 2 and 3 hereof is available, in respect of any Proceeding in which the Company is jointly liable with the Indemnitee (or would be if joined in such Proceeding), the Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring the Indemnitee to contribute to such payment and the Company hereby waives and relinquishes any right of contribution it may have against the Indemnitee. The Company

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shall not enter into a settlement of any Proceeding in which the Company is jointly liable with the Indemnitee (or would be if joined in such Proceeding) unless such settlement provides for a full and final release of all claims asserted against the Indemnitee.
(b)      Without diminishing or impairing the obligations of the Company set forth in Section 4(a) , if, for any reason, the Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any Proceeding in which the Company is jointly liable with the Indemnitee (or would be if joined in such Proceeding), the Company shall contribute to the amount of Expense, judgments, fines and settlements actually and reasonably incurred and paid or payable by the Indemnitee in proportion to the relative benefits received by the Company and all officers, directors, managers or employees of the Company, other than the Indemnitee, who are jointly liable with the Indemnitee (or would be if joined in such Proceeding), on the one hand, and the Indemnitee, on the other hand, from the transaction from which such Proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of the Company and all officers, directors, managers or employees of the Company other than the Indemnitee who are jointly liable with the Indemnitee (or would be if joined in such Proceeding), on the one hand, and the Indemnitee, on the other hand, in connection with the events that resulted in such Expense, judgments, fines or settlement amounts, as well as any other equitable considerations which the law may require to be considered. The relative fault of the Company and all officers, directors, managers or employees of the Company, other than the Indemnitee, who are jointly liable with the Indemnitee (or would be if joined in such Proceeding), on the one hand, and the Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary and the degree to which their conduct is active or passive.
(c)      To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to the Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying the Indemnitee, shall contribute to the amount incurred by the Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and the Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, managers, officers, employees and agents) and the Indemnitee in connection with such event(s) and/or transaction(s).
5.      Indemnification for Expenses of a Witness . Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee is, by reason of the Indemnitee’s status as an Enterprise Fiduciary, a witness in any Proceeding to which the Indemnitee is not a party, the Indemnitee shall be indemnified by the Company against all Expenses actually and reasonably incurred by the Indemnitee or on the Indemnitee’s behalf in connection therewith.

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6.      Advancement of Expenses .
(a)      Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of the Indemnitee in connection with any Proceeding by reason of the fact that the Indemnitee is or was an Enterprise Fiduciary, within 20 days after the receipt by the Company of a statement or statements from the Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by the Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of the Indemnitee to repay any Expenses advanced if it shall ultimately be determined by a Final Adjudication that the Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 6 shall be unsecured and interest free.
(b)      The indemnification, advancement of Expenses and other provisions of this Section 6 are for the benefit of the Indemnitee, the Indemnitee’s heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other persons.
7.      Procedures and Presumptions for Determination of Entitlement to Indemnification . It is the intent of this Agreement to secure for the Indemnitee rights of indemnity that are at least as favorable as those rights permitted under the LLC Agreement and public policy of the State of Delaware. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether the Indemnitee is entitled to indemnification under this Agreement.
(a)      To obtain indemnification under this Agreement, the Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification.
(b)      Upon written request by the Indemnitee for indemnification pursuant to the first sentence of Section 7(a) hereof, a determination with respect to the Indemnitee’s entitlement thereto shall be made in the specific case by one of the following four methods, which shall be at the election of the Board: (1) by a majority vote of the Disinterested Directors, even though less than a quorum, (2) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum, (3) if there are no Disinterested Directors or if the Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to the Indemnitee, or (4) if so directed by the Board, by the Company’s unit holders.
(c)      If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7(b) hereof, the Independent Counsel shall be selected

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as provided in this Section 7(c) . The Independent Counsel shall be selected by the Board. The Indemnitee may, within 10 days after such written notice of selection shall have been given, deliver to the Company a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 1 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by the Indemnitee of a written request for indemnification pursuant to Section 7(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or the Indemnitee may petition the Chancery Court for resolution of any objection which shall have been made by the Indemnitee to the Company’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 7(b) hereof. The Company shall pay any and all reasonable fees and Expense of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 7(b) hereof, and the Company shall pay all reasonable fees and Expense incident to the procedures of this Section 7(c) , regardless of the manner in which such Independent Counsel was selected or appointed.
(d)      Neither the failure of the Company (including its Disinterested Directors, a committee of such directors, Independent Counsel, or its unit holders) to have made a determination prior to the commencement of a Proceeding that indemnification of the Indemnitee is proper in the circumstances under the applicable standard of conduct set forth in this Agreement, nor an actual determination by the Company (including its Disinterested Directors, a committee of such Disinterested Directors, Independent Counsel, or the Company’s unit holders) that the Indemnitee has not met the applicable standard of conduct shall create a presumption that the Indemnitee has not met the applicable standard of conduct, or, in the case of a suit brought by the Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to enforce a right to indemnification or to an advancement of Expense hereunder, or brought by the Company to recover an advancement of Expense pursuant to the terms of an undertaking, the burden of proving that the Indemnitee is not entitled to be indemnified or to such advancement of Expense, under this Section 7(d) or otherwise shall be on the Company.
(e)      the Indemnitee shall be deemed to have acted in good faith if the Indemnitee’s action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to the Indemnitee by the officers or managers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any other director, manager, officer, agent or employee of the Enterprise shall not be imputed to the Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 7(e) are satisfied, it shall in any event be presumed that the Indemnitee has at all times acted in good faith and in a manner the Indemnitee reasonably

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believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.
(f)      the Indemnitee shall cooperate with the person, persons or entity making such determination with respect to the Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to the Indemnitee and reasonably necessary to such determination. Any Independent Counsel or member of the Board shall act reasonably and in good faith in making a determination regarding the Indemnitee’s entitlement to indemnification under this Agreement. Any costs or Expense incurred by the Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to the Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold the Indemnitee harmless therefrom.
(g)      The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which the Indemnitee is a party is resolved in any manner other than by adverse judgment against the Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that the Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.
(h)      The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that the Indemnitee’s conduct was unlawful.
8.      Remedies of the Indemnitee .
(a)      If a claim under this Agreement is not paid in full by the Company within 60 days after a written claim has been received by the Company, except in the case of a claim for an advancement of Expenses, in which case the applicable period shall be 20 days, the Indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Company to recover an advancement of Expenses pursuant to the terms of an undertaking, the Indemnitee shall be entitled to be paid also the reasonable Expenses of prosecuting or defending such suit. In any suit brought by the Indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the Indemnitee to enforce a right to an advancement of Expenses) it shall be a defense that, in accordance with the procedures, presumptions and provisions set forth in this Agreement, the Indemnitee has not met any material applicable standard for

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indemnification set forth in this Agreement under procedures and provisions set forth herein. In any suit brought by the Company to recover an advancement of Expenses pursuant to the terms of an undertaking, the Company shall be entitled to recover such Expenses upon a Final Adjudication that the Indemnitee has not met any material applicable standard for indemnification set forth in this Agreement at the Effective Date.
(b)      In the event that a determination shall have been made pursuant to Section 7(b) of this Agreement that the Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 8 shall be conducted in all respects as a de novo trial on the merits, and the Indemnitee shall not be prejudiced by reason of the adverse determination under Section 7(b) .
(c)      If a determination shall have been made pursuant to Section 7(b) of this Agreement that the Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 8 , absent (i) a misstatement by the Indemnitee of a material fact, or an omission of a material fact necessary to make the Indemnitee’s misstatement not materially misleading in connection with the application for indemnification, or (ii) a prohibition of such indemnification under applicable law.
(d)      In the event that the Indemnitee, pursuant to this Section 8 , seeks a judicial adjudication of the Indemnitee’s rights under, or to recover damages for breach of, this Agreement, or to recover under any directors’ and officers’ liability insurance policies maintained by the Company, the Company shall pay on the Indemnitee’s behalf, in advance, any and all Expenses (of the types described in the definition of “Expenses” in Section 1 of this Agreement) actually and reasonably incurred by the Indemnitee in such judicial adjudication, regardless of whether the Indemnitee ultimately is determined to be entitled to such indemnification, advancement of Expenses or insurance recovery.
(e)      The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 8 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement.
(f)      Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding.
9.      Non-Exclusivity; Insurance; Subrogation .
(a)      The rights of indemnification, advancement of Expenses and other rights of the Indemnitee under this Agreement shall be in addition to any other rights to which an the Indemnitee may be entitled under any agreement, including (1) the LLC Agreement; (2) pursuant to those rights adopted by any vote of the unit holders; (3) as a matter of law; or (4) otherwise, as to actions in the Indemnitee’s capacity as an Enterprise Fiduciary. No amendment or modification of this Agreement or of any provision hereof shall limit or restrict any right of the Indemnitee under this Agreement in respect of any action taken or omitted by such the Indemnitee in the Indemnitee’s capacity as an Enterprise Fiduciary prior to such amendment,

