**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 
| **x** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**For the Quarterly Period Ended March 31, 2008**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**forthe transition period from              to              **

 

**CommissionFile Number: 000-51719**

 

**LINNENERGY, LLC**

**(**Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **65-1177591**                     |
|------------------------------------------------------------------|------------|------------------------------------|
| (State or other jurisdiction of incorporation or   organization) |       | (IRS Employer  Identification No.) |
| * *                                                         | * *   | * *                           |
| **600 Travis, Suite 5100  Houston, Texas**                  | ** ** | **77002**                          |
| (Address of principal executive offices)                         |       | (Zip Code)                         |
| * *                                                         | * *   | * *                           |
| **(281) 840-4000**                                          |
| (Registrant’s telephone number, including area code)        |

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes  x    No  o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer x                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by checkmark whether registrant is a shell company (as defined in Rule 12b-2 ofthe Exchange Act).   Yes  o    No  x

 

As of April 30,2008, there were 114,953,864 units outstanding.

 

 

----

 

**TABLE OF CONTENTS**

 
| ** ** | ** **                                                                                                              | **Page**   |
|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
|       |                                                                                                                    |       |
| ** ** | **Glossary  of Terms**                                                                                                  | ii         |
|       |                                                                                                                    |       |
| ** ** | **Part I  - Financial Information**                                                                                | ** ** |
| Item 1.    | Financial Statements                                                                                                    |       |
|       | Condensed Consolidated Balance Sheets as of  March 31, 2008 and December 31, 2007                        | 1          |
|       | Condensed Consolidated Statements of Operations for  the three months ended March 31, 2008 and 2007                | 2          |
|       | Condensed Consolidated Statements of Unitholders’  Capital for the three months ended March 31, 2008 and 2007 | 3          |
|       | Condensed Consolidated Statements of Cash Flows for  the three months ended March 31, 2008 and 2007                | 4          |
|       | Notes to Condensed Consolidated Financial Statements  (Unaudited)                                                       | 5          |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             | 18         |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                                             | 29         |
| Item 4.    | Controls and  Procedures                                                                                                | 30         |
| ** ** | **Part II  - Other Information**                                                                                   |       |
| Item 1.    | Legal Proceedings                                                                                                       | 31         |
| Item 1A.   | Risk Factors                                                                                                            | 31         |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                            | 31         |
| Item 3.    | Defaults Upon  Senior Securities                                                                                        | 31         |
| Item 4.    | Submission of  Matters to a Vote of Security Holders                                                                    | 31         |
| Item 5.    | Other Information                                                                                                       | 31         |
| Item 6.    | Exhibits                                                                                                                | 32         |
|       |                                                                                                                    |       |
| ** ** | **Signature**                                                                                                           | 33         |

 

i

----

 

**GLOSSARY OF TERMS**

 

As commonly usedin the oil and gas industry and as used in this Quarterly Report on Form 10-Q,the following terms have the following meanings:

 

*Bbl. *One stock tank barrel or 42 United States gallonsliquid volume.

 

*Bcfe.* One billion cubic feet equivalent, determined using a ratio of six Mcfof gas to one Bbl of oil, condensate or natural gas liquids.

 

*MBbls.* One thousand barrels of oil or other liquid hydrocarbons.

 

*Mcf.* One thousand cubic feet.

 

*Mcfe.* One thousand cubic feet equivalent, determined using the ratio of sixMcf of gas to one Bbl of oil, condensate or natural gas liquids.

 

*MMBtu.* One million British thermal units.

 

*MMcf.* One million cubic feet.

 

*MMcfe.* One million cubic feet equivalent, determined using a ratio of six Mcfof gas to one Bbl of oil, condensate or natural gas liquids.

 

*MMcfe/d.* One MMcfe per day.

 

*MMMBtu.* One billion British thermal units.

 

*Tcfe.* One trillion cubic feet equivalent, determined using the ratio of sixMcf of gas to one Bbl of oil, condensate or natural gas liquids.

 

ii

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**PART I – FINANCIAL INFORMATION**

 

**Item 1.       Financial Statements**

 

**LINN ENERGY, LLC**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                      | ** ** | **March 31,**                                  | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2008**                                            | ** ** | **2007**              | ** ** |
| ** **                                                                                                                      | ** ** | (Unaudited)                                         |       |                  | ** ** |
| ** **                                                                                                                      | ** ** | (in thousands,  except unit amounts) | ** ** |
| **Assets**                                                                                                                      |       |                                                |       |                  |       |
| **Current  assets:**                                                                                                            |       |                                                |       |                  |       |
| Cash and cash  equivalents                                                                                                      |       | $                                                   | 1,076      |                  | $          | 1,441 |   |
| Accounts  receivable – trade, net                                                                                          |       | 197,342                                             |       | 149,850               |       |
| Derivative  instruments                                                                                                         |       | —                                              |       | 26,100                |       |
| Other current  assets                                                                                                           |       | 15,454                                              |       | 5,768                 |       |
| Total current  assets                                                                                                           |       | 213,872                                             |       | 183,159               |       |
|                                                                                                                            |       |                                                |       |                  |       |
| **Oil and  gas properties and equipment** (successful efforts method)                                                           |       | 4,274,036                                           |       | 3,618,741             |       |
| Less accumulated  depreciation, depletion and amortization                                                                      |       | (176,326                                            | )          | (127,265              | )          |
|                                                                                                                            |       | 4,097,710                                           |       | 3,491,476             |       |
|                                                                                                                            |       |                                                |       |                  |       |
| **Property  and equipment**                                                                                                     |       | 27,604                                              |       | 37,407                |       |
| Less accumulated  depreciation                                                                                                  |       | (4,299                                              | )          | (5,383                | )          |
|                                                                                                                            |       | 23,305                                              |       | 32,024                |       |
|                                                                                                                            |       |                                                |       |                  |       |
| **Other  noncurrent assets:**                                                                                                   |       |                                                |       |                  |       |
| Goodwill                                                                                                                        |       | 64,419                                              |       | 64,419                |       |
| Other noncurrent  assets, net                                                                                                   |       | 14,280                                              |       | 36,625                |       |
|                                                                                                                            |       | 78,699                                              |       | 101,044               |       |
| Total assets                                                                                                                    |       | $                                                   | 4,413,586  |                  | $          | 3,807,703 |   |
|                                                                                                                            |       |                                                |       |                  |       |
| **Liabilities and Unitholders’ Capital**                                                                                   | ** ** | ** **                                          | ** ** | ** **            | ** ** |
| **Current  liabilities:**                                                                                                       |       |                                                |       |                  |       |
| Accounts payable  and accrued expenses                                                                                          |       | $                                                   | 225,764    |                  | $          | 223,636 |   |
| Derivative  instruments                                                                                                         |       | 158,415                                             |       | 6,148                 |       |
| Other current  liabilities                                                                                                      |       | 24,381                                              |       | 12,943                |       |
| Total current  liabilities                                                                                                      |       | 408,560                                             |       | 242,727               |       |
|                                                                                                                            |       |                                                |       |                  |       |
| **Noncurrent  liabilities:**                                                                                                    |       |                                                |       |                  |       |
| Credit facility                                                                                                                 |       | 1,665,000                                           |       | 1,443,000             |       |
| Term loan                                                                                                                       |       | 400,000                                             |       | —                |       |
| Derivative  instruments                                                                                                         |       | 190,348                                             |       | 63,813                |       |
| Other noncurrent  liabilities                                                                                                   |       | 37,440                                              |       | 31,522                |       |
| Total noncurrent  liabilities                                                                                                   |       | 2,292,788                                           |       | 1,538,335             |       |
|                                                                                                                            |       |                                                |       |                  |       |
| **Unitholders’  capital:**                                                                                                 |       |                                                |       |                  |       |
| 114,540,574 units and 113,815,914 units issued and outstanding  at March 31, 2008 and December 31, 2007, respectively |       | 2,319,616                                           |       | 2,374,660             |       |
| Accumulated loss                                                                                                                |       | (607,378                                            | )          | (348,019              | )          |
|                                                                                                                            |       | 1,712,238                                           |       | 2,026,641             |       |
| Total  liabilities and unitholders’ capital                                                                                |       | $                                                   | 4,413,586  |                  | $          | 3,807,703 |   |

 

*The accompanying notes are anintegral part of these condensed consolidated financial statements**.*

 

1

----

 

**LINN ENERGY, LLC**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(Unaudited)

* *
| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                    |       | (in thousands, except  per unit  amounts)        |       |
| **Revenues:**                                 |       |                                             |       |   |   |
| Oil, gas and natural  gas liquid sales        |       | $                                                | 195,516    |   | $ | 39,204 |   |
| Loss on oil and  gas derivatives              |       | (268,794                                         | )          | (60,441 | ) |
| Natural gas  marketing revenues               |       | 4,147                                            |       | 1,778 |   |
| Other revenues                                |       | 665                                              |       | 2,090 |   |
|                                          |       | (68,466                                          | )          | (17,369 | ) |
| ** **                                    |       |                                             |       |   |   |
| **Expenses:**                                 |       |                                             |       |   |   |
| Operating  expenses                           |       | 41,838                                           |       | 12,456 |   |
| Natural gas  marketing expenses               |       | 3,994                                            |       | 1,347 |   |
| General and  administrative expenses          |       | 20,014                                           |       | 10,621 |   |
| Data license  expenses                        |       | 2,428                                            |       | — |   |
| Depreciation,  depletion and amortization     |       | 50,470                                           |       | 11,851 |   |
|                                          |       | 118,744                                          |       | 36,275 |   |
|                                          |       | (187,210                                         | )          | (53,644 | ) |
| ** **                                    |       |                                             |       |   |   |
| **Other  income and (expenses):**             |       |                                             |       |   |   |
| Interest  expense, net of amounts capitalized |       | (32,384                                          | )          | (9,836 | ) |
| Loss on interest  rate swaps                  |       | (39,393                                          | )          | (77 | ) |
| Other expenses,  net                          |       | (163                                             | )          | (658 | ) |
|                                          |       | (71,940                                          | )          | (10,571 | ) |
| Loss before  income taxes                     |       | (259,150                                         | )          | (64,215 | ) |
| Income tax  provision                         |       | (209                                             | )          | (3,632 | ) |
| Net loss                                      |       | $                                                | (259,359   | ) | $ | (67,847 | ) |
|                                          |       |                                             |       |   |   |
| **Net  loss per unit:**                       |       |                                             |       |   |   |
| Units – basic                            |       | $                                                | (2.28      | ) | $ | (1.35 | ) |
| Units – diluted                          |       | $                                                | (2.28      | ) | $ | (1.35 | ) |
|                                          |       |                                             |       |   |   |
| Class C  units – basic              |       | $                                                | —     |   | $ | (1.35 | ) |
| Class C units  – diluted            |       | $                                                | —     |   | $ | (1.35 | ) |
|                                          |       |                                             |       |   |   |
| **Weighted  average units outstanding:**      |       |                                             |       |   |   |
| Units – basic                            |       | 113,757                                          |       | 45,456 |   |
| Units – diluted                          |       | 113,757                                          |       | 45,456 |   |
|                                          |       |                                             |       |   |   |
| Class C  units – basic              |       | —                                           |       | 4,894 |   |
| Class C  units – diluted            |       | —                                           |       | 4,894 |   |
|                                          |       |                                             |       |   |   |
| Distributions  declared per unit              |       | $                                                | 0.63       |   | $ | 0.52 |   |

 

*The accompanying notes are anintegral part of these condensed consolidated financial statements**.*

 

