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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 for the transition period from  to
 Commission File Number: 000-51719
 
 LINN ENERGY, LLC
 (Exact name of registrant as specified in its charter)
 
 Delaware
    
    65-1177591(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 650 Washington Road
8 th Floor
Pittsburgh, PA 15228
(Address of principal executive offices)
 (412) 440-1400
(Registrants telephone number, including area code)
 
 þ o
  o o þ
 o þ




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TABLE OF CONTENTS
 PagePart I  Financial InformationItem 1.
    
    Financial Statements
    
    
    3Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005
    
    
    3Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005
(Unaudited)
    
    
    5Consolidated
Statement of Unitholders Capital (Deficit) for the three months ended March 31, 2006
(Unaudited)
    
    
    6Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005
(Unaudited)
    
    
    7Notes to Consolidated Financial Statements (Unaudited)
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    24Part IIOther InformationItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3.
    
    Defaults Upon Senior Securities
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    27SignaturesExhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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Item 1.
 LINN ENERGY, LLC
 
 CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)(in thousands)AssetsCurrent assets:Cash and cash equivalents
    
    $
    15,880
    
    
    $
    11,041Receivables:Natural gas and oil, net of allowance for doubtful
accounts of $100,000
as of March 31, 2006 and December 31, 2005
    
    
    9,387
    
    
    
    17,103Other
    
    
    241
    
    
    
    650Fair value of interest rate swaps
    
    
    273
    
    
    
    202Inventory
    
    
    68
    
    
    
    68Current portion of natural gas derivatives
    
    
    8,831
    
    
    
    1,601Prepaid expenses and other current assets
    
    
    1,528
    
    
    
    4,068Total current assets
    
    
    36,208
    
    
    
    34,733Natural gas and oil properties and related equipment
    
    
    272,048
    
    
    
    249,565Less accumulated depreciation, depletion, and amortization
    
    
    14,254
    
    
    
    10,707257,794
    
    
    
    238,858Property and equipment, net
    
    
    3,626
    
    
    
    2,525Other assets:Prepaid drilling costs
    
    
    418
    
    
    
    435Long-term portion of natural gas derivatives
    
    
    3,751
    
    
    
    2,795Operating bonds
    
    
    197
    
    
    
    1984,366
    
    
    
    3,428Total assets
    
    $
    301,994
    
    
    $
    279,544
 The accompanying notes are an integral part of these financial statements.
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LINN ENERGY, LLC
 CONSOLIDATED BALANCE SHEETS
 March
31,
    
    
    December 31,2006
    
    
    2005(Unaudited)(in thousands)Liabilities and Unitholders Capital (Deficit)Current liabilities:Current portion of long-term notes payable
    
    $
    442
    
    
    $
    113Subordinated term loan
    
    
    
    
    
    
    59,501Accounts payable and accrued expenses
    
    
    4,257
    
    
    
    5,572Current portion of natural gas derivatives
    
    
    4,869
    
    
    
    12,094Revenue distribution
    
    
    1,520
    
    
    
    6,082Accrued interest payable
    
    
    958
    
    
    
    1,448Gas purchases payable
    
    
    761
    
    
    
    1,208Other current liabilities
    
    
    40
    
    
    
    40Total current liabilities
    
    
    12,847
    
    
    
    86,058Long-term liabilities:Long-term portion of notes payable
    
    
    1,476
    
    
    
    695Credit facility
    
    
    157,279
    
    
    
    206,119Long-term portion of interest rate swaps
    
    
    327
    
    
    
    663Asset retirement obligation
    
    
    5,555
    
    
    
    5,443Long-term portion of natural gas derivatives
    
    
    18,955
    
    
    
    27,139Other long-term liabilities
    
    
    368
    
    
    
    258Total long-term liabilities
    
    
    183,960
    
    
    
    240,317Total liabilities
    
    
    196,807
    
    
    
    326,375Unitholders capital (deficit):27,812,500 Units issued and outstanding at March 31, 2006
    
    
    146,065
    
    
    