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alteration or repeal. To the extent that an amendment or modification of the LLC Agreement, whether by law, amendment or otherwise, or an amendment to Delaware law, permits greater indemnification than would be afforded currently under this Agreement, it is the intent of the parties hereto that the Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.
(b)      If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.
(c)      In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
(d)      The Company's obligation to indemnify or advance Expenses hereunder to the Indemnitee who is or was serving at the request of the Company as an Enterprise Fiduciary to an Enterprise other than the Company shall be reduced by any amount the Indemnitee has actually received as indemnification or advancement of Expenses from such other Enterprise.
(e)      Any indemnification pursuant to this Agreement shall be made only out of the assets of the Company, including any insurance purchased and maintained by the Company for such purpose, it being agreed that the Company’s unit holders shall not be personally liable for such indemnification and shall have no obligation to contribute or loan any monies or property to the Company to enable it to effectuate such indemnification.
(f)      the Indemnitee shall not be denied indemnification in whole or in part under this Agreement because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement as in effect at the time of the transaction.
10.      Exception to Right of Indemnification . Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against the Indemnitee:
(a)      for which payment has actually been made to or on behalf of the Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision; or

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(b)      for an accounting of profits made from the purchase and sale (or sale and purchase) by the Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law; or
(c)      in connection with any Proceeding (or any part of any Proceeding) initiated by the Indemnitee, against the Company or its directors, managers, officers, employees or other indemnitees, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.
11.      Duration of Agreement . All agreements and obligations of the Company contained herein shall continue during the period the Indemnitee is an Enterprise Fiduciary of the Company (or is or was serving at the request of the Company as an Enterprise Fiduciary another Enterprise) and shall continue thereafter so long as the Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 7 hereof) by reason of the fact that the Indemnitee is or was an Enterprise Fiduciary, whether or not the Indemnitee is acting or serving in any such capacity at the time any liability or Expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives.
12.      Security . To the extent requested by the Indemnitee and approved by the Board, the Company may at any time and from time to time provide security to the Indemnitee for the Company’s obligations hereunder through an irrevocable bank line of credit or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee.
13.      Enforcement .
(a)      The Company expressly confirms and agrees that it has entered into this Agreement and assumes the obligations imposed on it hereby in order to induce the Indemnitee to serve as Director of the Company, and the Company acknowledges that the Indemnitee is relying upon this Agreement in serving as such Enterprise Fiduciary of the Company.
(b)      This Agreement and the LLC Agreement constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.
14.      Severability . The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. Without limiting the generality of the foregoing, this Agreement is intended to confer upon the Indemnitee indemnification rights to the fullest extent not prohibited by law. In the event any provision

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hereof conflicts with any applicable law, such provision shall be deemed modified, consistent with the aforementioned intent, to the extent necessary to resolve such conflict.
15.      Modification and Waiver . No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
16.      Notice By the Indemnitee . the Indemnitee agrees promptly to notify the Company in writing upon being served with or otherwise receiving any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company.
17.      Notices . All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent:
(a)      To the Indemnitee at the address set forth below the Indemnitee signature hereto.
 
To the Company at:
 
 
 
Linn Energy, LLC
JP Morgan Chase Tower
600 Travis, Suite 5100
Houston, TX 77002
Fax: 281-840-4180
Attention: Senior Vice President and General Counsel
cripley@linn energy.com
or to such other address as may have been furnished to the Indemnitee by the Company or to the Company by the Indemnitee, as the case may be.
18.      Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. This Agreement may also be executed and delivered by facsimile signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

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19.      Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.
20.      Governing Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. The Company and the Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Chancery Court and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Chancery Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) appoint, to the extent such party is not otherwise subject to service of process in the State of Delaware, irrevocably Capitol Services, Inc., at 615 South Dupont Highway, Dover, Delaware 19901 (as such address may be changed from time to time by such agent) as its agent in the State of Delaware as such party's agent for acceptance of legal process in connection with any such action or proceeding against such party with the same legal force and validity as if served upon such party personally within the State of Delaware, (iv) waive any objection to the laying of venue of any such action or proceeding in the Chancery Court, and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Chancery Court has been brought in an improper or inconvenient forum.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written.
COMPANY

By: /s/ Mark E. Ellis    
Mark E. Ellis
Chairman, President and Chief Executive Officer


INDEMNITEE


/s/ David D. Dunlap    
David D. Dunlap

Address:

______________________________________

______________________________________


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Exhibit 10.29

INDEMNITY AGREEMENT

THIS INDEMNITY AGREEMENT (the “ Agreement ”) is made and entered into as of February 4, 2013 (the “ Effective Date”) between Linn Energy, LLC , a Delaware limited liability company (the “ Company ”), and Linda M. Stephens (the “ Indemnitee ”).
WITNESSETH THAT:
A. Experienced and competent persons have become more reluctant to serve companies as directors, managers or officers unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the entity;
B. The Board of Directors of the Company (the “ Board ”) has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities. The Third Amended and Restated Limited Liability Company Agreement of the Company (the “ LLC Agreement ”), requires indemnification of the officers, managers and directors of the Company. The LLC Agreement states that its indemnification provisions are in addition to any other indemnification rights of the Indemnitee under any other agreement;
C. It is reasonable, prudent and necessary for the Company to contractually obligate itself to indemnify, and to advance Expenses on behalf of, such persons so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified;
D. This Agreement is supplemental to the LLC Agreement of the Company and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of the Indemnitee thereunder;
E. The Indemnitee is willing to serve, or to continue to serve, or to take on additional service for, the Company or its affiliates or other Enterprise (as defined below) as Director on condition that the Indemnitee be indemnified, and in consideration for being indemnified, as provided for in this Agreement. Indemnitee acknowledges she is serving as a Director of LinnCo, LLC, the Company’s affiliate, at the request of the Company.
NOW, THEREFORE, in consideration of the Indemnitee’s agreement to serve or continue to serve as Director after the date hereof, the parties hereto agree as follows:
1. Definitions . For purposes of this Agreement:
(a)      “ Chancery Court ” means the Delaware Court of Chancery.
(b)      “ Disinterested Director ” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee.

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(c)      “ Enterprise ” shall mean the Company and any other limited liability company, corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that the Indemnitee is or was serving at the express written request of the Company as a director, manager, officer, employee, agent or fiduciary.
(d)      “ Enterprise Fiduciary ” means a person who is or was serving as a director, manager, officer, employee or agent of an Enterprise, or, while serving as a director, manager, officer, employee or agent of an Enterprise, is or was serving as a tax matters partner of the Company or, at the request of the Company, as a director, manager, officer, tax matters partner, employee, partner, manager, fiduciary or trustee of any affiliate of the Company or any other Enterprise.
(e)      “ Expenses ” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding. Expenses also shall include expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond, or other appeal bond or its equivalent.
(f)      “Final Adjudication” shall mean a final judicial decision from which there is no further right to appeal .
(g)      “ Independent Counsel ” means a law firm, or a member of a law firm, that is experienced in matters of public companies, fiduciary duties, indemnity matters and corporation and limited liability company law, and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or the Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee’s rights under this Agreement, unless the party with whom counsel had a conflict of interest agrees, in such party’s sole discretion, to waive such conflict. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above.
(h)      “ Proceeding ” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which the Indemnitee was, is or will be involved as a party, witness or otherwise, by reason of the fact that the Indemnitee is or was an Enterprise Fiduciary, by reason of any action taken by the Indemnitee or of any inaction on the Indemnitee’s part while acting as an Enterprise Fiduciary, or by reason of the fact that the Indemnitee is or was serving at the request of the Company as a

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director, manager, officer, employee, agent or fiduciary of another limited liability company, corporation, partnership, joint venture, trust or other Enterprise; in each case whether or not the Indemnitee is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement, but excluding one initiated by the Indemnitee pursuant to Section 8 of this Agreement to enforce the Indemnitee’s rights under this Agreement.
2.      Indemnification of the Indemnitee . The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by applicable Delaware law as it currently exists and to such greater extent as applicable law may hereafter permit, with respect to claims asserted from and after the Effective Date, which claims relate to any act or alleged act of Indemnitee, or other event, regardless of whether any such act, alleged act or event occurred prior to or after the Effective Date, but subject to the limitations expressly provided in this Agreement. The Company shall be deemed to have requested the Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by the Indemnitee to the Company also imposes duties on, or otherwise involves services by the Indemnitee to the plan or participants or beneficiaries of the plan. In such case, the Indemnitee shall be deemed to be an “Enterprise Fiduciary.” Excise taxes assessed on the Indemnitee with respect to an employee benefit plan pursuant to applicable law shall constitute “fines” within the meaning of Sections 2(a) and 2(b) . In furtherance of the foregoing indemnification, and without limiting the generality thereof:
(a)      Proceedings Other Than Proceedings by or in the Right of the Company . The Indemnitee shall be entitled to the rights of indemnification provided in this Section 2(a) to the extent that the Indemnitee was or is a party or is threatened to be made a party to, or otherwise requires representation of counsel in connection with, any Proceeding (other than an action by or in the right of the Company which is governed by Section 2(b) below) by reason of the fact that the Indemnitee is or was an Enterprise Fiduciary or by reason of any action alleged to have been taken or omitted in such capacity, against losses, Expenses, judgments, fines, damages, penalties, interest, liabilities and amounts paid in settlement actually and reasonably incurred by the Indemnitee in connection with such Proceeding if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that the Indemnitee’s conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the Indemnitee’s conduct was unlawful.
(b)      Proceedings by or in the Right of the Company . The Indemnitee shall be entitled to the rights of indemnification provided in this Section 2(b) to the extent that the Indemnitee was or is a party or is threatened to be made a party to, or otherwise requires representation of counsel in connection with, any threatened, pending or completed action, suit or proceeding, by or in the right of the Company to procure a judgment in its favor by reason of the fact that the Indemnitee was or is an Enterprise Fiduciary, or by reason of any action alleged to have been taken or omitted in such capacity, against losses, Expenses, judgments, fines, damages, penalties, interest, liabilities and amounts paid in settlement actually and reasonably