2

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**LINN ENERGY, LLC**

**CONDENSED CONSOLIDATED STATEMENTS OFUNITHOLDERS’ CAPITAL**

(Unaudited)

 
| ** **                                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                 | ** ** | (in thousands)                              | ** ** |
| **Unitholders’  capital:**                            |       |                                             |       |   |   |
| Balance,  beginning of period                              |       | $                                                | 2,374,660  |   | $ | 434,624 |   |
| Sale of private  placement units, net of expense of $6,860 |       | —                                           |       | 353,140 |   |
| Issuance of  units                                         |       | 14,708                                           |       | — |   |
| Cancellation of  units                                     |       | (1,451                                           | )          | (7,399 | ) |
| Distributions to  unitholders                              |       | (72,189                                          | )          | (22,745 | ) |
| Unit-based  compensation and unit warrant expenses         |       | 3,888                                            |       | 3,740 |   |
| Balance, end of  period                                    |       | 2,319,616                                        |       | 761,360 |   |
| **Accumulated  loss:**                                     |       |                                             |       |   |   |
| Balance,  beginning of period                              |       | (348,019                                         | )          | 16,330 |   |
| Net loss                                                   |       | (259,359                                         | )          | (67,847 | ) |
| Balance, end of  period                                    |       | (607,378                                         | )          | (51,517 | ) |
| **Treasury  units (at cost):**                             |       |                                             |       |   |   |
| Balance,  beginning of period                              |       | —                                           |       | — |   |
| Purchase of  units                                         |       | (1,451                                           | )          | (7,399 | ) |
| Cancellation of  units                                     |       | 1,451                                            |       | 7,399 |   |
| Balance, end of  period                                    |       | —                                           |       | — |   |
| Total  unitholders’ capital                           |       | $                                                | 1,712,238  |   | $ | 709,843 |   |

 

*The accompanying notes are anintegral part of these condensed consolidated financial statements**.*

 

3

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###### ** **

###### **LINN ENERGY, LLC**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

(Unaudited)

* *
| ** **                                                                                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                                                     | ** ** | (in thousands)                              | ** ** |
| **Cash  flow from operating activities:**                                                      |       |                                             |       |   |   |
| Net loss                                                                                       |       | $                                                | (259,359   | ) | $ | (67,847 | ) |
| **Adjustments  to reconcile net loss to net cash provided by (used in) operating activities:** |       |                                             |       |   |   |
| Depreciation,  depletion and amortization and other                                            |       | 52,757                                           |       | 11,733 |   |
| Unit-based  compensation and unit warrant expenses                                             |       | 3,888                                            |       | 3,740 |   |
| Deferred income  tax                                                                           |       | —                                           |       | 3,501 |   |
| **Mark-to-market  on derivatives:**                                                            |       |                                             |       |   |   |
| Total losses                                                                                   |       | 308,187                                          |       | 60,518 |   |
| Cash settlements                                                                               |       | (1,958                                           | )          | 6,447 |   |
| **Premiums  paid for derivatives**                                                             |       | (1,278                                           | )          | (52,992 | ) |
| **Changes  in assets and liabilities:**                                                        |       |                                             |       |   |   |
| Increase in  accounts receivable                                                               |       | (57,012                                          | )          | (3,923 | ) |
| Decrease in  other assets                                                                      |       | 1,245                                            |       | 3,094 |   |
| Increase  (decrease) in accounts payable and accrued expenses                                  |       | 12,251                                           |       | (2,799 | ) |
| Increase in  other liabilities                                                                 |       | 2,479                                            |       | 639 |   |
| Net cash  provided by (used in) operating activities                                           |       | 61,200                                           |       | (37,889 | ) |
| **Cash  flow from investing activities:**                                                      |       |                                             |       |   |   |
| Acquisition of  oil and gas properties                                                         |       | (517,990                                         | )          | (440,418 | ) |
| Additions to oil  and gas properties                                                           |       | (92,739                                          | )          | (18,715 | ) |
| Purchases of  property and equipment                                                           |       | (2,565                                           | )          | (3,284 | ) |
| Proceeds from  sales of property and equipment                                                 |       | —                                           |       | 2,492 |   |
| Net cash used in  investing activities                                                         |       | (613,294                                         | )          | (459,925 | ) |
| **Cash  flow from financing activities:**                                                      |       |                                             |       |   |   |
| Proceeds from  sale of units                                                                   |       | —                                           |       | 360,000 |   |
| Purchase of  units                                                                             |       | (1,451                                           | )          | (7,399 | ) |
| Proceeds from  issuance of debt                                                                |       | 667,000                                          |       | 171,000 |   |
| Principal  payments on debt                                                                    |       | (44,927                                          | )          | (239 | ) |
| Distributions to  unitholders                                                                  |       | (72,189                                          | )          | (22,745 | ) |
| Financing fees  and other, net                                                                 |       | 3,296                                            |       | (8,422 | ) |
| Net cash  provided by financing activities                                                     |       | 551,729                                          |       | 492,195 |   |
| **Net  decrease in cash and cash equivalents**                                                 |       | (365                                             | )          | (5,619 | ) |
| **Cash  and cash equivalents:**                                                                |       |                                             |       |   |   |
| Beginning                                                                                      |       | 1,441                                            |       | 6,595 |   |
| Ending                                                                                         |       | $                                                | 1,076      |   | $ | 976 |   |

 

*The accompanying notes are anintegral part of these condensed consolidated financial statements**.*

 

4

----

 

 

**LINN ENERGY, LLC**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

(Unaudited)

 

**(1)****                                ****Basis of Presentation**

 

Linn Energy, LLC (“Linn Energy” or the “Company”) isan independent oil and gas company focused on the development and acquisitionof long life properties which complement its asset profile in producing basinswithin the United States.

 

The condensed consolidated financial statements at March 31,2008, and for the three months ended March 31, 2008 and 2007, areunaudited, but in the opinion of management include all adjustments (consistingonly of normal recurring adjustments) necessary for a fair presentation of theresults for the interim periods.  Certaininformation and note disclosures normally included in annual financialstatements prepared in accordance with United States generally acceptedaccounting principles (“GAAP”) have been condensed or omitted under Securitiesand Exchange Commission (“SEC”) rules and regulations, and as such thisreport should be read in conjunction with the financial statements and notes inthe Company’s Annual Report on Form 10-K for the year ended December 31,2007.  The results reported in theseunaudited condensed consolidated financial statements should not necessarily betaken as indicative of results that may be expected for the entire year.

 

Certain amounts in the condensed consolidatedfinancial statements and notes thereto have been reclassified to conform to the2008 financial statement presentation.

 

The condensed consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiaries.  All significant intercompany transactions andbalances have been eliminated upon consolidation.

 

Management of the Company has made a number ofestimates and assumptions relating to the reporting of assets and liabilitiesand revenues and expenses and the disclosure of contingent assets andliabilities to prepare these condensed consolidated financial statements inconformity with GAAP.  Actual results coulddiffer from those estimates.

 

**(2)****                                ****Acquisitions**

 

The Company accounts for its acquisitions using the purchase method ofaccounting as prescribed in SFAS No. 141, *“BusinessCombinations.”*  On January 31,2008, the Company completed the acquisition of certain oil and gas properties,effective October 1, 2007, located primarily in the Mid-Continent regionfrom Lamamco Drilling Company (“Lamamco”) for a contract price of $552.2million, subject to purchase price adjustments (“Mid-Continent IV”).  The acquisition was financed with acombination of borrowings under the Company’s credit facility and proceeds froma term loan entered into at closing (see Note 6).

 

The following presents the preliminary purchase accounting for theMid-Continent IV acquisition, based on preliminary estimates of fair value:

 
| ** **                             | ** ** | **Mid-Continent  IV** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | (in thousands)   | ** ** |
|                                   |       |                  |       |
| Cash                                   |       | $                     | 534,821    |   |
| Estimated  transaction costs           |       | 570                   |       |
| Estimated  pending closing adjustments |       | (807                  | )          |
|                                   |       | 534,584               |       |
| Fair value of  liabilities assumed     |       | 4,972                 |       |
| Total purchase  price                  |       | $                     | 539,556    |   |

 

5

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**LINN ENERGY, LLC**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS - Continued**

(Unaudited)

 

The following presents the preliminary allocation of the purchase pricefor the Mid-Continent IV acquisition, based on preliminary estimates offair value:

 
| ** **                     | ** ** | **Mid-Continent  IV** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | (in thousands)   | ** ** |
|                           |       |                  |       |
| Current assets                 |       | $                     | 1,811      |   |
| Oil and gas  properties        |       | 536,600               |       |
| Property, plant  and equipment |       | 1,145                 |       |
|                           |       | $                     | 539,556    |   |

 

The purchase price and purchaseprice allocation above are based on reserve reports, published market pricesand estimates by management.  The mostsignificant assumptions are related to the estimated fair values assigned toproved oil and gas properties.  Toestimate the fair values of these properties, the Company utilized preliminaryestimates of oil and gas reserves.  TheCompany estimated future prices to apply to the estimated reserve quantitiesacquired, and estimated future operating and development costs to arrive atestimates of future net revenues.  TheCompany also reviewed comparable purchases and sales of oil and gas propertieswithin the same regions.  The purchaseprice and the allocation of the purchase price are preliminary.  Items pending completion include finalclosing adjustments and completion of independent appraisals of fixed assets,and additional analysis related to the fair value of oil and gas reserves,including discounted cash flows and market-based data.  The purchase price and purchase priceallocation will be finalized within one year of the acquisition date.

 

The following unaudited pro formafinancial information presents a summary of Linn Energy’s consolidated resultsof operations for the three months ended March 31, 2008 and 2007, assumingthe Mid-Continent IV acquisition had been completed as of January 1,2007, including adjustments to reflect the allocation of the purchase price tothe acquired net assets.  The pro formafinancial information also assumes that the following 2007 acquisitions werecompleted as of January 1, 2007:

 

·                  February 1, 2007, effective January 1, 2007, acquisition ofcertain oil and gas properties and related assets in the Texas Panhandle for acontract price of $415.0 million (“Mid-Continent I”)

 

·                  June 12, 2007, effective April 1, 2007, acquisition ofcertain oil and gas properties in the Texas Panhandle for a contract price of$90.5 million (“Mid-Continent II”)

 

·                  August 31, 2007, effective July 1, 2007, acquisition ofcertain oil and gas properties in the Mid-Continent, in Oklahoma, Kansas and theTexas Panhandle for a contract price of $2.05 billion (“Mid-Continent III”)

 

The revenues and expenses of theMid-Continent I, Mid-Continent II and Mid-Continent III assets areincluded in the consolidated results of the Company as of February 1,2007, June 12, 2007 and September 1, 2007, respectively.  The revenues and expenses of theMid-Continent IV assets are included in the consolidated results of the Companyeffective February 1, 2008.  The proforma financial information is not necessarily indicative of the results ofoperations if the acquisitions had been effective as of these dates.

 

6

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**LINN ENERGY, LLC**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS - Continued**

(Unaudited)

 
| ** **                         | ** ** | **Three Months Ended  March 31,**             | ** ** |
|------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                         | ** ** | **2008**                                                     | ** ** | **2007** | ** ** |
| ** **                         | ** ** | (in thousands, except per unit  amounts) | ** ** |
|                               |       |                                                         |       |   |   |
| Total revenues                     |       | $                                                            | (59,193    | ) | $ | 79,463 |   |
| Total operating  expenses          |       | $                                                            | 123,375    |   | $ | 92,809 |   |
| Net loss                           |       | $                                                            | (258,354   | ) | $ | (52,098 | ) |
|                               |       |                                                         |       |   |   |
| Net loss per  unit:                |       |                                                         |       |   |   |
| Units – basic                 |       | $                                                            | (2.27      | ) | $ | (1.03 | ) |
| Units – diluted               |       | $                                                            | (2.27      | ) | $ | (1.03 | ) |
|                               |       |                                                         |       |   |   |
| Class C  units – basic   |       | $                                                            | —     |   | $ | (1.03 | ) |
| Class C  units – diluted |       | $                                                            | —     |   | $ | (1.03 | ) |

 

**(3)****                                ****Unitholders’ Capital**

 

***Issuance of Units***

 

In the first quarter of 2008, the Company issued 600,000 units inconnection with the acquisition of certain gas properties in Appalachia (equalto a fair value of approximately $14.7 million).