    16,024Accumulated loss
    
    
    (40,878
    )
    
    
    (62,855
    )105,187
    
    
    
    (46,831
    )Total liabilities and unitholders capital (deficit)
    
    $
    301,994
    
    
    $
    279,544
 The accompanying notes are an integral part of these financial statements.
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LINN ENERGY, LLC
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three months ended March 31,2006
    
    
    2005(in thousands)Revenues:Natural gas and oil sales
    
    $
    16,375
    
    
    $
    6,146Realized gain (loss) on natural gas derivatives
    
    
    3,323
    
    
    
    (8,575
    )Unrealized gain (loss) on natural gas derivatives
    
    
    20,923
    
    
    
    (6,580
    )Natural gas marketing income
    
    
    1,218
    
    
    
    814Other income
    
    
    289
    
    
    
    7442,128
    
    
    
    (8,121
    )Expenses:Operating expenses
    
    
    2,994
    
    
    
    1,817Natural gas marketing expense
    
    
    983
    
    
    
    790General and administrative expenses
    
    
    9,470
    
    
    
    478Depreciation, depletion and amortization
    
    
    3,700
    
    
    
    1,18117,147
    
    
    
    4,26624,981
    
    
    
    (12,387
    )Other income and (expenses):Interest income
    
    
    146
    
    
    
    Interest and financing expense
    
    
    (2,639
    )
    
    
    20Write-off of deferred financing fees and other losses
    
    
    (392
    )
    
    
    (32
    )(2,885
    )
    
    
    (12
    )Income (loss) before income taxes
    
    
    22,096
    
    
    
    (12,399
    )Income tax (provision)
    
    
    (119
    )
    
    
    Net income (loss)
    
    $
    21,977
    
    
    $
    (12,399
    )Net income (loss) per unit  basic
    
    $
    0.84
    
    
    $
    (.60
    )Net income (loss) per unit  diluted
    
    $
    0.84
    
    
    $
    (.60
    )Weighted average units outstanding  basic
    
    
    26,272,564
    
    
    
    20,518,065Weighted average units outstanding  diluted
    
    
    26,272,564
    
    
    
    20,518,065
 The accompanying notes are an integral part of these financial statements.
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LINN ENERGY, LLC
 
 CONSOLIDATED STATEMENT OF UNITHOLDERS CAPITAL (DEFICIT)
 For the Three Months Ended March 31, 2006
 (Unaudited)
 Treasury
    
    
    TotalUnitholders
    
    
    Accumulated
    
    
    Units
    
    
    UnitholdersCapital
    
    
    Loss
    
    
    (at Cost)
    
    
    Capital (Deficit)(in thousands)Balance as of December 31, 2005
    
    $
    16,024
    
    
    $
    (62,855
    )
    
    
    
    
    
    $
    (46,831
    )Sale of units, net of offering expense of $4,339
    
    
    225,139
    
    
    
    
    
    
    
    13,671
    
    
    
    238,810Redemption
of member interests
    
    
    
    
    
    
    
    
    
    
    (114,449
    )
    
    
    (114,449
    )Cancellation
of member interests
    
    
    (100,778
    )
    
    
    
    
    
    
    100,778
    
    
    
    Unit-based
compensation expense
    
    
    5,680
    
    
    
    
    
    
    
    
    
    
    
    5,680Net income
    
    
    
    
    
    
    21,977
    
    
    
    
    
    
    
    21,977Balance as of March 31, 2006
    
    $
    146,065
    
    
    $
    (40,878
    )
    
    
    
    
    
    $
    105,187
 The accompanying notes are an integral part of these financial statements.
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LINN ENERGY, LLC
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three months ended March 31,2006
    
    
    2005(in thousands)Cash flow from operating activities:Net income (loss)
    
    $
    21,977
    
    
    $
    (12,399
    )Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:Depreciation, depletion and amortization
    
    
    3,700
    
    
    
    1,181Amortization of deferred financing fees
    
    
    190
    
    
    
    45Write-off of deferred financing fees and other losses
    
    
    392
    
    
    