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incurred by the Indemnitee in connection with such action, suit or proceeding if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which the Indemnitee shall have been adjudged to be liable to the Company unless and only to the extent that the Indemnitee obtains a Final Adjudication that, despite the adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnity for such Expenses. Action taken or omitted by the Indemnitee with respect to any employee benefit plan in the performance of the Indemnitee’s duties for a purpose reasonably believed by the Indemnitee to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose that is in, or not opposed to, the best interests of the Company.
(c)      Indemnification for Expenses of a Party Who is Wholly or Partly Successful . To the extent that the Indemnitee is successful, on the merits or otherwise, in any Proceeding, the Indemnitee shall be indemnified with respect to Expenses to the maximum extent permitted by this Agreement and by Delaware law if greater, against all Expenses actually and reasonably incurred by the Indemnitee or on the Indemnitee’s behalf in connection with the successful resolution of a Proceeding. If the Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify the Indemnitee against all Expenses actually and reasonably incurred by the Indemnitee or on the Indemnitee’s behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
3.      Insurance . If available, the Company shall maintain an insurance policy or policies providing liability insurance for Enterprise Fiduciaries which is at least as favorable to the Indemnitee as the policy in effect on the Effective Date and for so long as the Indemnitee's services are covered pursuant to this Agreement, regardless of whether the Company would have the power to indemnify such Enterprise Fiduciaries against such liability under the provisions of this Agreement; provided and to the extent that such insurance is available on a reasonable commercial basis, as determined by the Board. To the extent that the Company maintains an insurance policy or policies providing liability insurance for its Enterprise Fiduciaries, the Indemnitee shall be covered by such policy or policies to the maximum extent permitted under its or their terms. However, the Indemnitee shall continue to be entitled to the indemnification rights provided pursuant to this Agreement regardless of whether liability or other insurance coverage is at any time obtained or retained by the Company.
4.      Contribution .
(a)      Whether or not the indemnification provided in Sections 2 and 3 hereof is available, in respect of any Proceeding in which the Company is jointly liable with the Indemnitee (or would be if joined in such Proceeding), the Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring the Indemnitee to contribute to such payment and the Company hereby waives and relinquishes any right of contribution it may have against the Indemnitee. The Company

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shall not enter into a settlement of any Proceeding in which the Company is jointly liable with the Indemnitee (or would be if joined in such Proceeding) unless such settlement provides for a full and final release of all claims asserted against the Indemnitee.
(b)      Without diminishing or impairing the obligations of the Company set forth in Section 4(a) , if, for any reason, the Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any Proceeding in which the Company is jointly liable with the Indemnitee (or would be if joined in such Proceeding), the Company shall contribute to the amount of Expense, judgments, fines and settlements actually and reasonably incurred and paid or payable by the Indemnitee in proportion to the relative benefits received by the Company and all officers, directors, managers or employees of the Company, other than the Indemnitee, who are jointly liable with the Indemnitee (or would be if joined in such Proceeding), on the one hand, and the Indemnitee, on the other hand, from the transaction from which such Proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of the Company and all officers, directors, managers or employees of the Company other than the Indemnitee who are jointly liable with the Indemnitee (or would be if joined in such Proceeding), on the one hand, and the Indemnitee, on the other hand, in connection with the events that resulted in such Expense, judgments, fines or settlement amounts, as well as any other equitable considerations which the law may require to be considered. The relative fault of the Company and all officers, directors, managers or employees of the Company, other than the Indemnitee, who are jointly liable with the Indemnitee (or would be if joined in such Proceeding), on the one hand, and the Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary and the degree to which their conduct is active or passive.
(c)      To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to the Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying the Indemnitee, shall contribute to the amount incurred by the Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and the Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, managers, officers, employees and agents) and the Indemnitee in connection with such event(s) and/or transaction(s).
5.      Indemnification for Expenses of a Witness . Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee is, by reason of the Indemnitee’s status as an Enterprise Fiduciary, a witness in any Proceeding to which the Indemnitee is not a party, the Indemnitee shall be indemnified by the Company against all Expenses actually and reasonably incurred by the Indemnitee or on the Indemnitee’s behalf in connection therewith.

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6.      Advancement of Expenses .
(a)      Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of the Indemnitee in connection with any Proceeding by reason of the fact that the Indemnitee is or was an Enterprise Fiduciary, within 20 days after the receipt by the Company of a statement or statements from the Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by the Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of the Indemnitee to repay any Expenses advanced if it shall ultimately be determined by a Final Adjudication that the Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 6 shall be unsecured and interest free.
(b)      The indemnification, advancement of Expenses and other provisions of this Section 6 are for the benefit of the Indemnitee, the Indemnitee’s heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other persons.
7.      Procedures and Presumptions for Determination of Entitlement to Indemnification . It is the intent of this Agreement to secure for the Indemnitee rights of indemnity that are at least as favorable as those rights permitted under the LLC Agreement and public policy of the State of Delaware. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether the Indemnitee is entitled to indemnification under this Agreement.
(a)      To obtain indemnification under this Agreement, the Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification.
(b)      Upon written request by the Indemnitee for indemnification pursuant to the first sentence of Section 7(a) hereof, a determination with respect to the Indemnitee’s entitlement thereto shall be made in the specific case by one of the following four methods, which shall be at the election of the Board: (1) by a majority vote of the Disinterested Directors, even though less than a quorum, (2) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum, (3) if there are no Disinterested Directors or if the Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to the Indemnitee, or (4) if so directed by the Board, by the Company’s unit holders.
(c)      If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 7(b) hereof, the Independent Counsel shall be selected

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as provided in this Section 7(c) . The Independent Counsel shall be selected by the Board. The Indemnitee may, within 10 days after such written notice of selection shall have been given, deliver to the Company a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 1 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by the Indemnitee of a written request for indemnification pursuant to Section 7(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or the Indemnitee may petition the Chancery Court for resolution of any objection which shall have been made by the Indemnitee to the Company’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 7(b) hereof. The Company shall pay any and all reasonable fees and Expense of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 7(b) hereof, and the Company shall pay all reasonable fees and Expense incident to the procedures of this Section 7(c) , regardless of the manner in which such Independent Counsel was selected or appointed.
(d)      Neither the failure of the Company (including its Disinterested Directors, a committee of such directors, Independent Counsel, or its unit holders) to have made a determination prior to the commencement of a Proceeding that indemnification of the Indemnitee is proper in the circumstances under the applicable standard of conduct set forth in this Agreement, nor an actual determination by the Company (including its Disinterested Directors, a committee of such Disinterested Directors, Independent Counsel, or the Company’s unit holders) that the Indemnitee has not met the applicable standard of conduct shall create a presumption that the Indemnitee has not met the applicable standard of conduct, or, in the case of a suit brought by the Indemnitee, be a defense to such suit. In any suit brought by the Indemnitee to enforce a right to indemnification or to an advancement of Expense hereunder, or brought by the Company to recover an advancement of Expense pursuant to the terms of an undertaking, the burden of proving that the Indemnitee is not entitled to be indemnified or to such advancement of Expense, under this Section 7(d) or otherwise shall be on the Company.
(e)      the Indemnitee shall be deemed to have acted in good faith if the Indemnitee’s action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to the Indemnitee by the officers or managers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any other director, manager, officer, agent or employee of the Enterprise shall not be imputed to the Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 7(e) are satisfied, it shall in any event be presumed that the Indemnitee has at all times acted in good faith and in a manner the Indemnitee reasonably