 

In the first quarter of2007, the Company closed its private placement of $360.0 million of unitsto a group of institutional investors, consisting of 7,465,946 Class C units at a priceof $25.06 per unit, and 6,650,144 units at a price of $26.00 per unit.  Proceeds, net of expenses, were$353.1 million and were used to finance the acquisitions of certain oiland gas properties in the Mid-Continent and Appalachia.  The Class C units were converted intounits on a one-for-one basis in April 2007.

 

***Cancellation of Units***

 

In the first quarter of 2008 and the first quarter of2007, the Company purchased 72,337 and 226,561 restricted units from employeesfor $1.5 million and $7.4 million, respectively, (market price on the day ofpurchase) in conjunction with the vesting of restricted unit awards.  The proceeds were used to fund the employees’payroll taxes on the awards, and the Company canceled the units.

 

7

----

 

**LINN ENERGY, LLC**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS - Continued**

(Unaudited)

 

**(4)****                                ****Oil and Gas CapitalizedCosts**

 

Aggregate capitalized costs related to oil and gas productionactivities with applicable accumulated depreciation, depletion and amortizationare presented below:

 
| ** **                                                 | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **2008**            | ** ** | **2007**              | ** ** |
| ** **                                                 | ** ** | (in thousands) | ** ** |
| Proved  properties:                                        |       |                |       |                  |       |
| Leasehold  acquisition                                     |       | $                   | 3,656,115  |                  | $          | 3,095,400 |   |
| Development                                                |       | 347,315             |       | 254,251               |       |
| Unproved  properties                                       |       | 156,328             |       | 156,908               |       |
| Gas compression  plant and pipelines                       |       | 114,278             |       | 112,182               |       |
|                                                       |       | 4,274,036           |       | 3,618,741             |       |
| Less accumulated  depletion, depreciation and amortization |       | (176,326            | )          | (127,265              | )          |
|                                                       |       | $                   | 4,097,710  |                  | $          | 3,491,476 |   |

 

During March 2008, the Company exitedthe drilling and service business in Appalachia provided by its wholly ownedsubsidiary Mid Atlantic Well Service (“Mid Atlantic”).  At March 31, 2008, substantially all ofthe property and equipment held by Mid Atlantic totaling approximately $9.2million were classified as available for sale and reported in “other currentassets” on the condensed consolidated balance sheet.  During the three months ended March 31,2008, the Company recorded an impairment loss on the assets held for sale ofapproximately $0.3 million, which is recorded in “general and administrativeexpenses” on the condensed consolidated statement of operations.  The Company is actively marketing the assetsfor sale and expects such sale to be completed during the second quarter of2008.

 

**(5)****                                ****Business and CreditConcentrations**

 

For the three months ended March 31, 2008, the Company’s twolargest customers each represented approximately 14% of the Company’ssales.  For the three months ended March 31,2007, the Company’s three largest customers represented approximately 34%, 19%and 12%, respectively, of the Company’s sales.

 

At March 31, 2008, two customers’ trade accounts receivable fromoil, gas and natural gas liquids (“NGL”) sales accounted for more than 10% ofthe Company’s total trade accounts receivable. As of March 31, 2008, trade accounts receivable from the Company’stwo largest customers represented approximately 14% and 11% of the Company’sreceivables.  At December 31, 2007,three customers’ trade accounts receivable from oil, gas and NGL salesaccounted for more than 10% of the Company’s total trade accountsreceivable.  As of December 31,2007, trade accounts receivable from the Company’s three largest customers representedapproximately 22%, 13% and 12% of the Company’s receivables.

 

**(6)****                                ****Debt**

 

***Credit Facility***

 

At March 31, 2008, the Company had a $1.9 billion borrowing baseunder its Third Amended and Restated Credit Agreement (“Credit Facility”) witha maturity of August 2010. Effective April 11, 2008, the borrowing base under the CreditFacility was redetermined and increased to $2.0 billion, all of which isconforming.

 

8

----

 

**LINN ENERGY, LLC**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS - Continued**

(Unaudited)

 

The borrowing base under the Credit Facility will be redeterminedsemi-annually by the lenders in their sole discretion, based on, among otherthings, reserve reports as prepared by reserve engineers taking into accountthe oil and gas prices at such time.  Atthe Company’s election, interest on borrowings under the Credit Facility isdetermined by reference to either the LondonInterbank Offered Rate (“LIBOR”) plus an applicable margin between 1.00%and 1.75% per annum or the alternate base rate (“ABR”) plus an applicablemargin between 0% and 0.25% per annum.

 

***Term Loan***

 

On January 31, 2008, in order to fund a portion of the January 2008acquisition of oil and gas properties in the Mid-Continent (see Note 2),the Company entered into a $400.0 million Second Lien Term Loan Agreement (“TermLoan”) maturing on July 31, 2009, secured by a second priority lien on alloil and gas properties as well as a second priority pledge on all ownershipinterests in its operating subsidiaries. In connection with this loan, the Company paid financing fees ofapproximately $6.3 million, which were deferred and amortized over the life ofthe Term Loan.  Covenants under the TermLoan are substantially similar to those under the Credit Facility.  Interest is determined by reference to LIBORplus an applicable margin of 5.0% for the first twelve months and 7.5% for theremaining period until maturity or a domestic bank rate plus an applicablemargin of 3.5% for the first twelve months and 6.0% for the remaining perioduntil maturity.

 

As of March 31, 2008 and December 31, 2007, the Company hadthe following debt outstanding:

 
| ** **               | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** |
|--------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2008**            | ** ** | **2007**              | ** ** |
| ** **               | ** ** | (in thousands) | ** ** |
|                     |       |                |       |                  |       |
| Credit Facility (1)      |       | $                   | 1,665,000  |                  | $          | 1,443,000 |   |
| Term Loan (2)            |       | 400,000             |       | —                |       |
| Less current  maturities |       | —              |       | —                |       |
|                     |       | $                   | 2,065,000  |                  | $          | 1,443,000 |   |

 

----

(1)              Variable rate of 4.73% at March 31, 2008 and7.02% at December 31, 2007.

 

(2)              Variable rate of 8.09% at March 31, 2008.

 

At March 31, 2008, the Company also had $2.5 million outstandingletters of credit, which reduce its borrowing availability under the CreditFacility.  At March 31, 2008,available borrowing under the Credit Facility was $232.5 million.  With the increase in borrowing base notedabove, available borrowing under the Credit Facility was $347.3 million at April 30,2008.

 

**(7)****                                ****Derivatives**

 

***Commodity Derivatives***

 

The Company sells oil, gas and NGL in the normal course of its businessand utilizes derivative instruments to minimize the variability in cash flowsdue to price movements in oil, gas and NGL. The Company enters into derivative instruments such as swap contracts,collars and put options to hedge a portion of its forecasted oil, gas and NGLsales.  Oil puts are also used to hedgeNGL sales.  See Note 8 foradditional disclosures about oil and gas commodity derivatives as required byStatement of Financial Accounting Standards No. 157, *“Fair ValueMeasurements”* (“SFAS 157”).

 

9

----

 

**LINN ENERGY, LLC**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS - Continued**

(Unaudited)

 

The following table summarizes open positions as of March 31, 2008and represents, as of such date, derivatives in place through December 31,2013, on annual production volumes:

 
| ** **                             | ** ** | **Year  2008** | ** ** | **Year  2009** | ** ** | **Year  2010** | ** ** | **Year  2011** | ** ** | **Year  2012** | ** ** | **Year  2013** | ** ** |
|----------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
| **Gas  Positions:**                    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** |
| Fixed Price  Swaps:                    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** |
| Hedged Volume  (MMMBtu)                |       | 32,907         |       | 49,271         |       | 42,086         |       | 38,741         |       | 34,066         |       | —         |       |
| Average Price  ($/MMBtu)               |       | $              | 8.48       |           | $          | 8.32           |       | $              | 8.14       |           | $          | 8.08           |       | $ | 8.45 |   | $ | — |   |
| Puts:                                  |       |           |       |           |       |           |       |           |       |           |       |           |       |
| Hedged Volume  (MMMBtu)                |       | 4,708          |       | 6,960          |       | 6,960          |       | 6,960          |       | —         |       | —         |       |
| Average Price  ($/MMBtu)               |       | $              | 8.07       |           | $          | 7.50           |       | $              | 7.50       |           | $          | 7.50           |       | $ | — |   | $ | — |   |
| PEPL Puts: (1)                         |       |           |       |           |       |           |       |           |       |           |       |           |       |
| Hedged Volume  (MMMBtu)                |       | 2,891          |       | 5,334          |       | 10,634         |       | 13,259         |       | 5,934          |       | —         |       |
| Average Price  ($/MMBtu)               |       | $              | 7.85       |           | $          | 7.85           |       | $              | 7.85       |           | $          | 7.85           |       | $ | 7.85 |   | $ | — |   |
| Total:                                 |       |           |       |           |       |           |       |           |       |           |       |           |       |
| Hedged Volume  (MMMBtu)                |       | 40,506         |       | 61,565         |       | 59,680         |       | 58,960         |       | 40,000         |       | —         |       |
| Average Price  ($/MMBtu)               |       | $              | 8.39       |           | $          | 8.19           |       | $              | 8.02       |           | $          | 7.96           |       | $ | 8.36 |   | $ | — |   |
|                                   |       |           |       |           |       |           |       |           |       |           |       |           |       |
| **Oil  Positions:**                    |       |           |       |           |       |           |       |           |       |           |       |           |       |
| Fixed Price  Swaps:                    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** |
| Hedged Volume  (MBbls)                 |       | 2,064          |       | 2,437          |       | 2,150          |       | 2,073          |       | 2,025          |       | 900            |       |
| Average Price  ($/Bbl)                 |       | $              | 82.11      |           | $          | 78.07          |       | $              | 78.28      |           | $          | 79.65          |       | $ | 77.65 |   | $ | 72.22 |   |
| Puts: (2)                              |       |           |       |           |       |           |       |           |       |           |       |           |       |
| Hedged Volume  (MBbls)                 |       | 1,401          |       | 1,843          |       | 2,250          |       | 2,352          |       | 500            |       | —         |       |
| Average Price  ($/Bbl)                 |       | $              | 73.34      |           | $          | 72.13          |       | $              | 70.56      |           | $          | 69.11          |       | $ | 77.73 |   | $ | — |   |
| Collars:                               |       |           |       |           |       |           |       |           |       |           |       |           |       |
| Hedged Volume  (MBbls)                 |       | —         |       | 250            |       | 250            |       | 276            |       | 348            |       | —         |       |
| Average Floor  Price ($/Bbl)           |       | $              | —     |           | $          | 90.00          |       | $              | 90.00      |           | $          | 90.00          |       | $ | 90.00 |   | $ | — |   |
| Average Ceiling  Price ($/Bbl)         |       | $              | —     |           | $          | 114.25         |       | $              | 112.00     |           | $          | 112.25         |       | $ | 112.35 |   | $ | — |   |
| Total:                                 |       |           |       |           |       |           |       |           |       |           |       |           |       |
| Hedged Volume  (MBbls)                 |       | 3,465          |       | 4,530          |       | 4,650          |       | 4,701          |       | 2,873          |       | 900            |       |
| Average Price  ($/Bbl)                 |       | $              | 78.57      |           | $          | 76.31          |       | $              | 75.17      |           | $          | 74.98          |       | $ | 79.16 |   | $ | 72.22 |   |
|                                   |       |           |       |           |       |           |       |           |       |           |       |           |       |
| **Gas  Basis Differential Positions:** |       |           |       |           |       |           |       |           |       |           |       |           |       |
| PEPL Basis Swaps:  (3)                 |       |           |       |           |       |           |       |           |       |           |       |           |       |
| Hedged Volume  (MMMBtu)                |       | 27,109         |       | 34,666         |       | 29,366         |       | 26,741         |       | 34,066         |       | —         |       |
| Hedged  Differential ($/MMBtu)         |       | $              | (0.95      | )              | $          | (0.95          | )          | $              | (0.95      | )              | $          | (0.95          | )          | $ | (0.95 | ) | $ | — |   |

 

----

(1)              Settle on the Panhandle Eastern Pipeline (“PEPL”) spotprice of gas to hedge basis differential associated with gas production in theMid-Continent region.