    32Accretion of asset retirement obligation
    
    
    58
    
    
    
    25Unrealized (gain) loss on natural gas and interest rate derivatives
    
    
    (21,330
    )
    
    
    5,624Unit-based compensation
    
    
    5,680
    
    
    
    Changes in assets and liabilities:Decrease in accounts receivable
    
    
    8,126
    
    
    
    906(Increase) decrease in prepaid expenses and other assets
    
    
    (992
    )
    
    
    11(Decrease) in accounts payable and accrued expenses
    
    
    (4,344
    )
    
    
    (1,162
    )(Decrease) in natural gas derivatives
    
    
    (2,673
    )
    
    
    (522
    )(Decrease) in revenue distribution
    
    
    (4,562
    )
    
    
    (215
    )Increase in asset retirement obligation
    
    
    4
    
    
    
    11(Decrease) in accrued interest payable
    
    
    (489
    )
    
    
    (298
    )Increase in other liabilities
    
    
    110
    
    
    
    (Decrease) increase in gas purchases payable
    
    
    (447
    )
    
    
    22Net cash provided by (used in) operating activities
    
    
    5,400
    
    
    
    (6,739
    )Cash flow from investing activities:Acquisition and development of natural gas and oil properties
    
    
    (21,784
    )
    
    
    (1,899
    )Purchases of property and equipment
    
    
    (747
    )
    
    
    (29
    )Obligations related to drilling activities
    
    
    3,024
    
    
    
    Proceeds from sale of assets
    
    
    14
    
    
    
    24Decrease (increase) in operating bonds
    
    
    
    
    
    
    (31
    )Net cash used in investing activities
    
    
    (19,493
    )
    
    
    (1,935
    )Cash flow from financing activities:Proceeds from sale of units
    
    
    243,149
    
    
    
    Redemption
of members units
    
    
    (114,449
    )
    
    
    Proceeds from notes payable
    
    
    
    
    
    
    5,000Principal payments on notes payable
    
    
    (60,056
    )
    
    
    (14
    )Principal payment on credit facility
    
    
    (62,000
    )
    
    
    Proceeds from credit facility
    
    
    13,000
    
    
    
    3,000Deferred offering costs
    
    
    (807
    )
    
    
    (265
    )Deferred financing fees
    
    
    95
    
    
    
    (15
    )Net cash provided by financing activities
    
    
    18,932
    
    
    
    7,706Net increase (decrease) in cash
    
    
    4,839
    
    
    
    (968
    )Cash and cash equivalents:Beginning
    
    
    11,041
    
    
    
    2,188Ending
    
    $
    15,880
    
    
    $
    1,220Supplemental disclosure of cash flow information:Cash payments for interest
    
    $
    3,336
    
    
    $
    1,189Supplemental disclosure of non cash investing and financing activities:Increase in natural gas and oil properties and related asset
retirement obligation due to acquisitions and new drilling
    
    $
    49
    
    
    $
    5Acquisition
of vehicles and equipment through the issuance of notes payable
    
    
    1,172
    
    
    
    
 The accompanying notes are an integral part of these financial statements.
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LINN ENERGY, LLC
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (1) Basis of Presentation
   (2) Summary of Significant Accounting Policies
 (a)
    
    Organization and Description of BusinessLinn Energy, LLC (Linn or the Company) was reorganized as a limited liability
company in April 2005 under the laws of the State of Delaware. The Company is an
independent natural gas and oil company focused on the development and acquisition of properties in the Appalachian Basin, primarily in West Virginia, Pennsylvania, New
York and Virginia. Linns wholly owned subsidiaries include Linn Energy Holdings, LLC
(Holdings), Linn Operating, Inc. (Operating), Penn West Pipeline, LLC (Penn
West), and Mid Atlantic Well Service, Inc. (Mid Atlantic).(b)
    
    Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. The Company presents its financial statements in accordance
with U.S. generally accepted accounting principles. All material inter-company
transactions and balances have been eliminated upon consolidation.(c)
    