7

believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.
(f)      the Indemnitee shall cooperate with the person, persons or entity making such determination with respect to the Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to the Indemnitee and reasonably necessary to such determination. Any Independent Counsel or member of the Board shall act reasonably and in good faith in making a determination regarding the Indemnitee’s entitlement to indemnification under this Agreement. Any costs or Expense incurred by the Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to the Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold the Indemnitee harmless therefrom.
(g)      The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which the Indemnitee is a party is resolved in any manner other than by adverse judgment against the Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that the Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.
(h)      The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that the Indemnitee had reasonable cause to believe that the Indemnitee’s conduct was unlawful.
8.      Remedies of the Indemnitee .
(a)      If a claim under this Agreement is not paid in full by the Company within 60 days after a written claim has been received by the Company, except in the case of a claim for an advancement of Expenses, in which case the applicable period shall be 20 days, the Indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Company to recover an advancement of Expenses pursuant to the terms of an undertaking, the Indemnitee shall be entitled to be paid also the reasonable Expenses of prosecuting or defending such suit. In any suit brought by the Indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the Indemnitee to enforce a right to an advancement of Expenses) it shall be a defense that, in accordance with the procedures, presumptions and provisions set forth in this Agreement, the Indemnitee has not met any material applicable standard for

8

indemnification set forth in this Agreement under procedures and provisions set forth herein. In any suit brought by the Company to recover an advancement of Expenses pursuant to the terms of an undertaking, the Company shall be entitled to recover such Expenses upon a Final Adjudication that the Indemnitee has not met any material applicable standard for indemnification set forth in this Agreement at the Effective Date.
(b)      In the event that a determination shall have been made pursuant to Section 7(b) of this Agreement that the Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 8 shall be conducted in all respects as a de novo trial on the merits, and the Indemnitee shall not be prejudiced by reason of the adverse determination under Section 7(b) .
(c)      If a determination shall have been made pursuant to Section 7(b) of this Agreement that the Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 8 , absent (i) a misstatement by the Indemnitee of a material fact, or an omission of a material fact necessary to make the Indemnitee’s misstatement not materially misleading in connection with the application for indemnification, or (ii) a prohibition of such indemnification under applicable law.
(d)      In the event that the Indemnitee, pursuant to this Section 8 , seeks a judicial adjudication of the Indemnitee’s rights under, or to recover damages for breach of, this Agreement, or to recover under any directors’ and officers’ liability insurance policies maintained by the Company, the Company shall pay on the Indemnitee’s behalf, in advance, any and all Expenses (of the types described in the definition of “Expenses” in Section 1 of this Agreement) actually and reasonably incurred by the Indemnitee in such judicial adjudication, regardless of whether the Indemnitee ultimately is determined to be entitled to such indemnification, advancement of Expenses or insurance recovery.
(e)      The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 8 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement.
(f)      Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding.
9.      Non-Exclusivity; Insurance; Subrogation .
(a)      The rights of indemnification, advancement of Expenses and other rights of the Indemnitee under this Agreement shall be in addition to any other rights to which an the Indemnitee may be entitled under any agreement, including (1) the LLC Agreement; (2) pursuant to those rights adopted by any vote of the unit holders; (3) as a matter of law; or (4) otherwise, as to actions in the Indemnitee’s capacity as an Enterprise Fiduciary. No amendment or modification of this Agreement or of any provision hereof shall limit or restrict any right of the Indemnitee under this Agreement in respect of any action taken or omitted by such the Indemnitee in the Indemnitee’s capacity as an Enterprise Fiduciary prior to such amendment,

9

alteration or repeal. To the extent that an amendment or modification of the LLC Agreement, whether by law, amendment or otherwise, or an amendment to Delaware law, permits greater indemnification than would be afforded currently under this Agreement, it is the intent of the parties hereto that the Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.
(b)      If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.
(c)      In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.
(d)      The Company's obligation to indemnify or advance Expenses hereunder to the Indemnitee who is or was serving at the request of the Company as an Enterprise Fiduciary to an Enterprise other than the Company shall be reduced by any amount the Indemnitee has actually received as indemnification or advancement of Expenses from such other Enterprise.
(e)      Any indemnification pursuant to this Agreement shall be made only out of the assets of the Company, including any insurance purchased and maintained by the Company for such purpose, it being agreed that the Company’s unit holders shall not be personally liable for such indemnification and shall have no obligation to contribute or loan any monies or property to the Company to enable it to effectuate such indemnification.
(f)      the Indemnitee shall not be denied indemnification in whole or in part under this Agreement because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement as in effect at the time of the transaction.
10.      Exception to Right of Indemnification . Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against the Indemnitee:
(a)      for which payment has actually been made to or on behalf of the Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision; or

10

(b)      for an accounting of profits made from the purchase and sale (or sale and purchase) by the Indemnitee of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of state statutory law or common law; or
(c)      in connection with any Proceeding (or any part of any Proceeding) initiated by the Indemnitee, against the Company or its directors, managers, officers, employees or other indemnitees, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.
11.      Duration of Agreement . All agreements and obligations of the Company contained herein shall continue during the period the Indemnitee is an Enterprise Fiduciary of the Company (or is or was serving at the request of the Company as an Enterprise Fiduciary another Enterprise) and shall continue thereafter so long as the Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 7 hereof) by reason of the fact that the Indemnitee is or was an Enterprise Fiduciary, whether or not the Indemnitee is acting or serving in any such capacity at the time any liability or Expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives.
12.      Security . To the extent requested by the Indemnitee and approved by the Board, the Company may at any time and from time to time provide security to the Indemnitee for the Company’s obligations hereunder through an irrevocable bank line of credit or other collateral. Any such security, once provided to the Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee.
13.      Enforcement .
(a)      The Company expressly confirms and agrees that it has entered into this Agreement and assumes the obligations imposed on it hereby in order to induce the Indemnitee to serve as Director of the Company, and the Company acknowledges that the Indemnitee is relying upon this Agreement in serving as such Enterprise Fiduciary of the Company.
(b)      This Agreement and the LLC Agreement constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.
14.      Severability . The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. Without limiting the generality of the foregoing, this Agreement is intended to confer upon the Indemnitee indemnification rights to the fullest extent not prohibited by law. In the event any provision

11

hereof conflicts with any applicable law, such provision shall be deemed modified, consistent with the aforementioned intent, to the extent necessary to resolve such conflict.
15.      Modification and Waiver . No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
16.      Notice By the Indemnitee . the Indemnitee agrees promptly to notify the Company in writing upon being served with or otherwise receiving any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company.
17.      Notices . All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent:
(a)      To the Indemnitee at the address set forth below the Indemnitee signature hereto.
 
To the Company at:
 
 
 
Linn Energy, LLC
JP Morgan Chase Tower
600 Travis, Suite 5100
Houston, TX 77002
Fax: 281-840-4180
Attention: Senior Vice President and General Counsel
cripley@ linnenergy.com
or to such other address as may have been furnished to the Indemnitee by the Company or to the Company by the Indemnitee, as the case may be.
18.      Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. This Agreement may also be executed and delivered by facsimile signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

12

19.      Headings . The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.
20.      Governing Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. The Company and the Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Chancery Court and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Chancery Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) appoint, to the extent such party is not otherwise subject to service of process in the State of Delaware, irrevocably Capitol Services, Inc., at 615 South Dupont Highway, Dover, Delaware 19901 (as such address may be changed from time to time by such agent) as its agent in the State of Delaware as such party's agent for acceptance of legal process in connection with any such action or proceeding against such party with the same legal force and validity as if served upon such party personally within the State of Delaware, (iv) waive any objection to the laying of venue of any such action or proceeding in the Chancery Court, and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Chancery Court has been brought in an improper or inconvenient forum.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written.
COMPANY

By: /s/ Mark E. Ellis    
Mark E. Ellis
Chairman, President and Chief Executive Officer


INDEMNITEE


/s/ Linda M. Stephens    
Linda M. Stephens

Address:

44 Jackies Cove    
Boerne, TX 78006    


13
Exhibit 10.35
EXECUTION VERSION



FIFTH AMENDMENT
TO
FIFTH AMENDED AND RESTATED CREDIT AGREEMENT
DATED AS OF FEBRUARY 20, 2013
AMONG
LINN ENERGY, LLC,
AS BORROWER,
THE GUARANTORS,
WELLS FARGO BANK, NATIONAL ASSOCIATION,
AS ADMINISTRATIVE AGENT,
ROYAL BANK OF CANADA,
AS SYNDICATION AGENT,
THE ROYAL BANK OF SCOTLAND PLC, CREDIT AGRICOLE CORPORATE AND INVESTMENT BANK, CITIBANK, NA AND BARCLAYS BANK PLC,
AS CO-DOCUMENTATION AGENTS
AND
THE LENDERS PARTY HERETO
______________________________________________________________________________