 

(2)              The Company utilizes oil puts to hedge revenuesassociated with its NGL production.

 

(3)              Represents a swap of the basis between the New YorkMercantile Exchange (“NYMEX”) and the PEPL spot price of gas of $(0.95) perMMBtu for the volumes hedged.

 

Settled derivatives on gas production for the three months ended March 31,2008 included a volume of 14,634 MMMBtu at an average contract price of$8.38.  Settled derivatives on oil andNGL production for the three months ended March 31, 2008 included a volumeof 795 MBbls at an average contract price of $74.76.  The gas derivatives are settled based on theclosing NYMEX future price of gas or on the published PEPL spot price of gas onthe settlement date, which occurs on the third day preceding the 

 

10

----

 

**LINN ENERGY, LLC**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS - Continued**

(Unaudited)

 

production month.  The oiltransactions are settled based on the average month’s daily NYMEX price oflight oil and settlement occurs on the final day of the production month.

 

By using derivative instruments tohedge exposures to changes in commodity prices, the Company exposes itself tocredit risk and market risk.  Credit riskis the failure of the counterparty to perform under the terms of the derivativecontract.  When the fair value of aderivative contract is positive, the counterparty owes the Company, whichcreates credit risk.  The Companyminimizes the credit risk in derivative instruments by entering intotransactions with credit-worthy counterparties.

 

See Note 16 for detail about gashedge contracts canceled subsequent to March 31, 2008.

 

***Interest Rate Swaps***

 

The Company has entered into interest rate swap agreements based onLIBOR to minimize the effect of fluctuations in interest rates.  If LIBOR is lower than the fixed rate in thecontract, the Company is required to pay the counterparties the difference, andconversely, the counterparties are required to pay the Company if LIBOR ishigher than the fixed rate in the contract. The Company did not designate the interest rate swap agreements as cashflow hedges under SFAS No. 133, “*Accountingfor Derivative Instruments and Hedging Activities,”* as amended, (“SFAS 133”);therefore, the changes in fair value of these instruments are recorded incurrent earnings.  See Note 8 foradditional disclosures about interest rate swaps as required by SFAS 157.

 

The following presents the settlement terms of the interest rate swaps:

 
| ** **                      | ** ** | **Year  2008** | ** ** | **Year  2009** | ** ** | **Year  2010** | ** ** | **Year  2011 **(1) | ** ** |
|---------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|-------------------------|------------|
| ** **                      | ** ** | ** **     | ** ** | ** **     | ** ** | ** **     | ** ** | ** **              | ** ** |
| Notional Amount  (in thousands) |       | $              | 50,000     |           | $          | —         |       | $                       | —     |   | $ | — |   |
| Fixed Rate                      |       | 5.79           | %          | —         |       | —         |       | —                  |       |
| Notional Amount  (in thousands) |       | $              | 985,000    |           | $          | 985,000        |       | $                       | 985,000    |   | $ | 985,000 |   |
| Fixed Rate                      |       | 4.25           | %          | 5.10           | %          | 5.10           | %          | 5.10                    | %          |
| Notional Amount  (in thousands) |       | $              | 177,000    |           | $          | 227,000        |       | $                       | 227,000    |   | $ | 227,000 |   |
| Fixed Rate                      |       | 3.50           | %          | 4.89           | %          | 4.89           | %          | 4.89                    | %          |

 

----

(1)     Representsinterest rate swaps that settle in January 2011.

 

***Outstanding Notional Amounts***

 

The following presents theoutstanding notional amounts and maximum number of months outstanding ofderivative instruments:

 
| ** **                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Outstanding  notional amounts of gas hedges (MMMBtu)               |       | 260,711            |       | 275,769               |       |
| Maximum number  of months gas hedges outstanding                   |       | 56                 |       | 59                    |       |
| Outstanding  notional amounts of oil hedges (MBbls)                |       | 21,119             |       | 16,214                |       |
| Maximum number  of months oil hedges outstanding                   |       | 68                 |       | 72                    |       |
| Outstanding  notional amount of interest rate swaps (in thousands) |       | $                  | 1,212,000  |                  | $          | 1,212,000 |   |
| Maximum number  of months interest rate swaps outstanding          |       | 33                 |       | 36                    |       |
|                                                                    |            |                    |            |                       |            |  |  |

 

11

----

 

 

**LINN ENERGY, LLC**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS - Continued**

(Unaudited)

 

***Balance Sheet Presentation***

 

The Company’scommodity derivatives and interest rate swap derivatives are presented on a netbasis in “derivative instruments” on the condensed consolidated balancesheets.  The following summarizes thefair value of derivatives outstanding on a gross basis:

 
| ** **            | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** |
|-----------------------|------------|---------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2008**            | ** ** | **2007**              | ** ** |
| ** **            | ** ** | (in thousands) | ** ** |
| **Assets:**           |       |                |       |                  |       |
| Commodity derivatives |       | $                   | 192,001    |                  | $          | 244,847 |   |
| Interest rate swaps   |       | —              |       | 2,548                 |       |
|                  |       | $                   | 192,001    |                  | $          | 247,395 |   |
| **Liabilities:**      |       |                |       |                  |       |
| Commodity derivatives |       | $                   | 472,884    |                  | $          | 260,058 |   |
| Interest rate swaps   |       | 67,880              |       | 32,475                |       |
|                  |       | $                   | 540,764    |                  | $          | 292,533 |   |

 

The Company’scounterparties are participants in its Credit Facility (see Note 6) which issecured by the Company’s oil and gas reserves; therefore, the Company is notrequired to post any collateral.  Thecounterparties are large, international financial services institutions andtherefore the Company does not require collateral from the counterparties.  The maximum amount of loss due to creditrisk, based on the gross fair value of financial instruments that the Companywould incur if its counterparties failed completely to perform according to theterms of the contracts was approximately $26.4 million at March 31,2008.  In accordance with the Company’sstandard practice, its commodity and interest rate swap derivatives are subjectto counterparty netting under master netting agreements and therefore the riskof such loss is substantially mitigated at March 31, 2008.

 

***Gain (Loss) on Derivatives***

 

Gains andlosses on derivatives are reported on the condensed consolidated statements ofoperations in “gain (loss) on oil and gas derivatives” and “gain (loss) oninterest rate swaps” and includes realized and unrealized gains (losses).  Realized gains (losses) represent amounts theCompany received or paid upon settlement of the derivative instruments.  Unrealized gains (losses) represent thechange in fair value of the derivative instruments and are non-cash items.  The following presents the Company’s reportedgains and losses on derivative instruments:

 
| ** **                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                   | ** ** | (in thousands)                              | ** ** |
| **Realized gains (losses):** |       |                                             |       |   |   |
| Commodity derivatives        |       | $                                                | (15,247    | ) | $ | 9,073 |   |
| Interest rate swaps          |       | (1,441                                           | )          | 82 |   |
|                         |       | $                                                | (16,688    | ) | $ | 9,155 |   |
| **Unrealized losses:**       |       |                                             |       |   |   |
| Commodity derivatives        |       | $                                                | (253,547   | ) | $ | (69,514 | ) |
| Interest rate swaps          |       | (37,952                                          | )          | (159 | ) |
|                         |       | $                                                | (291,499   | ) | $ | (69,673 | ) |
| **Total losses:**            |       |                                             |       |   |   |
| Commodity derivatives        |       | $                                                | (268,794   | ) | $ | (60,441 | ) |
| Interest rate swaps          |       | (39,393                                          | )          | (77 | ) |
|                         |       | $                                                | (308,187   | ) | $ | (60,518 | ) |

 

12

----

 

**LINN ENERGY,LLC**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS - Continued**

(Unaudited)

** **

 

Realized gains(losses) in the table above are based on contract settlement dates and includeboth cash and accrued gains and losses. The “cash settlements” reported within operating activities on thestatement of cash flows reflect only cash receipts or payments during theperiods presented.

 

**(8)****                                 FairValue of Financial Instruments**

 

TheCompany accounts for its oil and gas commodity derivatives and interest rateswaps at fair value (see Note 7) on a recurring basis.  Effective January 1, 2008, the Companyadopted SFAS 157 for these financial instruments.  SFAS 157 defines fair value, establishesa framework for measuring fair value, establishes a fair value hierarchy basedon the quality of inputs used to measure fair value, and enhances disclosurerequirements for fair value measurements. The impact of theadoption of SFAS 157 to the Company’s results of operations was a decreaseto net loss by approximately $9.7 million, or $0.08 per unit, for the threemonths ended March 31, 2008, resulting from an assumed credit riskadjustment.

 

The fair valueof derivative instruments is determined utilizing pricing models forsignificantly similar instruments.  Themodels use a variety of techniques to arrive at fair value, including quotesand pricing analysis.  Inputs to thepricing models include publicly available prices and forward curves generatedfrom a compilation of data gathered from third parties.

 

***Fair Value Hierarchy***

 

In accordancewith SFAS 157, the Company has categorized its financial instruments,based on the priority of inputs to the valuation technique, into a three-levelfair value hierarchy.  The fair valuehierarchy gives the highest priority to quoted prices in active markets foridentical assets or liabilities (Level 1) and the lowest priority tounobservable inputs (Level 3).

 

Financialassets and liabilities recorded on the condensed consolidated balance sheetsare categorized based on the inputs to the valuation techniques as follows:

 

*Level 1**                    *Financialassets and liabilities for which values are based on unadjusted quoted pricesfor identical assets or liabilities in an active market that management has theability to access.

 

*Level 2**                    *Financialassets and liabilities for which values are based on quoted prices in marketsthat are not active or model inputs that are observable either directly orindirectly for substantially the full term of the asset or liability (commodityderivatives and interest rate swaps).

 

*Level 3**                    *Financialassets and liabilities for which values are based on prices or valuationtechniques that require inputs that are both unobservable and significant tothe overall fair value measurement. These inputs reflect management’s own assumptions about the assumptionsa market participant would use in pricing the asset or liability.

 

As required bySFAS 157, when the inputs used to measure fair value fall within differentlevels of the hierarchy, the level within which the fair value measurement iscategorized is based on the lowest level input that is significant to the fairvalue measurement in its entirety.  TheCompany conducts a review of fair value hierarchy classifications on aquarterly basis.  Changes in theobservability of valuation inputs may result in a reclassification for certainfinancial assets or liabilities.

 

13

----

 

**LINN ENERGY,LLC**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS - Continued**

(Unaudited)

 

The followingpresents the Company’s fair value hierarchy for assets and liabilities measuredat fair value on a recurring basis at March 31, 2008.  These items are included in “derivativeinstruments” on the condensed consolidated balance sheet.

 
| ** **            | ** ** | **Fair Value Measurements on a Recurring Basis  March 31, 2008** | ** ** |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **            | ** ** | **Level 2**                                                                                         | ** ** | **Netting ****(1)** | ** ** | **Total** | ** ** |
| ** **            | ** ** | (in thousands)                                                                                      | ** ** |
| **Assets:**           |       |                                                                                                     |       |   |   |   |   |
| Commodity derivatives |       | $                                                                                                        | 192,001    |   | $ | (192,001 | ) | $ | — |   |
|                  |       |                                                                                                     |       |   |   |   |   |
| **Liabilities:**      |       |                                                                                                     |       |   |   |   |   |
| Commodity derivatives |       | $                                                                                                        | 472,884    |   | $ | (192,001 | ) | $ | 280,883 |   |
| Interest rate swaps   |       | $                                                                                                        | 67,880     |   | $ | — |   | $ | 67,880 |   |

 

----

(1)     Representscounterparty netting under master netting agreements.