    Cash EquivalentsFor purposes of the statement of cash flows, the Company considers all highly liquid
debt instruments with original maturities of three months or less to be cash
equivalents.(d)
    
    Natural Gas and Oil PropertiesThe Company accounts for natural gas and oil properties by the successful efforts
method. Leasehold acquisition costs are capitalized. If proved reserves are found on
an undeveloped property, leasehold costs are transferred to proved properties. Under
this method of accounting, costs relating to the development of proved areas are
capitalized when incurred.Depreciation and depletion of producing natural gas and oil properties is recorded
based on units of production. Unit rates are computed for unamortized drilling and
development costs using proved developed reserves and for unamortized leasehold costs
using all proved reserves. Statement of Financial Accounting Standards (SFAS) No. 19
requires that acquisition costs of proved properties be amortized on the basis of all
proved reserves, developed and undeveloped, and that capitalized development costs
(wells and related equipment and facilities) be amortized on the basis of proved
developed reserves. The Company follows SFAS No. 143. Under SFAS 143, estimated asset
retirement costs are recognized when the obligation is incurred, and are
amortized over proved developed reserves using the units of production method. Asset
retirement costs are estimated by the Companys engineers using existing regulatory
requirements and anticipated future inflation rates.Geological, geophysical and exploratory dry hole costs on natural gas and oil
properties relating to unsuccessful exploratory wells are charged to expense as
incurred.
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Upon sale or retirement of complete fields of depreciable or depleted property, the
book value thereof, less proceeds or salvage value, is charged or credited to income.
On sale or retirement of an individual well the proceeds are credited to accumulated
depreciation and depletion.Natural gas and oil properties are reviewed for impairment when facts and
circumstances indicate that their carrying value may not be recoverable. The Company
assesses impairment of capitalized costs of proved natural gas and oil properties by
comparing net capitalized costs to estimated undiscounted future net cash flows using
expected prices. If net capitalized costs exceed estimated undiscounted future net
cash flows, the measurement of impairment is based on estimated fair value, which
would consider estimated future discounted cash flows. No impairments were recorded
during the first three months of 2006 or 2005.Unproved properties that are individually insignificant are amortized. Unproved
properties that are individually significant are assessed for impairment on a
property-by-property basis. If considered impaired, costs are charged to expense when
such impairment is deemed to have occurred.(e)
    
    Natural Gas and Oil Reserve QuantitiesThe Companys estimate of proved reserves is based on the quantities of natural gas
and oil that engineering and geological analyses demonstrate, with reasonable
certainty, to be recoverable from established reservoirs in the future under current
operating and economic parameters. Schlumberger Data and Consulting Services prepares
a reserve and economic evaluation of all the Companys properties on a well-by-well
basis annually.Reserves and their relation to estimated future net cash flows impact the Companys
depletion and impairment calculations. As a result, adjustments to depletion and
impairment are made concurrently with changes to reserve estimates. The Company
prepares its reserve estimates, and the projected cash flows derived from these
reserve estimates, in accordance with SEC guidelines. The independent engineering firm
described above adheres to the same guidelines when preparing their reserve reports.
The accuracy of the Companys reserve estimates is a function of many factors
including the following: the quality and quantity of available data, the
interpretation of that data, the accuracy of various mandated economic assumptions,
and the judgments of the individuals preparing the estimates.The Companys proved reserve estimates are a function of many assumptions, all of
which could deviate significantly from actual results. As such, reserve estimates may
materially vary from the ultimate quantities of natural gas, natural gas liquids and
oil eventually recovered.(f)
    
    Income TaxesThe Company is a limited liability company treated as a partnership for federal and
state income tax purposes with all income tax liabilities and/or benefits of the
Company being passed through to the unitholders. As such, no recognition of federal
or state income taxes for the company and its subsidiaries that are organized as
limited liability companies have been provided for in the accompanying financial
statements except as described below.Certain subsidiaries are subchapter C-corporations subject to corporate income taxes,
which are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities
and their respective tax basis and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment
date. Deferred tax liabilities of approximately $193,000 and $74,000 have been
included in other long-term liabilities as of March 31, 2006 and December 31, 2005,
respectively. Deferred tax benefits of $900,000 related to net
operating losses and other carry-forwards are reflected net of a
valuation allowance of the same amount since, as of March 31,
2006, the subsidiaries generating that benefit are unlikely to
generate adequate on-going taxable income to realize those benefits.(g)
    