JOINT BOOK RUNNERS AND JOINT LEAD ARRANGERS
WELLS FARGO SECURITIES, LLC                    RBC CAPITAL MARKETS






FIFTH AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO FIFTH AMENDED AND RESTATED CREDIT AGREEMENT (this “ Fifth Amendment ”) dated as of February 20, 2013, among LINN ENERGY, LLC , a Delaware limited liability company, (the “ Borrower ”); the Guarantors signatory hereto, each of the Lenders party to the Credit Agreement referred to below; and WELLS FARGO BANK, NATIONAL ASSOCIATION , as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the “ Administrative Agent ”).
R E C I T A L S
A.    The Borrower, the Administrative Agent, the Lenders and the other Agents party thereto entered into that certain Fifth Amended and Restated Credit Agreement dated as of May 2, 2011 as amended by that certain First Amendment dated as of February 29, 2012, that certain Second Amendment dated as of May 10, 2012, that certain Third Amendment dated as of July 25, 2012 and that certain Fourth Amendment dated as of September 28, 2012 (the “ Credit Agreement ”), pursuant to which the Lenders have made certain credit and other financial accommodations available to and on behalf of the Borrower and its Subsidiaries.
B.    The Borrower has requested and the Administrative Agent and the Majority Lenders have agreed to amend certain provisions of the Credit Agreement.
C.    NOW, THEREFORE, to induce the Administrative Agent and the Lenders to enter into this Fifth Amendment and in consideration of the premises and the mutual covenants herein contained, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
Section 1. Defined Terms . Each capitalized term used herein but not otherwise defined herein has the meaning given such term in the Credit Agreement, as amended by this Fifth Amendment. Unless otherwise indicated, all section or article references in this Fifth Amendment refer to sections or articles of the Credit Agreement.
Section 2.      Amendments to Credit Agreement.
2.1      Amendment to Section 1.02 . Section 1.02 is hereby amended by deleting the defined term “Agreement” in its entirety and replacing them with the following:
“‘ Agreement ’ means this Credit Agreement, as amended by that certain First Amendment dated as of February 29, 2012, that certain Second Amendment dated as of May 10, 2012 , that certain Third Amendment dated as of July 25, 2012 that certain Fourth Amendment dated as of September 28, 2012 and that certain Fifth Amendment dated as of February 20, 2013 as the same may from time to time be further amended, modified, supplemented or restated.”
2.2      Amendment to Section 9.04(a)(iii) . Section 9.04(a)(iii) is hereby amended by deleting such Section in its entirety and replacing it with the following:



“(iii) so long as no Borrowing Base Deficiency, Default or Event of Default has occurred and is continuing or would result therefrom, the Borrower may declare and pay cash dividends to its members in an amount not to exceed the amount of Available Cash for the preceding quarter (including amounts borrowed as contemplated under clause (a)(ii) of the definition of Available Cash subsequent to the end of such quarter),”

Section 3.      Conditions Precedent . This Fifth Amendment shall become effective on the date (such date, the “Fifth Amendment Effective Date”), when each of the following conditions is satisfied (or waived in accordance with Section 12.02 of the Credit Agreement):
3.1      The Administrative Agent shall have received (a) all fees and other amounts due and payable on or prior to the Fifth Amendment Effective Date and all other fees the Borrower has agreed to pay in connection with this Fifth Amendment and (b) to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower under the Original Agreement.
3.2      The Administrative Agent shall have received from Lenders constituting the Majority Lenders and the Borrower, counterparts (in such number as may be requested by the Administrative Agent) of this Fifth Amendment signed on behalf of such Person.
3.3      No Default shall have occurred and be continuing as of the date hereof, after giving effect to the terms of this Fifth Amendment.
The Administrative Agent is hereby authorized and directed to declare this Fifth Amendment to be effective when it has received documents confirming or certifying, to the satisfaction of the Administrative Agent, compliance with the conditions set forth in this Section 3 or the waiver of such conditions as permitted in Section 12.02 of the Credit Agreement. Such declaration shall be final, conclusive and binding upon all parties to the Agreement for all purposes.
Section 4.      Miscellaneous.
4.1      Confirmation . The provisions of the Credit Agreement, as amended by this Fifth Amendment, shall remain in full force and effect following the effectiveness of this Fifth Amendment.
4.2      Ratification and Affirmation; Representations and Warranties . Each of the Borrower and the Guarantors hereby (a) acknowledges the terms of this Fifth Amendment; (b) ratifies and affirms its obligations under, and acknowledges its continued liability under, each Loan Document to which it is a party and agrees that each Loan Document to which it is a party remains in full force and effect as expressly amended hereby and (c) represents and warrants to the Lenders that as of the date hereof, after giving effect to the terms of this Fifth Amendment:
(i)      all of the representations and warranties contained in each Loan Document to which it is a party are true and correct in all material respects (except those which have a materiality qualifier, which shall be true and correct as so qualified), except to the extent any such representations and warranties are expressly limited to an earlier date, in

2
13724778.2

which case, such representations and warranties shall continue to be true and correct as of such specified earlier date,
(iii)      no Default or Event of Default has occurred and is continuing, and
(iv)      no event or events have occurred which individually or in the aggregate could reasonably be expected to have a Material Adverse Effect.
4.3      Loan Document . This Fifth Amendment is a Loan Document.
4.4      Counterparts . This Fifth Amendment may be executed by one or more of the parties hereto in any number of separate counterparts, and all of such counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of this Fifth Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof.
4.5      NO ORAL AGREEMENT . THIS FIFTH AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS EXECUTED IN CONNECTION HEREWITH AND THEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.
4.6      GOVERNING LAW . THIS FIFTH AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
4.7      Payment of Expenses . In accordance with Section 12.03 of the Credit Agreement, the Borrower agrees to pay or reimburse the Administrative Agent for all of its reasonable out-of- pocket costs and reasonable expenses incurred in connection with this Fifth Amendment, any other documents prepared in connection herewith and the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent.
4.8      Severability . Any provision of this Fifth Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
4.9      Successors and Assigns . This Fifth Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

[SIGNATURES BEGIN NEXT PAGE]


3
13724778.2


IN WITNESS WHEREOF, the parties hereto have caused this Fifth Amendment to be duly executed as of the date first written above.
BORROWER:
LINN ENERGY, LLC
 
 
 
 
 
 
 
By:
/s/ Kolja Rockov
 
Name:
Kolja Rockov
 
Title:
Executive Vice President and
Chief Financial Officer


Signature Page to Fifth Amendment
13724778


GUARANTORS:
LINN ENERGY HOLDINGS, LLC
 
 
 
LINN OPERATING, INC.
 
 
 
MID-CONTINENT HOLDINGS I, LLC
 
 
 
MID-CONTINENT HOLDINGS II, LLC
 
 
 
MID-CONTINENT I, LLC
 
 
 
MID-CONTINENT II, LLC
 
 
 
LINN GAS MARKETING, LLC
 
 
 
LINN EXPLORATION &
PRODUCTION MICHIGAN LLC
 
 
 
LINN MIDWEST ENERGY LLC
 
 
 
 
 
 
 
By:
/s/ Kolja Rockov
 
 
Kolja Rockov
 
 
Executive Vice President and Chief Financial Officer
 
 
 
LINN EXPLORATION MIDCONTINENT, LLC
 
 
 
By: Mid-Continent Holdings II, LLC, its sole member, as Member/Manager
 
 
 
 
 
By:
/s/ Kolja Rockov
 
Name:
Kolja Rockov
 
Title:
Executive Vice President and Chief Financial Officer

Signature Page to Fifth Amendment
13724778



LENDERS:
WELLS FARGO BANK, NATIONAL ASSOCIATION , as Administrative Agent and a Lender
 
 
 
 
 
 
 
By:
/s/ Betsy Jocher
 
Name:
Betsy Jocher
 
Title:
Director


Signature Page to Fifth Amendment
13724778


 
ROYAL BANK OF CANADA
 
 
 
 
 
 
 
By:
/s/ Kristan Spivey
 
Name:
Kristan Spivey
 
Title:
Authorized Signatory


Signature Page to Fifth Amendment
13724778


 
BARCLAYS BANK PLC
 
 
 
 
 
 
 
By:
/s/ Vanessa A. Kurbatskiy
 
Name:
Vanessa A. Kurbatskiy
 
Title:
Vice President


Signature Page to Fifth Amendment
13724778


 
CITIBANK, N.A.
 