 

**(9)****                                 Commitmentsand Contingencies**

 

From time to time the Company is a party to various legalproceedings or is subject to industry rulings that could bring rise to claimsin the ordinary course of business.  TheCompany is not currently a party to any litigation or pending claims that itbelieves would have a material adverse effect on its business, financialposition, results of operations or liquidity.

 

**(10)****                          EarningsPer Unit**

 

Basicand diluted earnings per unit are presented on the condensed consolidatedstatements of operations.  Basic unitsoutstanding excludes the effect of average anti-dilutive common stockequivalents related to unit options and warrants and unvested restricted unitsof 2,355,865 and 1,834,646 for the three months ended March 31, 2008 and2007, respectively.  All equivalent unitswere anti-dilutive for the three months ended March 31, 2008 and 2007, asthe Company reported a net loss from operations.

 

Dualpresentation of basic and diluted earnings per unit has been presented for thethree months ended March 31, 2007 for each class of units issued andoutstanding at that date, units and Class C units.  Net income per unit was allocated to theunits and the Class C units on an equal basis.  Since the Class C units were convertedto units in April 2007, they share equally in all distributions.

 

**(11)****                          Unit-BasedCompensation**

 

***Employee Grants***

 

During the three months ended March 31, 2008, theCompany granted an aggregate 296,120 restricted units and 641,000 unit optionsto employees as part of its annual review of employee compensation with anaggregate fair value of approximately $7.6 million.  The majority of these restricted units andoptions vest ratably over three years. For the three months ended March 31, 2008 and 2007, the Companyrecorded unit-based compensation expense of approximately $3.9 million and $3.3million, respectively, as a non-cash charge against income before income taxesand it is included in “operating expenses” and “general and administrativeexpenses” on the condensed consolidated statements of operations.

 

14

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**LINN ENERGY,LLC**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS - Continued**

(Unaudited)

 

**(12)****                          IncomeTaxes**

 

The Companyis a limited liability company treated as a partnership for federal and stateincome tax purposes with all income tax liabilities and/or benefits of theCompany being passed through to the unitholders, with the exception of thestate of Texas.  As such, no recognitionof federal income taxes for the Company or its subsidiaries that are organizedas limited liability companies have been provided for in the accompanyingfinancial statements.  Limited liabilitycompanies are subject to state income taxes in Texas.  In addition, certain of the Company’ssubsidiaries are Subchapter C-corporations subject to federal and state incometaxes.

 

**(13)****                          RelatedParty Transactions**

 

***Lehman Brothers Holdings, Inc.***

 

At March 31,2008, on an aggregate basis, a group of certain direct or indirect wholly ownedsubsidiaries of Lehman Brothers Holdings, Inc. (“Lehman”) owned over 10%of the Company’s outstanding units.  Assuch, Lehman is considered a related party under the provisions of SFAS No. 57*“Related Party Disclosures.”* Lehman subsidiaries provide certain servicesto the Company, including participation in the Company’s Credit Facility andTerm Loan (see Note 6) and sale of commodity derivative instruments (seeNote 7), which were all consummated on terms equivalent to those thatprevail in arm’s-length transactions. See Note 16 regarding additional services provided by Lehman to theCompany.

 

During thethree months ended March 31, 2008 and 2007, the Company paid distributionson units to Lehman of approximately $9.3million and $1.2million,respectively.  During the three monthsended March 31, 2008, the Company purchased approximately $1.3million of dealcontingent oil swap contracts from Lehman.

 

During thethree months ended March 31, 2008 and 2007, the Company paid Lehman,through the administrator of its Credit Facility and Term Loan, interest onborrowings of approximately $1.1 million and $0.4 million, respectively, andfinancing fees of approximately $0.4 million and $13,000, respectively.

 

During the threemonths ended March 31, 2007, in conjunction with its February 2007,$360.0 million private placement of units, the Company paid Lehman underwritingfees of approximately $2.1 million. Lehman was a participant in the private placement and the Company received$50.0 million of proceeds from Lehman in relation to this transaction duringthe same time period.

 

The followingsets forth the amounts due to or from Lehman as of the respective balance sheetdates included in the accompanying condensed consolidated financial statements:

 
| ** **                                     | ** ** | **March 31,**  | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2008**            | ** ** | **2007**              | ** ** |
| ** **                                     | ** ** | (in thousands) | ** ** |
| **Assets:**                                    |       |                |       |                  |       |
| Current oil and gas derivative assets          |       | $                   | —     |                  | $          | 14,226 |   |
| **Liabilities:**                               |       |                |       |                  |       |
| Accrued interest payable                       |       | $                   | 298        |                  | $          | 162 |   |
| Current oil and gas derivative liabilities     |       | $                   | 85,385     |                  | $          | — |   |
| Other current liabilities                      |       | $                   | —     |                  | $          | 1,278 |   |
| Long-term debt                                 |       | $                   | 75,250     |                  | $          | 40,404 |   |
| Noncurrent oil and gas derivative  liabilities |       | $                   | 73,663     |                  | $          | 7,028 |   |

 

15

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**LINN ENERGY,LLC**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS - Continued**

(Unaudited)

 

***Other***

 

Eric P.Linn, brother of the Company’s Chairman and Chief Executive Officer, served asPresident of one of the Company’s wholly owned subsidiaries.  Effective March 31, 2008, Mr. Linn’semployment with the Company terminated and he executed a Severance Agreementand Release.  Under the terms of thatagreement, Mr. Linn will receive $0.2 million in cash, six months ofoutplacement services, accelerated vesting of certain unvested restricted unitsand unvested options, and payment of COBRA coverage until December 31,2008 or until obtainment of other comparable health care benefits.

 

**(14)****                          SupplementalDisclosures to the Consolidated Statements of Cash Flows**

 
| ** **                                                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                                                            | ** ** | (in thousands)                              | ** ** |
| **Supplemental disclosure of cash flow  information:**                                                |       |                                             |       |   |   |
| Cash payments for interest                                                                            |       | $                                                | 29,902     |   | $ | 9,310 |   |
| **Supplemental disclosures of non-cash  investing activities:**                                       |       |                                             |       |   |   |
| In connection with the purchase of oil and  gas properties, liabilities were assumed as follows: |       |                                             |       |   |   |
| Fair value of assets acquired                                                                         |       | $                                                | 537,529    |   | $ | 450,694 |   |
| Cash paid                                                                                             |       | (517,990                                         | )          | (440,418 | ) |
| Fair value of units paid                                                                              |       | (14,708                                          | )          | — |   |
| Liabilities assumed, net                                                                              |       | $                                                | 4,831      |   | $ | 10,276 |   |

 

For purposesof the statement of cash flows, the Company considers all highly liquidshort-term investments with original maturities of three months or less to becash equivalents.  Restricted cash of$0.7 million and $0.5 million is included in “other noncurrent assets” on thecondensed consolidated balance sheets at March 31, 2008 and December 31,2007, respectively, and represents cash the Company has deposited into aseparate account and designated for asset retirement obligations in accordancewith contractual agreements.

 

The Companymanages its working capital and cash requirements to borrow only as needed fromits Credit Facility.  At March 31,2008 and December 31, 2007, the Company had approximately $16.5 millionand $5.2 million, respectively, of outstanding checks, the balance of which isincluded in “other current liabilities” on the condensed consolidated balancesheets.

 

**(15)****                          Recently Issued Accounting Standards**

 

In February 2008,the Financial Accounting Standards Board (“FASB”) issued FASB Staff PositionFAS 157-2, *“Effective Date of FASB Statement No. 157,”*which defers the effective date of SFAS 157 for one year for certainnonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis.  On January 1, 2008, the Company adopted theprovisions of SFAS 157 related to financial assets and liabilities and tononfinancial assets and liabilities measured at fair value on a recurring basis(see Note 8).  On January 1, 2009, the Company will adopt theprovisions for nonfinancial assets and nonfinancial liabilities that are notrequired or permitted to be measured at fair value on a recurring basis, whichinclude those measured at fair value in goodwill impairment testing,indefinite-lived intangible assets measured at fair value for impairmentassessment, nonfinancial long-lived assets measured at fair value forimpairment assessment, asset retirement obligations initially measured at fairvalue, and those initially measured at fair value in a business 

 

16

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**LINN ENERGY,LLC**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS - Continued**

(Unaudited)

 

combination.  TheCompany is currently evaluating the impact the provisions of SFAS 157related to these items will have on its results of operations and financialposition.

 

In March 2008,the FASB issued Statement of Financial Accounting Standards No. 161, “*Disclosures about Derivative Instruments and HedgingActivities - an Amendment of FASB Statement 133”*(“SFAS 161”).* *SFAS 161requires expanded disclosure regarding derivatives and hedging activitiesincluding disclosure of the fair values of derivative instruments and theirgains and losses in tabular form. SFAS 161 is effective for fiscal years and interim periodsbeginning after November 15, 2008, with early adoption encouraged.  The Company adopted SFAS 161 effective January 1,2008.  The adoption of the requirementsof SFAS 161, which solely expanded disclosures, had no effect on theCompany’s results of operations or financial position.

 

**(16)****                          SubsequentEvents**

 

On April 13,2008, the Company entered into an agreement with XTO Energy, Inc. (“XTO”)to sell all of its interests in oil and gas properties in Appalachia for cashconsideration of $600.0 million, subject to closing adjustments.  The Company received a cash down payment of$60.0 million in April 2008.  TheCompany plans to use net proceeds from the sale to reduce indebtedness (seeNote 6).  The Company anticipatesclosing on or before July 1, 2008, subject to closing conditions,including approvals under the Hart-Scott-Rodino Antitrust Improvement Act of1976.  There can be no assurance that allof the conditions to closing will be satisfied. Lehman (see Note 13) acted as financial advisor to the Company forthis transaction and will be paid an advisory fee of approximately $5.0 millionupon the closing of the sale.

 

The propertiesinclude proved reserves of approximately 197 Bcfe (estimate as of December 31,2007).  Assuming the sale of propertiesto XTO closes as expected, the Company will report the results of operations ofthese properties as discontinued operations in the second quarter of 2008,effective April 13, 2008.  Thecarrying value of assets to be sold was preliminarily estimated at $370.8million.

 

In April 2008,the Company canceled (before the contract settlement date) hedge contracts onestimated future gas production primarily associated with the pending sale ofproperties in Appalachia for a cost of $68.2 million.

 

17

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**Item2.****                     Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

Thefollowing discussion and analysis should be read in conjunction with thefinancial statements and related notes included elsewhere in this QuarterlyReport on Form 10-Q.  Areference to a “Note” herein refers to the accompanying Notes to CondensedConsolidated Financial Statements contained in Item 1. “Financial Statements.”

 

**ExecutiveSummary**

 

Linn Energy is an independentoil and gas company focused on the development and acquisition of long lifeproperties which complement its asset profile in producing basins within theUnited States.  From inception throughthe date of this report, the Company has completed 24 acquisitions of workingand royalty interests in oil and gas properties and related gathering andpipeline assets.  Total acquired provedreserves were approximately 1.9 Tcfe at an acquisition cost of approximately$2.11 per Mcfe.  See Note 2 foradditional details about the Company’s recent acquisitions.  TheCompany finances acquisitions with a combination of proceeds from the issuanceof its units, bank borrowings and cash flow from operations.

 

First quarter 2008 results includedthe following:

 

·                  oil, gas and NGL sales ofapproximately $195.5 million, compared to $39.2 million in the first quarter of2007;

·                  dailyproduction of 220.3 MMcfe/d, compared to 60.3 MMcfe/d in the first quarter of2007;

·                  leaseoperating expenses of $1.39 per Mcfe, compared to $1.81 per Mcfe in the firstquarter of 2007; and

·                  generaland administrative expenses of $1.00 per Mcfe, compared to $1.96 per Mcfe inthe first quarter of 2007.