    Derivative Instruments and Hedging ActivitiesThe Company periodically uses derivative financial instruments to achieve a more
predictable cash flow from its natural gas production by reducing its exposure to
price fluctuations. As of March 31, 2006, these transactions were in the form of swaps
and puts. Additionally, the Company uses derivative financial instruments in the form
of interest rate swaps to mitigate its interest rate exposure. The Company accounts
for its derivatives at fair value as an asset or liability and the change in the fair
value of derivatives is included in income.
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(h)
    
    Earnings per unitBasic earnings per unit is computed by dividing net earnings attributable
to unitholders by the weighted average number of units outstanding during each period.
During 2006 for the period prior to the Offering, equivalent units
were calculated by adjusting pre-Offering members membership
interests by the exchange ratio to reflect the exchange of
pre-Offering membership interests for post-Offering units and cash
immediately prior to completion of the Offering (see Note 3).
Diluted earnings per unit is computed by adjusting the average number of units
outstanding for the dilutive effect, if any, of unit equivalents. The Company uses the
treasury stock method to determine the dilutive effect. For the quarter ended March 31, 2006, unvested units granted but not issued to the CEO and all unit options outstanding were excluded in the computation of diluted EPS, because to do so would have been antidilutive for the period.(i)
    
    Use of EstimatesManagement of the Company has made a number of estimates and assumptions relating to
the reporting of assets and liabilities and revenues and expenses and the disclosure
of contingent assets and liabilities to prepare these financial statements in
conformity with U.S. generally accepted accounting principles. Actual results could
differ from those estimates. The estimates that are particularly significant to the
financial statements include estimates of natural gas and oil reserves, future cash
flows from natural gas and oil properties, and depreciation, depletion and
amortization, asset retirement obligations and the fair value of derivatives.(j)
    
    Revenue RecognitionSales of natural gas and oil are recognized when natural gas has been delivered to a
custody transfer point, persuasive evidence of a sales arrangement exists, the rights
and responsibility of ownership pass to the purchaser upon delivery, collection of
revenue from the sale is reasonably assured, and the sales price is fixed or
determinable. Natural gas is sold by the Company on a monthly basis. Virtually all of
the Companys contracts pricing provisions are tied to a market index, with certain
adjustments based on, among other factors, whether a well delivers to a gathering or
transmission line, quality of natural gas, and prevailing supply and demand
conditions, so that the price of the natural gas fluctuates to remain competitive with
other available natural gas supplies. As a result, the Companys revenues from the
sale of natural gas will suffer if market prices decline and benefit if they increase.
The Company believes that the pricing provisions of its natural gas contracts are
customary in the industry.Gas imbalances occur when the Company sells more or less than its entitled ownership
percentage of total gas production. Any amount received in excess of the Companys
share is treated as a liability. If the Company receives less than its entitled share,
the underproduction is recorded as a receivable. The Company did not have any
significant gas imbalance positions at March 31, 2006 or December 31, 2005.Natural gas marketing is recorded on the gross accounting method because Penn West,
the Companys marketing subsidiary, takes title to the natural gas it purchases from
the various producers and bears the risks and enjoys the benefits of that ownership.
Natural gas marketing revenues totaled $1,218,000 and $814,000 and natural gas
marketing expenses were $983,000 and $790,000 for the three months ended March 31, 2006
and 2005, respectively.The Company currently uses the Net-Back method of accounting for transportation
arrangements of its natural gas sales. The Company sells natural gas at the wellhead
and collects a price and recognizes revenues based on the wellhead sales price since
transportation costs downstream of the wellhead are incurred by its customers and
reflected in the wellhead price.The Company is paid a monthly operating fee for each well it operates for outside
owners. The fee covers monthly operating and accounting costs, insurance and other
recurring costs. As the operating fee is a reimbursement for costs incurred on behalf
of third parties, the fee has been netted against general and administrative expense.
For the three months ended March 31, 2006 and 2005 the operating fees netted against
general and administrative expense were $284,000 and $287,000, respectively.(k)
    