 
 
 
 
 
 
By:
/s/ Eamon Baqui
 
Name:
Eamon Baqui
 
Title:
Vice President

Signature Page to Fifth Amendment
13724778



 
CREDIT AGRICOLE CORPORATE AND INVESTMENT BANK
 
 
 
 
 
 
 
By:
/s/ Sharada Manne
 
Name:
Sharada Manne
 
Title:
Managing Director
 
 
 
 
 
 
 
By:
/s/ Dixon Schultz
 
Name:
Dixon Schultz
 
Title:
Managing Director


Signature Page to Fifth Amendment
13724778


 
CREDIT SUISSE AG, CAYMAN ISLAND BRANCH
 
 
 
 
 
 
 
By:
/s/ Vipul Dhadda
 
Name:
Vipul Dhadda
 
Title:
Vice President
 
 
 
 
 
 
 
By:
/s/ Wei-Jen Yuan
 
Name:
Wei-Jen Yuan
 
Title:
Associate


Signature Page to Fifth Amendment
13724778


 
THE ROYAL BANK OF SCOTLAND PLC
 
 
 
 
 
 
 
By:
/s/ James L. Moyes
 
Name:
James L. Moyes
 
Title:
Managing Director


Signature Page to Fifth Amendment
13724778


 
THE BANK OF NOVA SCOTIA
 
 
 
 
 
 
 
By:
/s/ Terry Donovan
 
Name:
Terry Donovan
 
Title:
Managing Director


Signature Page to Fifth Amendment
13724778


 
BANK OF MONTREAL
 
 
 
 
 
 
 
By:
/s/ James V. Ducote
 
Name:
James V. Ducote
 
Title:
Director


Signature Page to Fifth Amendment
13724778


 
CANADIAN IMPERIAL BANK OF COMMERCE, NEW YORK AGENCY
 
 
 
 
 
 
 
By:
/s/ Gordon R. Eadon
 
Name:
Gordon R. Eadon
 
Title:
Managing Director
 
 
 
 
 
 
 
By:
/s/ Jonathan J. Kim
 
Name:
Jonathan J. Kim
 
Title:
Authorized Signatory


Signature Page to Fifth Amendment
13724778


 
UBS AG, STAMFORD BRANCH
 
 
 
 
 
 
 
By:
/s/ Lana Gifas
 
Name:
Lana Gifas
 
Title:
Director
 
 
 
 
 
 
 
By:
/s/ Kenneth Chin
 
Name:
Kenneth Chin
 
Title:
Director


Signature Page to Fifth Amendment
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COMERICA BANK
 
 
 
 
 
 
 
By:
/s/ Brenton Bellamy
 
Name:
Brenton Bellamy
 
Title:
Assistant Vice President


Signature Page to Fifth Amendment
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ING CAPITAL LLC
 
 
 
 
 
 
 
By:
/s/ Charles Hall
 
Name:
Charles Hall
 
Title:
Managing Director

Signature Page to Fifth Amendment
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SOCIETE GENERALE
 
 
 
 
 
 
 
By:
/s/ David M. Bornstein
 
Name:
David M. Bornstein
 
Title:
Director
 
 
 
 
 
 
 
By:
 
 
Name:
 
 
Title:
 


Signature Page to Fifth Amendment
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U.S. BANK NATIONAL
ASSOCIATION
 
 
 
 
 
 
 
By:
/s/ Jonathan H. Lee
 
Name:
Jonathan H. Lee
 
Title:
Vice President


Signature Page to Fifth Amendment
13724778


 
ABN AMRO CAPITAL USA LLC
 
 
 
 
 
 
 
By:
/s/ David L. Montgomery
 
Name:
David L. Montgomery
 
Title:
Director
 
 
 
 
 
 
 
By:
/s/ Darrell Holley
 
Name:
Darrell Holley
 
Title:
Managing Director


Signature Page to Fifth Amendment
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COMPASS BANK
 
 
 
 
 
 
 
By:
/s/ Ann Van Wagener
 
Name:
Ann Van Wagener
 
Title:
Senior Vice President


Signature Page to Fifth Amendment
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DNB BANK ASA, GRAND CAYMAN BRANCH (f/k/a DnB NOR Bank ASA)
 
 
 
 
 
 
 
By:
/s/ Cathleen Buckley
 
Name:
Cathleen Buckley
 
Title:
Senior Vice President
 
 
 
 
 
 
 
By:
/s/ Kjell Tore Egge
 
Name:
Kjell Tore Egge
 
Title:
Senior Vice President


Signature Page to Fifth Amendment
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UNION BANK, N.A.
 
 
 
 
 
 
 
By:
/s/ Brian Caddell
 
Name:
Brian Caddell
 
Title:
Vice President


Signature Page to Fifth Amendment
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CAPITAL ONE, N.A.
 
 
 
 
 
 
 
By:
/s/ Matthew L. Molero
 
Name:
Matthew L. Molero
 
Title:
Vice President


Signature Page to Fifth Amendment
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SUNTRUST BANK
 
 
 
 
 
 
 
By:
/s/ Yann Pirio
 
Name:
Yann Pirio
 
Title:
Director


Signature Page to Fifth Amendment
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BANK OF AMERICA, N.A.
 
 
 
 
 
 
 
By:
/s/ Joseph Scott
 
Name:
Joseph Scott
 
Title:
Director


Signature Page to Fifth Amendment
13724778


 
JPMORGAN CHASE BANK, N.A .
 
 
 
 
 
 
 
By:
/s/ Michael A. Kamauf
 
Name:
Michael A. Kamauf
 
Title:
Authorized Officer

Signature Page to Fifth Amendment
13724778


 
DEUTSCHE BANK TRUST COMPANY AMERICAS
 
 
 
 
 
 
 
By:
/s/ Kevin Chichester
 
Name:
Kevin Chichester
 
Title:
Director
 
 
 
 
 
 
 
By:
/s/ Calli S. Hayes
 
Name:
Calli S. Hayes
 
Title:
Managing Director


Signature Page to Fifth Amendment
13724778


 
GOLDMAN SACHS BANK USA
 
 
 
 
 
 
 
By:
/s/ Lauren Havens
 
Name:
Lauren Havens
 
Title:
Authorized Signatory

Signature Page to Fifth Amendment
13724778


 
MACQUARIE BANK LIMITED
 
 
 
 
 
 
 
By:
 
 
Name:
 
 
Title:
 
 
 
 
 
 
 
 
By:
 
 
Name:
 
 
Title:
 

Signature Page to Fifth Amendment
13724778


 
MORGAN STANLEY BANK, N.A.
 
 
 
 
 
 
 
By:
/s/ Dmitriy Barskiy
 
Name:
Dmitriy Barskiy
 
Title:
Authorized Signatory

Signature Page to Fifth Amendment
13724778



 
BP ENERGY COMPANY
 
 
 
 
 
 
 
By:
 
 
Name:
 
 
Title:
 

Signature Page to Fifth Amendment
13724778


 
BNP PARIBAS
 
 
 
 
 
 
 
By:
/s/ David Dodd
 
Name:
David Dodd
 
Title:
Managing Director
 
 
 
 
 
 
 
By:
/s/ Sriram Chandrasekaran
 
Name:
Sriram Chandrasekaran
 
Title:
Vice President


Signature Page to Fifth Amendment
13724778


 
BRANCH BANKING AND TRUST COMPANY
 
 
 
 
 
 
 
By:
/s/ James Giordano
 
Name:
James Giordano
 
Title:
Vice President


Signature Page to Fifth Amendment
13724778


 
SUMITOMO MITSUI BANKING CORPORATION
 
 
 
 
 
 
 
By:
/s/ Shuji Yabe
 
Name:
Shuji Yabe
 
Title:
Managing Director


Signature Page to Fifth Amendment
13724778


 
WHITNEY BANK
 
 
 
 
 
 
 
By:
/s/ Liana Tchernysheva
 
Name:
Liana Tchernysheva
 
Title:
Senior Vice President


Signature Page to Fifth Amendment
13724778


 
AMEGY BANK NATIONAL ASSOCIATION
 
 
 
 
 
 
 
By:
/s/ William B. Robinson
 
Name:
William B. Robinson
 
Title:
Vice President


Signature Page to Fifth Amendment
13724778


 
ASSOCIATED BANK, N.A.
 
 
 
 
 
 
 
By:
/s/ Farhan Iqbal
 
Name:
Farhan Iqbal
 
Title:
Vice President


Signature Page to Fifth Amendment
13724778


 
KEYBANK NATIONAL ASSOCIATION
 
 
 
 
 
 
 
By:
/s/ Chulley Bogle
 
Name:
Chulley Bogle
 
Title:
Vice President


Signature Page to Fifth Amendment
13724778

Exhibit 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
 
Year Ended December 31,
 
2012
 
2011
 
2010
 
2009
 
2008
 
(dollars in thousands)
Earnings:
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations before income taxes and adjustment for income (loss) from equity investees
$
(383,826
)
 
$
443,905

 
$
(110,047
)
 
$
(300,062
)
 
$
828,369

(Income) loss from equity investees
(1,497
)
 
188

 
(10
)
 
—

 
—

Income (loss) from continuing operations before income taxes but after adjustment for (income) loss from equity investees
(385,323
)
 
444,093

 
(110,057
)
 
(300,062
)
 
828,369

Fixed charges
382,751

 
261,976

 
194,733

 
93,280

 
95,613

Distributed income of equity investees
1,265

 
900

 
854

 
—

 
—

Capitalized interest
(2,326
)
 
(1,868
)
 
(884
)
 
(324
)
 
(875
)
Total earnings available for fixed charges
$
(3,633
)
 
$
705,101

 
$
84,646

 
$
(207,106
)
 
$
923,107

Fixed charges:
 
 
 
 
 
 
 
 
 
Interest and debt expenses
$
379,937

 
$
259,725

 
$
193,510

 
$
92,701

 
$
94,517

Capitalized interest
2,326

 
1,868

 
884

 
324

 
875

Interest portion of rental expense
488

 
383

 
339

 
255

 
221

Total fixed charges
$
382,751

 
$
261,976

 
$
194,733

 
$
93,280

 
$
95,613

 
 
 
 
 
 
 
 
 
 
Ratio of earnings to fixed charges
—

(1)  
2.69

 
—

(1)  
—

(1)  
9.65

(1)  
Earnings for the year ended December 31, 2012, were insufficient to cover fixed charges by approximately $386 million, primarily due to noncash impairment charges of approximately $422 million associated with proved oil and natural gas properties related to a decline in commodity prices and noncash charges of approximately $278 million associated with changes in mark-to-market values related to oil and natural gas derivatives.  Earnings for the years ended December 31, 2010, and December 31, 2009, were insufficient to cover fixed charges by approximately $110 million and $300 million, respectively, primarily due to noncash charges of approximately $232 million and $591 million, respectively, associated with changes in mark-to-market values related to oil and natural gas derivatives.