 

On April 13,2008, the Company entered into an agreement with XTO to sell all of itsinterests in oil and gas properties in Appalachia for cashconsideration of $600.0 million, subject to closing adjustments.  The Company received a cash down payment of$60.0 million in April 2008.  TheCompany plans to use net proceeds from the sale to reduce indebtedness (seeNote 6).  The Company anticipatesclosing on or before July 1, 2008, subject to customary closingconditions.  There can be no assurancethat all of the conditions to closing will be satisfied.

 

The properties include provedreserves of approximately 197 Bcfe (estimate as of December 31, 2007) andcurrently produce approximately 25 MMcfe/d. Linn Energy’s core strategy isto focus on low risk development opportunities, and recent discoveries in theprospective Marcellus Shale provided the incentive for the Company to evaluateits holdings in Appalachia.  Adelineation of opportunities in the Marcellus Shale will take time andsuccessful exploration and development will require significant capitalinvestment.  As such, the Companybelieves that monetizing its Appalachian assets will create significant valuefor its unitholders.

 

Assuming the sale of propertiesto XTO closes as expected, the Company will report the results of operations ofthese properties as discontinued operations in the second quarter of 2008,effective April 13, 2008.

 

In April 2008, the Companycanceled (before the contract settlement date) hedge contracts on estimatedfuture gas production primarily associated with the pending sale of propertiesin Appalachia for a cost of $68.2 million.

 

18

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**Item 2.****                         Mangement’sDiscussion and Analysis of Financial Condition and Results of Operations -Continued**

 

**Resultsof Operations - Three Months Ended March 31, 2008 Compared to Three MonthsEnded March 31, 2007**

 
| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2008**                                         | ** ** | **2007**   | ** ** | **Variance** | ** ** |
| ** **                                 | ** ** | (in thousands)                              | ** ** |
| **Revenues:**                              |       |                                             |       |       |       |   |   |
| Gas sales                                  |       | $                                                | 104,358    |       | $          | 23,360 |   | $ | 80,998 |   |
| Oil sales                                  |       | 65,021                                           |       | 9,758      |       | 55,263 |   |
| NGL sales                                  |       | 26,137                                           |       | 6,086      |       | 20,051 |   |
| Total oil, gas and NGL sales               |       | 195,516                                          |       | 39,204     |       | 156,312 |   |
| Gain (loss) on oil and gas derivatives (1) |       | (268,794                                         | )          | (60,441    | )          | (208,353 | ) |
| Natural gas marketing revenues             |       | 4,147                                            |       | 1,778      |       | 2,369 |   |
| Other revenues                             |       | 665                                              |       | 2,090      |       | (1,425 | ) |
| Total revenues                             |       | $                                                | (68,466    | )          | $          | (17,369 | ) | $ | (51,097 | ) |
|                                       |       |                                             |       |       |       |   |   |
| **Expenses:**                              |       |                                             |       |       |       |   |   |
| Operating expenses:                        |       |                                             |       |       |       |   |   |
| Lease operating and other                  |       | $                                                | 27,897     |       | $          | 9,825 |   | $ | 18,072 |   |
| Production and ad valorem taxes            |       | 13,941                                           |       | 2,631      |       | 11,310 |   |
| Natural gas marketing expenses             |       | 3,994                                            |       | 1,347      |       | 2,647 |   |
| General and administrative expenses (2)    |       | 20,014                                           |       | 10,621     |       | 9,393 |   |
| Data license expenses                      |       | 2,428                                            |       | —     |       | 2,428 |   |
| Depreciation, depletion and amortization   |       | 50,470                                           |       | 11,851     |       | 38,619 |   |
| Total expenses                             |       | $                                                | 118,744    |       | $          | 36,275 |   | $ | 82,469 |   |
|                                       |       |                                             |       |       |       |   |   |
| **Other income and (expenses)**            |       | $                                                | (71,940    | )          | $          | (10,571 | ) | $ | (61,369 | ) |
|                                            |            |                                                  |            |            |            |  |  |  |  |  |  |

 
| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2008**                                         | ** ** | **2007**   | ** ** | **Variance** | ** ** |
| **Production:**                            |       |                                             |       |       |       |   |   |
| Gas production (MMcf)                      |       | 13,361                                           |       | 3,374      |       | 296.0 | % |
| Oil production (MBbls)                     |       | 718                                              |       | 215        |       | 234.0 | % |
| NGL production (MBbls)                     |       | 397                                              |       | 127        |       | 212.6 | % |
| Total production (MMcfe)                   |       | 20,051                                           |       | 5,424      |       | 269.7 | % |
| Average daily production (MMcfe/d)         |       | 220.3                                            |       | 60.3       |       | 265.3 | % |
| ** **                                 |       |                                             |       |       |       |   |   |
| **Weighted average prices (hedged):**(1)   |       |                                             |       |       |       |   |   |
| Gas (Mcf)                                  |       | $                                                | 7.49       |       | $          | 8.40 |   | (10.8 | )% |
| Oil (Bbl) (3)                              |       | $                                                | 75.25      |       | $          | 64.47 |   | 16.7 | % |
| NGL (Bbl)                                  |       | $                                                | 65.84      |       | $          | 47.92 |   | 37.4 | % |
| ** **                                 |       |                                             |       |       |       |   |   |
| **Weighted average prices (unhedged):**(4) |       |                                             |       |       |       |   |   |
| Gas (Mcf)                                  |       | $                                                | 7.81       |       | $          | 6.92 |   | 12.9 | % |
| Oil (Bbl) (3)                              |       | $                                                | 90.56      |       | $          | 45.39 |   | 99.5 | % |
| NGL (Bbl)                                  |       | $                                                | 65.84      |       | $          | 47.92 |   | 37.4 | % |
| ** **                                 |       |                                             |       |       |       |   |   |
| **Costs per Mcfe of production:**          |       |                                             |       |       |       |   |   |
| Operating expenses:                        |       |                                             |       |       |       |   |   |
| Lease operating and other                  |       | $                                                | 1.39       |       | $          | 1.81 |   | (23.2 | )% |
| Production and ad valorem taxes            |       | $                                                | 0.70       |       | $          | 0.49 |   | 42.9 | % |
| General and administrative expenses (2)    |       | $                                                | 1.00       |       | $          | 1.96 |   | (49.0 | )% |
| Depreciation, depletion and amortization   |       | $                                                | 2.52       |       | $          | 2.18 |   | 15.6 | % |

 

----

(1)              Includesthe effect of realized gains (losses) of $(15.2) million and $9.1 million onderivatives for the three months ended March 31, 2008 and 2007, respectively.

(2)              Themeasure for the three months ended March 31, 2008 and 2007 includesapproximately $3.8 million and $3.7 million, respectively, of unit-basedcompensation and unit warrant expenses. Excluding these amounts, general and administrative expenses for thethree months ended March 31, 2008 and 2007 were $0.81 per Mcfe and $1.27per Mcfe, respectively.  This is anon-GAAP measure used by Company management to analyze its performance.

(3)              Oilproduction in California is sold pursuant to a long-term contract at 79% ofNYMEX, and with gravity increase due to NGL being mixed into the oil stream,prices realized average approximately 82% of NYMEX.

(4)              Doesnot include the effect of realized gains (losses) on derivatives.

 

19

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** **

**Item 2.        Management’s Discussion and Analysis of Financial Conditionand Results of Operations - Continued**

 

***Revenues***

 

Gas, oil and NGL sales increased by approximately $156.3 million, or399%, to approximately $195.5 million for the three months ended March 31,2008, from $39.2 million for the three months ended March 31, 2007.  Revenues for the three months ended March 31,2008 includes approximately $19.6 million of gas and oil sales from theAppalachian region.  Revenues from thisregion will not be included in the Company’s future results due to the plannedsale of these properties (see Note 16).

 

The increase in gas, oil and NGL revenues was primarily attributable toincreased production as a result of acquisitions and, to a lesser extent,drilling.  Total production increased to20,051 MMcfe during the three months ended March 31, 2008, from 5,424MMcfe during the three months ended March 31, 2007.  The increase in production was due primarilyto production from the Mid-Continent III oil and gas properties acquiredin August 2007 (see Note 2). In addition, the Company drilled 101 wells during the three months endedMarch 31, 2008, compared to 41 wells during the same period of 2007.  Approximately 25 wells were drilled in theAppalachian region during the three months ended March 31, 2008.  Price increases during the three months endedMarch 31, 2008 increased total gas, oil and NGL revenues by $13.7 million,or 9%, compared to the same period of 2007.

 

Gas production increased to 13,361 MMcf during the three months ended March 31,2008, from 3,374 MMcf during the three months ended March 31, 2007,primarily due to the 2007 and 2008 acquisitions in the Mid-Continent region(see Note 2).  The increase in theweighted average price of gas for the period, to $7.81 per Mcf, from $6.92 perMcf, contributed approximately $3.0 million to the increase in gasrevenues.  Gas production for the threemonths ended March 31, 2008 includes 2,212 Mcf from the Appalachianregion.  Production from this region willnot be included in the Company’s future results due to the planned sale ofthese properties (see Note 16).

 

Oil production increased to 718 MBbls during the three months ended March 31,2008, from 215 MBbls during the three months ended March 31, 2007, due toacquisitions in the Mid-Continent region and the drilling of new wells in theCompany’s Western region.  Acquisitionsalso increased NGL production to 397 MBbls during the three months ended March 31,2008, from 127 MBbls during the comparative period of the prior year.  The increase in the weighted average price ofoil for the period, to $90.56 per Bbl, from $45.39 per Bbl, contributedapproximately $9.7 million to the increase in oil revenues.

 

***Commodity Hedging Activities***

 

During the three months ended March 31, 2008, the Company hadcommodity derivative contracts for approximately 110% of its gas production and71% of its oil and NGL production, which resulted in realized losses of $15.2million.  During the three months ended March 31,2007, the Company had approximately 115% of its gas production and 110% of itsoil production hedged, which resulted in realized gains of $9.1 million.  Unrealized gains and losses result fromchanges in market valuations of derivatives as future commodity priceexpectations change compared to the contract prices on the derivatives.  During the first quarters of 2008 and 2007,expected future oil and gas prices increased, which resulted in unrealizedlosses on derivatives of $253.5 million and $69.5 million for the three monthsended March 31, 2008 and 2007, respectively.  Such market value adjustments, if realized inthe future, would be offset by higher actual prices for production.  See Note 7 for details regardingderivatives in place through December 31, 2013.

 

***Expenses***

 

Lease operating and other expenses include expenses such as labor,field office, vehicle, supervision, transportation, maintenance, tools andsupplies.  As noted below, total leaseoperating expenses increased; however, lease operating expenses per equivalentunit of production (excluding production and ad valorem taxes) decreased to$1.39 per Mcfe for the three months ended March 31, 2008, compared to$1.81 per Mcfe for the three months ended March 31, 2007, due to acquiredproperties providing cost efficiencies and economies of scale.

 

20

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** **

**Item 2.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Continued**

 

Lease operating and other expenses increased by approximately $18.1million, or 185%, to $27.9 million for the three months ended March 31,2008, from $9.8 million for the three months ended March 31, 2007.  Operating expenses increased primarily due tohigher production and costs associated with the 2007 and 2008 acquisitions inthe Mid-Continent region, including expenses associated with the addition ofapproximately 150 field and direct field support employees in the third quarterof 2007.

 

Production and ad valorem taxes were approximately 7% of total salesfor both the three months ended March 31, 2008 and 2007.  Production and ad valorem taxes increased byapproximately $11.3 million, to $13.9 million for the three months ended March 31,2008, from $2.6 million for the three months ended March 31, 2007.  Production taxes, which are a function ofvolumes and revenues generated from production, increased by approximately $9.5million compared to the same period of 2007. Ad valorem taxes, which are based on the value of reserves and vary bylocation, increased by approximately $1.8 million compared to the three monthsended March 31, 2007.

 

General and administrative expenses are costs not directly associatedwith field operations and include costs of employees and executive officers,related benefits, office leases and professional fees.  As noted below, total general andadministrative expenses increased; however, expenses per equivalent unit ofproduction decreased to $1.00 per Mcfe for the three months ended March 31,2008, compared to $1.96 per Mcfe for the three months ended March 31,2007, due to acquired properties providing increased production, costefficiencies and economies of scale.