    Unit-Based CompensationThe Company accounts for unit-based compensation pursuant to SFAS No. 123(R) 
Share-Based Payment.SFAS No. 123(R), which requires an entity to recognize at the
grant date the fair value of unit options and other equity-based compensation issued
to employees in the income statement. The value of the portion of the award that is
ultimately expected to vest is recognized as expense over the requisite service
periods in the Companys consolidated income statement. Compensation expense
attributable to granted awards are recognized using the straight-line method.The Company utilizes a Black-Scholes option pricing model to measure the fair value of
unit options granted to employees. The Companys determination of fair value of
unit-based payment awards on the date of grant using the model is affected by the
Companys unit price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to, the Companys
expected unit price volatility over the term of the awards, and actual and projected
employee unit option exercise behaviors. In addition, forfeitures are required to be
estimated at the time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. Although the fair value of employee unit
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options is determined in accordance with SFAS No. 123R and SAB 107 using a
Black-Scholes option-pricing model, that value may not be indicative of the fair value
observed in a willing buyer/willing seller market transaction. The Company is
responsible for determining the assumptions used in estimating the fair value of its
unit-based payment awards. The Company recorded $5,680,000 of unit-based compensation
expense for the three months ended March 31, 2006. As of March 31, 2005 and December
31, 2005, there were no outstanding unit-based awards.(l)
    
    Recently Issued Accounting StandardsAs of January 1, 2006, the Company adopted SFAS No. 154  Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3 (SFAS No.
154). SFAS No. 154 requires retrospective application of voluntary changes in
accounting principles, unless it is impracticable. The implementation of this standard
did not have a material impact on the consolidated financial statements.
 (3) Initial Public Offering
   (4) Natural
Gas and Oil Properties:
 March 31,
    
    
    December 31,2006
    
    
    2005Unproved
Properties

    $
    6,181,000
    
    
    $
    4,562,000Proved Developed Properties:Acquisition,
equipment and drilling
    
    
    260,267,000
    
    
    
    239,423,000Pipelines
    
    
    5,600,000
    
    
    
    5,580,000272,048,000
    
    
    
    249,565,000Less
accumulated depreciation, depletion and amortization
    
    
    (14,254,000
    )
    
    
    (10,707,000
    )$
    257,794,000
    
    
    $
    238,858,000
 (5) Debt
 Credit Facility
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March, 31
    
    
    December, 31,2006
    
    
    2005Outstanding balance
    
    $
    158,000,000
    
    
    $
    207,000,000Less deferred financing fees, net of amortization of $226,000 and $160,000
    
    
    (721,000
    )
    
    
    (881,000
    )$
    157,279,000
    
    
    $
    206,119,000
   Subordinated Term Loan
  (6) Long-term Notes Payable
  March 31,
    
    
    December 31,2006
    
    
    2005Note payable to a bank with an
interest rate of 6.14%, payable in
monthly installments of $2,918,
including interest, through
September 2024. The note is secured
by an office building.
    
    $
    384,000
    
    
    $
    387,000Various notes for the purchase of
vehicles and equipment, payable in monthly
installments totaling $41,315 and
$10,806 as of March 31, 2006 and
December 31, 2005, respectively, including
interest. The interest rates range from 0-8.74%. The notes are secured by
the vehicles purchased and expire at
various dates from 2008 through 2011.
    