Exhibit 21.1
SIGNIFICANT SUBSIDIARIES
As of December 31, 2012, Linn Energy, LLC directly or indirectly owns all of the voting securities of Linn Energy Holdings, LLC, Mid-Continent Holdings II, LLC and Mid-Continent II, LLC, the “significant subsidiaries” (as defined in Rule 1−02(w) of Regulation S-X). As of December 31, 2012, Linn Energy, LLC also directly owns the sole voting share of LinnCo, LLC, an affiliate of Linn Energy, LLC, carried at cost.  All of LinnCo, LLC’s common shares are held by the public.


Exhibit 23.1


Consent of Independent Registered Public Accounting Firm

The Board of Directors
Linn Energy, LLC:
We consent to the incorporation by reference in the registration statements (Nos. 333‑131153 and 333-151610) on Form S-8 and in the registration statements (Nos. 333-146120, 333-148061, 333-148134, 333-162357, and 333-184647) on Form S-3 of Linn Energy, LLC of our reports dated February 21, 2013, with respect to the consolidated balance sheets of Linn Energy, LLC as of December 31, 2012 and 2011, and the related consolidated statements of operations, unitholders' capital, and cash flows for each of the years in the three-year period ended December 31, 2012, and the effectiveness of internal control over financial reporting as of December 31, 2012, which reports appear in the December 31, 2012 annual report on Form 10‑K of Linn Energy, LLC.


/s/ KPMG LLP    
Houston, Texas
February 21, 2013


Exhibit 23.2

CONSENT OF DEGOLYER AND MACNAUGHTON
Ladies and Gentlemen:
We hereby consent to the use of the name DeGolyer and MacNaughton, to references to DeGolyer and MacNaughton as independent petroleum engineers, and to the inclusion of information taken from our “Appraisal Report as of December 31, 2012 on Certain Properties owned by Linn Energy, LLC,” “Appraisal Report as of December 31, 2011 on Certain Properties owned by Linn Energy, LLC” and “Appraisal Report as of December 31, 2010 on Certain Properties owned by Linn Energy, LLC” in the sections “Business,” “Risk Factors,” “Selected Financial Data,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Supplemental Oil and Gas Data (Unaudited)” in the Linn Energy, LLC Annual Report on Form 10-K for the year ended December 31, 2012, (the “10-K”) and in the registration statements (Nos. 333-131153 and 333-151610) on Form S-8 and in the registration statements (Nos. 333-146120, 333-148061, 333-148134, 333-162357, and 333-184647) on Form S-3.  We further consent to the inclusion of our Letter Report dated February 14, 2013 as Exhibit 99.1 in the 10-K.


Very truly yours,

/s/ DeGOLYER and MacNAUGHTON    
Texas Registered Engineering Firm F-716
Dallas, Texas
February 21, 2013

Exhibit 31.1
I, Mark E. Ellis, certify that:

1. I have reviewed this Annual Report on Form 10-K of Linn Energy, LLC (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 21, 2013

/s/ Mark E. Ellis
 
Mark E. Ellis
 
Chairman, President and Chief Executive Officer
 



Exhibit 31.2
I, Kolja Rockov, certify that:

1. I have reviewed this Annual Report on Form 10-K of Linn Energy, LLC (the “registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 21, 2013

/s/ Kolja Rockov
 
Kolja Rockov
 
Executive Vice President and Chief Financial Officer
 




Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Linn Energy, LLC (the “Company”) on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark E. Ellis, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

February 21, 2013
/s/ Mark E. Ellis
 
Mark E. Ellis
 
Chairman, President and Chief Executive Officer





Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Linn Energy, LLC (the “Company”) on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kolja Rockov, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

February 21, 2013
/s/ Kolja Rockov
 
Kolja Rockov
 
Executive Vice President and Chief Financial Officer



Exhibit 99.1
DeGolyer and MacNaughton
5001 Spring Valley Road
Suite 800 East
Dallas, Texas 75244

February 14, 2013
Linn Energy LLC
JP Morgan Chase Tower
600 Travis, Suite 5100
Houston, Texas 77002
Gentlemen:
Pursuant to your request, we have prepared estimates of the extent and value of the net proved oil, condensate, natural gas liquids (NGL), and natural gas reserves, as of December 31, 2012, of certain properties owned by Linn Energy LLC (Linn). This evaluation was completed February 14, 2013. The properties appraised consist of working and royalty interests located in the states of Arkansas, California, Illinois, Indiana, Kansas, Louisiana, Michigan, Mississippi, Montana, New Mexico, North Dakota, Oklahoma, South Dakota, Texas, and Wyoming. Linn has represented that these properties account for 100 percent of Linn’s net proved reserves as of December 31, 2012. The net proved reserves estimates prepared by us have been prepared in accordance with the reserves definitions of Rules 4-10(a) (1)-(32) of Regulation S-X of the Securities and Exchange Commission (SEC) of the United States. This report was prepared in accordance with guidelines specified in Item 1202 (a)(8) of Regulation S-K and is to be used for inclusion in certain SEC filings by Linn.

Reserves included herein are expressed as net reserves. Gross reserves are defined as the total estimated petroleum to be produced from these properties after December 31, 2012. Net reserves are defined as that portion of the gross reserves attributable to the interests owned by Linn after deducting all royalties and interests owned by others.

Data used in this report were obtained from Linn, from records on file with the appropriate regulatory agencies, and from public sources. In the preparation of this report we have relied, without independent verification, upon such information furnished by Linn with respect to property interests appraised, production from such

2

DeGolyer and MacNaughton

properties, current costs of operation and development, current prices for production, agreements relating to current and future operations and sale of production, and various other information and data that were accepted as represented. It was not considered necessary to make a field examination of the physical condition and operation of the properties.


Methodology and Procedures
Estimates of reserves were prepared by the use of appropriate geologic, petroleum engineering, and evaluation principals and techniques that are in accordance with practices generally recognized by the petroleum industry as presented in the publication of the Society of Petroleum Engineers entitled “Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information (Revision as of February 19, 2007).” The method or combination of methods used in the analysis of each reservoir was tempered by experience with similar reservoirs, stage of development, quality and completeness of basic data, and production history.

For some areas, the volumetric method was used to estimate the original oil in place (OOIP). Structure and isopach maps were used to estimate reservoir volume. Electrical logs, radioactivity logs, core analyses, and other available data were used to estimate representative values for porosity and water saturation.

Estimates of ultimate recovery were obtained after applying recovery factors to OOIP. These recovery factors were based on consideration of the type of energy inherent in the reservoirs, analyses of the petroleum, the structural positions of the properties, and the production histories. An analysis of reservoir performance, including production rate, reservoir pressure, and gas-oil ratio behavior, was used in the estimation of reserves.

For depletion-type reservoirs or those whose performance disclosed a reliable decline in producing-rate trends or other diagnostic characteristics, reserves were estimated by the application of appropriate decline curves or other performance relationships. In the analyses of production‑decline curves, reserves were estimated only to the limits of economic production.


3

DeGolyer and MacNaughton

Definition of Reserves
Petroleum reserves estimated by us included in this report are classified as proved. Only proved reserves have been evaluated for this report. Reserves classifications used by us in this report are in accordance with the reserves definitions of Rules 4-10(a) (1)-(32) of Regulation S-X of the SEC. Reserves are judged to be economically producible in future years from known reservoirs under existing economic and operating conditions and assuming continuation of current regulatory practices using conventional production methods and equipment. In the analyses of production-decline curves, reserves were estimated only to the limit of economic rates of production under existing economic and operating conditions using prices and costs consistent with the effective date of this report, including consideration of changes in existing prices provided only by contractual arrangements but not including escalations based upon future conditions. The petroleum reserves are classified as follows:

Proved oil and gas reserves - Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

(i) The area of the reservoir considered as proved includes:
(A) The area identified by drilling and limited by fluid contacts, if any, and (B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.