 

General and administrative expenses increased by approximately $9.4million, or 89%, to $20.0 million for the three months ended March 31,2008, from $10.6 million for the three months ended March 31, 2007.  The increase in general and administrativeexpenses over the first quarter of 2007 was primarily due to costs incurred tosupport the Company’s increased size and infrastructure growth, including theaddition of a regional operating center in Oklahoma.  Salaries and benefits expense increasedapproximately $5.4 million during the three months ended March 31, 2008and includes costs associated with approximately 150 support employees added inthe third quarter of 2007.  Informationtechnology costs, such as software, data administration and data conversioncosts increased by approximately $2.0 million compared to the same period of2007.  Additionally, employee unit-basedcompensation expense increased by approximately $0.6 million during the threemonths ended March 31, 2008 compared to the same period of 2007.

 

The Company incurred expenses of approximately $2.4 million for datalicense fees during the three months ended March 31, 2008.  These expenses primarily represent one-timepayments for access to 3-D seismic and other data libraries in theMid-Continent for periods ranging from one to 50 years or more and enable theCompany to maximize drilling opportunities in that region.

 

Depreciation, depletion and amortization increased by approximately$38.6 million, to $50.5 million for the three months ended March 31, 2008,from $11.9 million for the three months ended March 31, 2007.  Higher total production levels, primarily dueto the Company’s acquisitions in the Mid-Continent in 2008 and 2007, were theprimary reason for the increase.

 

Other income and (expenses) increased by approximately $61.4 million,to a net expense of $71.9 million for the three months ended March 31, 2008,compared to a net expense of $10.6 million for the three months ended March 31,2007, primarily due to increased interest expense from increased debt levelsassociated with borrowings to fund acquisitions and drilling.  Cash payments for interest increased to $29.9million for the three ended March 31, 2008, compared to $9.3 million forthe three months ended March 31, 2007. The Company’s interest rate swaps were not designated as cash flowhedges under SFAS 133, even though they reduce exposure to changes ininterest rates (see Note 7). Therefore, the changes in fair values of these instruments were recordedas a loss of approximately $38.0 million and $0.2 million for the three monthsended March 31, 2008 and 2007, respectively.  These amounts are non-cash items.

 

Income tax expense was approximately $0.2 million and $3.6 million forthe three months ended March 31, 2008 and 2007, respectively.  The Company is a limited liability companytreated as a partnership for federal and state income tax purposes.  Certain of the Company’s subsidiaries areSubchapter C-corporations subject to federal and state income taxes.  Tax expense for the three months ended March 31,2008 primarily represents Texas margin tax 

 

21

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**Item 2.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Continued**

 

expense.  Tax expense for thethree months ended March 31, 2007 relates primarily to 2006 expenserecovery.  The Company’s taxablesubsidiaries generated net operating losses for the year ended December 31,2006, which were subsequently recovered through an intercompany service charge,resulting in tax expense for the three months ended March 31, 2007.

 

**Liquidity and****Capital Resources**

 

The Company has utilized public and private equity,proceeds from bank borrowings and cash flow from operations for capitalresources and liquidity.  To date, theprimary use of capital has been for the acquisition and development of oil andgas properties.  The Company manages itsworking capital and cash requirements to borrow only as needed.  At March 31, 2008, the Company’s totalcurrent liabilities exceeded current assets by $194.7 million due to a $158.4million current liability for derivative instruments and a $65.3 millioncurrent payable for post-closing settlement costs for an oil and gasacquisition.  The Company had $347.3million in available borrowing to meet such obligations at April 30, 2008.

 

As the Company pursues growth, it continually monitorsthe capital resources available to meet future financial obligations andplanned capital expenditures.  TheCompany’s future success in growing reserves and production will be highlydependent on the capital resources available and its success in drilling for oracquiring additional reserves.  TheCompany actively reviews acquisition opportunities on an ongoing basis.  If the Company were to make significantadditional acquisitions for cash, it would need to borrow additional amounts,if available, or obtain additional debt or equity financing.  The Company’s Credit Facility and Term Loanimpose certain restrictions on the Company’s ability to obtain additional debtfinancing.  Based upon currentexpectations, the Company believes liquidity and capital resources will besufficient for the conduct of its business and operations.

 

***Statements ofCash Flows – Operating Activities***

 

At March 31, 2008, the Company had $1.1 millioncash and cash equivalents compared to $1.4 million at December 31,2007.  Cash provided by operatingactivities for the three months ended March 31, 2008 was approximately$61.2 million, compared to cash used by operating activities of $37.9 millionfor the three months ended March 31, 2007. The increase in cash provided by operating activities was primarily dueto increased production during the three months ended March 31, 2008.  In addition, premiums paid for derivativeswere approximately $1.3 million during the three months ended March 31,2008, compared to $53.0 million during the three months ended March 31,2007.  The premiums paid were forderivative contracts that hedge future production for up to five years.  These hedges are expected to provide orstabilize the Company’s future cash flow and were funded through the Company’sCredit Facility.  See Note 7 foradditional details about commodity derivatives. The amount of derivative contracts the Company enters into in the futurewill be directly related to expected production from future acquisitions andcannot be predicted at this time.

 

***Statements of Cash Flows – Investing Activities***

 

Cash used in investing activities was approximately$613.3 million for the three months ended March 31, 2008, compared to$459.9 million for the three months ended March 31, 2007.  The increase in cash used in investingactivities was due to an increase in acquisition and development activityduring the three months ended March 31, 2008, compared to the same periodof the prior year.

 

The total cash used in investing activities for the three months ended March 31,2008 includes $507.2 million for the January 2008 acquisition ofproperties in the Mid-Continent (see Note 2).  Other acquisitions, including acquisitions ofadditional working interests in current wells, were approximately $10.8 millionand property, plant and equipment purchases were $2.6 million.  The total for the three months ended March 31,2008 also includes $92.7 million for the drilling and development of oil andgas properties and pipeline costs.  For2008, the Company estimates its total drilling and development capitalexpenditures will be between $250.0 million and $300.0 million.  This estimate is under continuous review andis subject to on-going adjustment.

 

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**Item 2.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Continued**

 

***Statements of Cash Flows – Financing Activities***

 

Cash provided by financing activities wasapproximately $551.7 million for the three months ended March 31, 2008,compared to $492.2 million for the three months ended March 31, 2007.  During the three months ended March 31,2008, total proceeds from the issuance of debt were $667.0 million and totalrepayments of debt were $44.9 million.

 

***Distributions***

 

Under the limited liabilitycompany agreement, Company unitholders are entitled to receive a quarterlydistribution of available cash to the extent there is sufficient cash fromoperations after establishment of cash reserves and payment of fees andexpenses.  The following provides asummary of distributions paid by the Company during the three months ended March 31, 2008:

 
| ** **         | ** ** | ** **                                        | ** ** | **Distributions** | ** ** |
|--------------------|------------|---------------------------------------------------|------------|-------------------|------------|
| **Date Paid** | ** ** | **Period Covered by Distribution** | ** ** | **Per Unit** | ** ** | **Total** | ** ** |
| ** **         | ** ** | ** **                                        | ** ** | ** **        | ** ** | (in thousands) | ** ** |
|               |       |                                              |       |              |       |   |   |
| February 2008 |       | October 1 – December 31, 2007      |       | $                 | 0.63       |   | $ | 72,189 |   |
|                    |            |                                                   |            |                   |            |  |  |  |  |

 

In April 2008, the Company’s Board of Directorsdeclared a cash distribution of $0.63 per unit with respect to the firstquarter of 2008.  The distribution totaling approximately $72.4 million willbe paid on May 14, 2008 to unitholders of record as of the close ofbusiness on May 6, 2008.

 

***Credit Facility***

 

At March 31, 2008, the Company had a $1.9 billion borrowing baseunder its Credit Facility with a maturity of August 2010.  Effective April 11, 2008, the borrowingbase under the Credit Facility was redetermined and increased to $2.0 billion,all of which is conforming.  At April 30,2008, the Company had $347.3 million available for borrowing under its CreditFacility.

 

The borrowing base under the Credit Facility will be redeterminedsemi-annually by the lenders in their sole discretion, based on, among otherthings, reserve reports as prepared by reserve engineers taking into accountthe oil and gas prices at such time.  Atthe Company’s election, interest on borrowings under the Credit Facility isdetermined by reference to either LIBOR plus an applicable margin between 1.00%and 1.75% per annum or the ABR plus an applicable margin between 0% and 0.25%per annum.  As noted above, the Companydepends on its Credit Facility for future capital needs.  In addition, the Company has drawn on theCredit Facility to fund or partially fund quarterly cash distribution payments,since it uses operating cash flows for investing activities and borrows as cashis needed.  Absent such borrowing, theCompany would have at times experienced a shortfall in cash available to paythe declared quarterly cash distribution amount.  If there is a default under the CreditFacility, the Company would be unable to make borrowings to fund distributions.

 

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*** ***

**Item 2.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Continued**

*** ***

***Term Loan***

 

On January 31,2008, in order to fund a portion of the January 2008 acquisition of oiland gas properties in the Mid-Continent (see Note 2), the Company enteredinto a $400.0 million Term Loan maturing on July 31, 2009, secured by asecond priority lien on all oil and gas properties as well as a second prioritypledge on all ownership interests in its operating subsidiaries.  In connection with this loan, the Companypaid financing fees of approximately $6.3 million, which were deferred andamortized over the life of the Term Loan. Covenants under the Term Loan are substantially similar to those underthe Credit Facility.  Interest isdetermined by reference to LIBOR plus an applicable margin of 5.0% for thefirst twelve months and 7.5% for the remaining period until maturity or adomestic bank rate plus an applicable margin of 3.5% for the first twelvemonths and 6.0% for the remaining period until maturity.

 

***Off-BalanceSheet Arrangements***

 

At March 31, 2008, the Company did not have anyoff-balance sheet arrangements that have, or are reasonably likely to have, amaterial effect on its financial position or results of operations.

 

***Contingencies***

 

During the three months ended March 2008 and2007, the Company made no significant payments to settle any legalproceedings.  The Company regularlyanalyzes current information and accrues for probable liabilities on thedisposition 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 liabilityhas been incurred and the amount can be reasonably estimated.

 

***Commitmentsand Contractual Obligations***

 

The Company has contractual obligations for long-term debt, operatingleases and other long-term liabilities that were summarized in a table ofcontractual obligations in the 2007 Annual Report on Form 10-K.  With the exception of a $400.0 million TermLoan, as of March 31, 2008, there have been no significant changes to theCompany’s contractual obligations from December 31, 2007.  See “Term Loan” above for detail about the$400.0 million Term Loan the Company entered into on January 31, 2008.

 

**Critical Accounting Policies and Estimates**

 

The discussion and analysis of the Company’s financial condition andresults of operations is based upon the consolidated financial statements,which have been prepared in accordance with U.S. generally accepted accountingprinciples (“GAAP”).  The preparation ofthese financial statements requires the Company to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities.  Certain accounting policies involve judgmentsand uncertainties to such an extent that there is reasonable likelihood thatmaterially different amounts could have been reported under differentconditions, or if different assumptions had been used.  The Company evaluates its estimates andassumptions on a regular basis.  TheCompany bases estimates on historical experience and various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates and assumptions used in the preparation of financial statements.

 

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**Item 2.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Continued**

 

As of March 31, 2008, there have been no significant changes withregard to the critical accounting policies disclosed in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2007.  The policies disclosed included theaccounting for oil and gas properties, revenue recognition, purchase accountingand derivative instruments.

 

**New Accounting Standards**

 

See Note 8 and Note15 for detail regarding SFAS 157 implementation effective January 1,2008 and January 1, 2009, and Note 15 for detail regardingSFAS 161 implementation effective January 1, 2008.