    
    1,534,000
    
    
    
    421,0001,918,000
    
    
    
    808,000Less current portion
    
    
    442,000
    
    
    
    113,000$
    1,476,000
    
    
    $
    695,000
  March 31:2006
    
    $
    442,0002007
    
    
    439,0002008
    
    
    374,0002009
    
    
    200,0002010
    
    
    146,000Thereafter
    
    
    317,000$
    1,918,000
 12




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##### Table of Contents



(7) Business and Credit Concentrations
 Cash
  Revenue and Trade Receivables
    (8) Unit-Based Compensation
    Unit Grants.
 Unit Options.
 Restricted Units.
 13




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##### Table of Contents



Accounting for unit-based
compensation. Accounting for
Income Taxes
  Restricted/Unrestricted Units
  Weighted AverageNumber of
    
    
    Grant-DateNon-vested Units
    
    
    Fair ValueNon-vested units as of December 31, 2005
    
    
    
    
    
    $
    Granted
    
    
    854,690
    
    
    
    21.00Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Non-vested units as of March 31, 2006
    
    
    854,690
    
    
    $
    21.00
  14




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##### Table of Contents



Securities Authorized for Issuance Under Equity Compensation Plan.
 Changes in Unit Options and Unit Options Outstanding.
  WeightedNumber of
    
    
    Average
    
    
    
    
    
    
    WeightedUnits
    
    
    Exercise
    
    
    Weighted Average
    
    
    AverageUnderlying
    
    
    Price
    
    
    Grant Date Fair
    
    
    ContractualOptions
    
    
    Per Unit
    
    
    Value
    
    
    Life in YearsOutstanding at December 31, 2005
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    Granted
    
    
    456,084
    
    
    
    20.74
    
    
    
    3.22
    
    
    
    10.00Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at March 31, 2006
    
    
    456,084
    
    
    $
    20.74
    
    
    $
    3.22
    
    
    
    10.00Exercisable at March 31, 2006
    
    
    30,000
    
    
    $
    20.18
    
    
    $
    2.80
    
    
    
    10.00
    Expected volatility
    
    
    29.70
    %Expected dividends (weighted average 7.5%)
    
    
    7.2%-7.9
    %Expected term (in years)
    
    
    5.00Risk free rate
    
    
    4.31%-4.75
    %Expected forfeiture rate
    
    
    23.10
    %
 (9) Property and Equipment
  March 31,
    
    December 31,2006
    
    2005Land
    
    $
    308,000
    
    
    $
    203,000Buildings and leasehold improvements
    
    
    1,001,000
    
    
    
    608,000Vehicles
    
    
    1,842,000
    
    
    
    1,317,000Furniture and equipment
    
    
    1,099,000
    
    
    
    888,0004,250,000
    
    
    
    3,016,000Accumulated depreciation
    
    
    624,000
    
    
    
    491,000$
    3,626,000
    
    
    $
    2,525,000
  (10) Commitments and Contingencies
   15




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##### Table of Contents



(11) Natural Gas Derivatives
  rd
 Year 2006
    
    Year 2007
    
    Year 2008
    
    Year 2009Fixed Price Swaps:Hedged Volume (MMMBtu)
    
    
    5,573
    
    
    
    7,168
    
    
    
    6,904
    
    
    
    5,125Average Price ($/MMBtu)
    
    $
    9.25
    
    
    $
    8.64
    
    
    $
    7.89
    
    
    $
    7.25Puts:Hedged Volume (MMMBtu)
    
    
    550
    
    
    
    730
    
    
    
    
    
    
    
    Average Price ($/MMBtu)
    
    $
    8.83
    
    
    $
    8.24
    
    
    $
    
    
    
    $
    Total:Hedged Volume (MMMBtu)
    
    
    6,123
    
    
    
    7,898
    
    
    
    6,904
    
    
    
    5,125Average Price ($/MMBtu)
    
    $
    9.21
    
    
    $
    8.60
    
    
    $
    7.89
    
    
    $
    7.25
  March 31,
    
    December 31,2006
    
    2005Outstanding notional amounts of hedges (MMMBtu)
    
    
    26,050
    
    
    
    28,069Maximum number of months hedges outstanding
    
    
    45
    
    
    
    48
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
    16




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##### Table of Contents



PurchaseGross
    
    
    
    
    PriceDate
    
    Seller
    
    Wells
    
    
    Location
    
    (in millions)May 2003
    
    Emax Oil Company
    
    
    34
    
    
    West Virginia
    
    $
    3.2Aug 2003
    
    Lenape Resources, Inc.
    