(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as seen in a well penetration unless geoscience,


4

DeGolyer and MacNaughton

engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.

(iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.

(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when:
(A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities.

(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12‑month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

Developed oil and gas reserves - Developed oil and gas reserves are reserves of any category that can be expected to be recovered:

(i) Through existing wells with existing equipment and operating methods or in which the cost of the required


5

DeGolyer and MacNaughton

equipment is relatively minor compared to the cost of a new well; and

(ii) Through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

Undeveloped oil and gas reserves - Undeveloped oil and gas reserves are reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

(i) Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances.

(ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances justify a longer time.

(iii) Under no circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, as defined in [section 210.4-10 (a) Definitions], or by other evidence using reliable technology establishing reasonable certainty.

The development status shown herein represents the status applicable on December 31, 2012. In the preparation of this study, data available from wells drilled on the appraised properties through December 31, 2012, were used in estimating gross ultimate recovery. When applicable, gross production estimated to December 31, 2012, was deducted from gross ultimate recovery to arrive at the estimates of gross reserves as of December 31, 2012. Production data were available through August 2012 for most properties.


6

DeGolyer and MacNaughton

Our estimates of Linn’s net proved reserves attributable to the reviewed properties are based on the definitions of proved reserves of the SEC and are as follows, expressed in thousands of barrels (Mbbl) and millions of cubic feet (MMcf):

 
 
Estimated by DeGolyer and MacNaughton


 
Net Proved Reserves
as of
December 31, 2012
 
 
Oil and Condensate
(Mbbl)
 
NGL (Mbbl)
 
Natural
Gas
(MMcf)
 
 
 
 
 
 
 
Proved Producing
 
124,287
 
110,322
 
1,621,201
Proved Non-Producing
 
7,056
 
2,696
 
40,126
Proved Undeveloped
 
60,122
 
66,382
 
909,782
 
 
 
 
 
 
 
Total Proved
 
191,465
 
179,400
 
2,571,109


Primary Economic Assumptions
Revenue values in this report are expressed in terms of estimated future gross revenue, future net revenue, and present worth of future net revenue. Future gross revenue is defined as that revenue to be realized from the production and sale of the estimated net reserves. Future net revenue is calculated by deducting estimated production taxes, ad valorem taxes, operating, gathering, processing expenses, and capital costs from the future gross revenue. Present worth of future net revenue is calculated by discounting the future net revenue at the arbitrary rate of 10 percent per year compounded monthly over the expected period of realization.

Revenue values in this report were estimated using the initial prices and costs specified by Linn. Future prices were estimated using guidelines established by the SEC and the Financial Accounting Standards Board (FASB). The prices used in this report are based on SEC guidelines. The assumptions used for estimating future prices and expenses are as follows:
Oil and Condensate Prices
Oil and condensate prices were calculated using specified differentials for each lease to a price of $94.64 per barrel. No escalation was applied to the prices. The WTI Cushing price of $94.64 per barrel is the 12-month average price, calculated as the unweighted arithmetic average of the first-day-of-the-


7

DeGolyer and MacNaughton

month price for each month within the 12-month period prior to the end of the reporting period. The weighted average price over the lives of the properties was $91.46 per barrel.
NGL Prices
NGL prices were calculated using specified differentials for each lease to a price of $94.64 per barrel. No escalation was applied to the prices. The WTI Cushing price of $94.64 per barrel is the 12-month average price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period. The weighted average price over the lives of the properties was $32.94 per barrel.
Natural Gas Prices
Linn has represented that the natural gas prices were based on a reference price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, unless prices are defined by contractual arrangements. The gas prices were calculated for each field using differentials and heating value adjustments to the Henry Hub reference price of $2.76 per million British thermal units (MMBtu) furnished by Linn and held constant thereafter. The volume weighted average price over the lives of the properties was $2.706 per thousands of cubic feet (Mcf).
Operating Expenses and Capital Costs
Estimates of operating expenses and capital costs based on current costs were used for the lives of the properties with no increases in the future based on inflation. In certain cases, future costs, either higher or lower than current costs, may have been used because of anticipated changes in operating conditions. Future capital expenditures were estimated using 2012 values and were not adjusted for inflation.


8

DeGolyer and MacNaughton

The estimated future revenue to be derived from the production and sale of the net proved reserves, as of December 31, 2012, of the properties appraised, expressed in thousands of dollars (M$), is summarized as follows:

 
 
Proved
 
 
 
 
Developed
Producing
(M$)
 
Developed
Nonproducing
(M$)
 
Undeveloped
(M$)
 
Total
Proved
(M$)
 
 
 
 
 
 
 
 
 
Future Gross Revenue
 
19,524,961
 
849,484
 
10,005,580
 
30,380,025
Production and Ad Valorem Taxes
 
1,660,103
 
73,097
 
846,372
 
2,579,572
Operating Expenses
 
6,274,937
 
168,555
 
2,437,790
 
8,881,282
Net Other Expenses
 
5,645
 
0
 
0
 
5,645
Capital Costs
 
103,875
 
88,966
 
3,080,682
 
3,273,523
Salvage & Abandonment
 
239,501
 
920
 
60,114
 
300,535
Future Net Revenue*
 
11,240,900
 
517,946
 
3,580,622
 
15,339,468
Present Worth at 10 Percent*
 
4,899,607
 
200,912
 
972,462
 
6,072,981
 
 
 
 
 
 
 
 
 
* Future income taxes have not been taken into account in the preparation of these estimates.

While the oil and gas industry may be subject to regulatory changes from time to time that could affect an industry participant’s ability to recover its oil and gas reserves, we are not aware of any such governmental actions which would restrict the recovery of the December 31, 2012, estimated oil and gas volumes. The reserves estimated in this report can be produced under current regulatory guidelines.

In our opinion, the information relating to estimated proved reserves, estimated future net revenue from proved reserves, and present worth of estimated future net revenue from proved reserves of oil, condensate, natural gas liquids, and gas contained in this report has been prepared in accordance with Paragraphs 932-235-50-4, 932-235-50-6, 932-235-50-7, 932-235-50-9, 932-235-50-30, and 932-235-50-31(a), (b), and (e) of the Accounting Standards Update 932-235-50, Extractive Industries - Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and Disclosures (January 2010) of the Financial Accounting Standards Board and Rules 4-10(a) (1)-(32) of Regulation S-X and Rules 302(b), 1201, 1202(a) (1), (2), (3), (4), (8)(i), (ii), and (v)-(x), and 1203(a) of Regulation S-K of the Securities and Exchange Commission; provided, however, that (i) future income tax expenses have not been taken into account in estimating the future net revenue and present worth values



9

DeGolyer and MacNaughton

set forth herein and (ii) estimates of the proved developed and proved undeveloped reserves are not presented at the beginning of the year.

To the extent the above-enumerated rules, regulations, and statements require determinations of an accounting or legal nature, we, as engineers, are necessarily unable to express an opinion as to whether the above-described information is in accordance therewith or sufficient therefor.

DeGolyer and MacNaughton is an independent petroleum engineering consulting firm that has been providing petroleum consulting services throughout the world since 1936. DeGolyer and MacNaughton does not have any financial interest, including stock ownership, in Linn. Our fees were not contingent on the results of our evaluation. This letter report has been prepared at the request of Linn. DeGolyer and MacNaughton has used all assumptions, data, procedures, and methods that it considers necessary and appropriate to prepare this report.
Submitted,


/s/ DeGOLYER and MacNAUGHTON
DeGOLYER and MacNAUGHTON
Texas Registered Engineering Firm F-716



/s/ Paul J. Szatkowski, P.E.
Paul J. Szatkowski, P.E.
Senior Vice President
DeGolyer and MacNaughton


DeGolyer and MacNaughton

CERTIFICATE of QUALIFICATION
I, Paul J. Szatkowski, Petroleum Engineer with DeGolyer and MacNaughton, 5001 Spring Valley Road, Suite 800 East, Dallas, Texas, 75244 U.S.A., hereby certify:

1.
That I am a Senior Vice President with DeGolyer and MacNaughton, which company did prepare the letter report addressed to Linn Energy LLC dated February 14, 2013, and that I, as Senior Vice President, was responsible for the preparation of this letter.

2.
That I attended Texas A&M University, and that I graduated with a Bachelor of Science degree in Petroleum Engineering in the year 1974; that I am a Registered Professional Engineer in the State of Texas; that I am a member of the International Society of Petroleum Engineers and the American Association of Petroleum Geologists; and that I have in excess of 38 years of experience in oil and gas reservoir studies and reserves evaluations.

Signed: February 14, 2013


/s/ Paul J. Szatkowski, P.E.
Paul J. Szatkowski, P.E.
Senior Vice President
DeGolyer and MacNaughton