 

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**Item 2.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Continued**

 

**Non-GAAP Financial Measures**

 

***Adjusted EBITDA***

 

The Company defines Adjusted EBITDA as net income(loss) plus:

 

·      Net operating cash flow from acquisitionsand divestitures, effective date through closing date;

·      Interest expense, net of amountscapitalized;

·      Depreciation, depletion and amortization;

·      Write-off of deferred financing fees andother;

·      (Gain) loss on sale of assets;

·      Accretion of asset retirement obligation;

·      Unrealized (gain) loss on derivatives;

·      Realized loss on canceled derivatives;

·      Unit-based compensation and unit warrantexpenses;

·      Data license expenses; and

·      Income tax (benefit) provision.

 

Adjusted EBITDA is a significant non-GAAP performancemetric used by Company management to indicate (prior to the establishment ofany reserves by its Board of Directors) the cash distributions the Companyexpects to pay unitholders. Specifically, this financial measure indicates to investors whether ornot the Company is generating cash flow at a level that can sustain or supportan increase in its quarterly distribution rates.  Adjusted EBITDA is also a quantitative metricused throughout the investment community with respect to publicly-tradedpartnerships and limited liability companies.

 

The following presents a reconciliation ofconsolidated net loss to Adjusted EBITDA:

 
| ** **                                                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                                          | ** ** | (in thousands)                              | ** ** |
|                                                                                |       |                                             |       |   |   |
| Net loss                                                                            |       | $                                                | (259,359   | ) | $ | (67,847 | ) |
| Plus:                                                                               |       |                                             |       |   |   |
| Net operating  cash flow from acquisitions, effective date through closing date (1) |       | 8,321                                            |       | 2,770 |   |
| Interest  expense, cash                                                             |       | 29,902                                           |       | 9,310 |   |
| Interest  expense, non-cash, net of amounts capitalized                             |       | 2,482                                            |       | 526 |   |
| Depreciation,  depletion and amortization                                           |       | 50,470                                           |       | 11,851 |   |
| Write-off of  deferred financing fees and other                                     |       | —                                           |       | 804 |   |
| (Gain) loss on  sale of assets                                                      |       | 294                                              |       | (945 | ) |
| Accretion of  asset retirement obligation                                           |       | 469                                              |       | 110 |   |
| Unrealized loss  on derivatives                                                     |       | 291,499                                          |       | 69,591 |   |
| Unit-based  compensation and unit warrant expenses                                  |       | 3,888                                            |       | 3,740 |   |
| Data license  expenses                                                              |       | 2,428                                            |       | — |   |
| Income tax  provision (2)                                                           |       | 209                                              |       | 3,632 |   |
| Adjusted EBITDA                                                                     |       | $                                                | 130,603    |   | $ | 33,542 |   |

 

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(1)              Includes net operating cash flow from acquisitionsthrough the date of this report (see Note 2).

 

(2)              The Company’s taxablesubsidiaries generated net operating losses for the year ended December 31,2006.  Management has subsequentlyrecovered expenses through an intercompany charge for services from LinnOperating, Inc. to Linn Energy which resulted in a corresponding taxexpense in the three months ended March 31, 2007.

 

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**Item 2.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Continued**

 

***Adjusted Net Income***

 

Adjusted Net Income is a non-GAAP performance measureused by Company management to evaluate its operational performance from oil andgas properties, prior to derivative gains and losses. The following presents areconciliation of consolidated net loss to Adjusted Net Income:

 
| ** **                                 | ** ** | **Three Months Ended  March 31,**             | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                                     | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | (in thousands, except per unit  amounts) | ** ** |
|                                       |       |                                                         |       |   |   |
| Net loss                                   |       | $                                                            | (259,359   | ) | $ | (67,847 | ) |
| Plus:                                      |       |                                                         |       |   |   |
| Unrealized loss  on derivatives            |       | 291,499                                                      |       | 69,591 |   |
| Adjusted Net  Income                       |       | $                                                            | 32,140     |   | $ | 1,744 |   |
|                                       |       |                                                         |       |   |   |
| Net loss per  unit – basic            |       | $                                                            | (2.28      | ) | $ | (1.35 | ) |
| Plus:                                      |       |                                                         |       |   |   |
| Unrealized loss  on derivatives per unit   |       | 2.56                                                         |       | 1.38 |   |
| Adjusted Net  Income per unit – basic |       | $                                                            | 0.28       |   | $ | 0.03 |   |

 

**Cautionary Statement**

 

This Quarterly Report on Form 10-Q contains forward-lookingstatements that are subject to a number of risks and uncertainties, many ofwhich are beyond the Company’s control. These statements may include statements about the Company’s:

 

·                  business strategy;

·                  acquisition strategy;

·                  financial strategy;

·                  drilling locations;

·                  oil, gas and NGL reserves;

·                  realized oil, gas and NGL prices;

·                  production volumes;

·                  lease operating expenses, general and administrativeexpenses and finding and development costs;

·                  future operating results; and

·                  plans, objectives, expectations and intentions.

 

All of these types of statements, other than statements of historicalfact included in this Quarterly Report on Form 10-Q, are forward lookingstatements.  These forward-lookingstatements may be found in Item 2. In some cases, forward-looking statements can be identified byterminology 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 comparableterminology.

 

The forward-looking statements contained in this Quarterly Report on Form 10-Qare largely based on Company expectations, which reflect estimates andassumptions made by Company management. These estimates and assumptions reflect management’s best judgment basedon currently known market conditions and other factors.  Although the Company believes such estimatesand assumptions to be reasonable, they are inherently uncertain and involve anumber of risks and uncertainties beyond its control.  In addition, management’s assumptions mayprove to be inaccurate.  The Companycautions that the forward-looking statements contained in this Quarterly Reporton Form 10-Q are not guarantees of future performance, and it cannotassure any reader that such statements will be 

 

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**Item 2.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Continued**

 

realized or the forward-looking statements or events will occur.  Actual results may differ materially fromthose anticipated or implied in forward-looking statements due to factorslisted in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2007, and elsewhere in the Annual Reportand also in the Company’s Quarterly Reports on Form 10-Q.  The forward-looking statements speak only asof the date made, and other than as required by law, the Company undertakes noobligation to publicly update or revise any forward-looking statement, whetheras a result of new information, future events or otherwise.

 

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**Item 3.  ****Quantitative and Qualitative Disclosures About Market Risk**

 

The primary objective of the following information is to provideforward-looking quantitative and qualitative information about potentialexposure to market risks.  A reference toa “Note” herein refers to the accompanying Notes to Condensed ConsolidatedFinancial Statements contained in Item 1. “Financial Statements.”

 

**Commodity Price Risk**

 

The Company enters into hedging arrangements with respect to a portionof its projected production through various transactions that provide aneconomic hedge of the risk related to the future prices received.  The Company does not enter into hedgetransactions for trading purposes.  SeeNote 7 for additional details.  At March 31,2008, the fair value of hedges that settle during the next twelve months was aliability of approximately $125.1 million for which the Company will owe itscounterparties.  A 10% increase in theindex oil and gas prices above the March 31, 2008 prices for the nexttwelve months would result in an increase in the hedge liability ofapproximately $75.1 million; conversely, a 10% decrease in the index oil andgas prices would result in a decrease of approximately $78.3 million.

 

**Interest Rate Risk**

 

At March 31, 2008, the Company had long-term debt outstanding ofapproximately $2.07 billion, which incurred interest at floating rates.  See Note 6 for additional details.  As of March 31, 2008, the interest ratebased on LIBOR was approximately 5.38%. A 1% increase in LIBOR would result in an estimated $20.7 millionincrease in annual interest expense.  TheCompany has entered into interest rate swap agreements based on LIBOR tominimize the effect of fluctuations in interest rates.  See Note 7 for additional details.

 

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**Item 4.   Controls and Procedures**

 

***Evaluation of Disclosure Controls and Procedures***

 

The Company maintains disclosure controls and procedures that aredesigned to ensure that information required to be disclosed in the Company’s reportsunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”) isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to management, including the Company’s Chief Executive Officer andChief Financial Officer, and the Company’s Audit Committee of the Board ofDirectors, as appropriate, to allow timely decisions regarding requireddisclosure.  In designing and evaluatingthe disclosure controls and procedures, management recognizes that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

The Company carried out an evaluation under the supervision and withthe participation of its management, including its Chief Executive Officer andChief Financial Officer, of the effectiveness of its disclosure controls andprocedures as of the end of the period covered by this report.  Based on this evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures were effective as of March 31, 2008.

 

***Changes in the Company’s Internal Control Over FinancialReporting***

 

The Company’s management is also responsible for establishing andmaintaining adequate internal controls over financial reporting, as defined in Rules 13a-15(f) and15d-15(f) of the Exchange Act.  TheCompany’s internal controls were designed to provide reasonable assurance as tothe reliability of its financial reporting and the preparation and presentationof the consolidated financial statements for external purposes in accordancewith accounting principles generally accepted in the United States.

 

There were no changes in the Company’s internal controls over financialreporting during the three months ended March 31, 2008 that materiallyaffected, or were reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

The Company completed acquisitions of oil and gas properties in theMid-Continent in August 2007 and January 2008.  Company management continues to integrateinternal controls and enhanced reporting related to the financial performanceof the acquired operations with the Company’s internal control over financialreporting.  This integration will lead tochanges in these controls in future fiscal periods, but management does notexpect these changes to materially affect the Company’s internal control overfinancial reporting.  Management willcomplete the integration process during 2008.

 

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**PART II– OTHER INFORMATION**

 

**Item 1.       Legal Proceedings**

 

Not applicable.

 

**Item 1A.    Risk Factors**

 

As of the date of this report, there are no factors that havematerially changed from those reported in “Item 1A. Risk Factors” in theCompany’s Annual Report on Form 10-K for the year ended December 31,2007.

 

**Item 2.       Unregistered Sales of Equity Securitiesand Use of Proceeds**

 

None not previously reported.

 

**Item 3.       Defaults Upon Senior Securities**

 

None.

 

**Item 4.       Submission of Matters to a Vote ofSecurity Holders**

 

None.

 

**Item 5.       Other Information**

 

None.

 

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**Item 6.   Exhibits**

 
| **Exhibit Number** | ** ** | ** ** | ** ** | **Description**                                                                                                                                                                                                                                                     | ** ** |
|-------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                    |       |       |       |                                                                                                                                                                                                                                                                |       |
| 2 .1†*             |       | —     |       | Asset Purchase and Sale Agreement, dated as of  April 13, 2008, between Linn Energy Holdings, LLC, Linn  Operating, Inc., Penn West Pipeline, LLC, as sellers, and XTO Energy,  Inc., as buyer                                                            |       |
| 2 .2†*             |       | —     |       | Limited Partnership Asset Purchase and Sale  Agreement, dated as of April 13, 2008, between Linn Energy Holdings,  LLC, Marathon 85-II Limited Partnership and Marathon 85-III Limited  Partnership, as sellers, and XTO Energy, Inc., as buyer |       |
| 31 .1†             |       | —     |       | Section 302 Certification of Michael C. Linn,  Chairman 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 Michael C. Linn,  Chairman 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                                                                                                                                           |       |

 

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†                 Filed herewith.

 

*                 The schedules to this agreement have been omitted fromthis filing pursuant to Item 601(b)(2) of Regulation S-K.  The Company will furnish copies of suchschedules to the Securities and Exchange Commission upon request.

 

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**SIGNATURE**

 

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 theundersigned, thereunto duly authorized.

 
| ** **             | **LINN  ENERGY, LLC**                                      |
|------------------------|------------------------------------------------------------|
|                   | (Registrant)                                               |
|                   |                                                       |
|                   |                                                       |
| Date: May 8, 2008 | /s/ Lisa D. Anderson                                       |
|                   | Lisa D. Anderson                                           |
|                   | Senior Vice President  and Chief Accounting Officer        |
|                   | (As Duly Authorized  Officer and Chief Accounting Officer) |

 

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