    
    61
    
    
    New York
    
    
    2.2Sep 2003
    
    Cabot Oil & Gas Corporation
    
    
    50
    
    
    Pennsylvania
    
    
    15.8Oct 2003
    
    Waco Oil & Gas Company
    
    
    353
    
    
    West Virginia and Virginia
    
    
    31.5May 2004
    
    Mountain V Oil & Gas, Inc.
    
    
    251
    
    
    Pennsylvania
    
    
    12.5Sep 2004
    
    Pentex Energy, Inc.
    
    
    447
    
    
    Pennsylvania
    
    
    15.1Apr 2005
    
    Columbia Natural Resources, LLC
    
    
    38
    
    
    West Virginia and Virginia
    
    
    4.4Aug 2005
    
    GasSearch Corporation
    
    
    130
    
    
    West Virginia
    
    
    5.4Oct 2005
    
    Exploration Partners, LLC
    
    
    550
    
    
    West Virginia and Virginia
    
    
    111.4Total
    
    
    1,914
    
    
    
    
    $
    201.5
       Our Operations
  17




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##### Table of Contents



Production and Operating Costs Reporting
  Land and Lease Tracking System
  Results of Operations
  For the Three Months EndedMarch 31,2006
    
    
    2005(in thousands, except for per unit data)(Unaudited)Revenues:Natural gas and oil sales
    
    $
    16,375
    
    
    $
    6,146Realized gain (loss) on natural gas derivatives
    
    
    3,323
    
    
    
    (8,575
    )Unrealized gain (loss) on natural gas derivatives
    
    
    20,923
    
    
    
    (6,580
    )Natural gas marketing income
    
    
    1,218
    
    
    
    814Other income
    
    
    289
    
    
    
    74Total revenue
    
    
    42,128
    
    
    
    (8,121
    )Expenses:Operating expenses
    
    $
    2,994
    
    
    $
    1,817Natural gas marketing expense
    
    
    983
    
    
    
    790General and administrative expenses
    
    
    9,470
    
    
    
    478Depreciation, depletion and amortization
    
    
    3,700
    
    
    
    1,181Total expenses
    
    
    17,147
    
    
    
    4,266Other Income and (Expenses):Interest and financing expense
    
    $
    (2,639
    )
    
    $
    20Net Production:Total production (MMcfe)
    
    
    1,836
    
    
    
    972Average daily production (Mcfe/d)
    
    
    20,400
    
    
    
    10,800Average Sales Prices:Weighted average realized natural gas price (Mcf)
    
    $
    9.74
    
    
    $
    5.84Weighted average realized price (Mcfe)
    
    
    9.72
    
    
    
    5.85Average
Unit Costs per Mcfe (Non-GAAP):Operating expenses
    
    $
    1.63
    
    
    $
    1.87General and
administrative expenses (1)
    
    
    0.97
    
    
    
    0.49Depreciation, depletion and amortization
    
    
    2.02
    
    
    
    1.22
 
 (1)
    
    This is a non-GAAP performance measure used by our management
and is a quantitative measure used in the oil and gas industry. The
measure for the three months ended March 31, 2006 excludes
approximately $2.0 million of bonuses paid and $5.7 million
of unit- based compensation awarded to certain executive officers in
connection with our IPO. General and administrative expenses per Mcfe
including these amounts were $5.16 and $.49 for the three months
ended March 31, 2006 and 2005, respectively. 18




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##### Table of Contents



Three Months Ended March 31, 2006 Compared to the Three Months Ended March 31, 2005
 Revenue
  For the Three Months Ended
    
    
    PercentageMarch 31,
    
    
    Increase2006
    
    
    2005
    
    

(Decrease)Net Production:Total production (MMcfe)
    
    
    1,836
    
    
    
    972
    
    
    
    89
    %Average daily production (Mcfe/d)
    
    
    20,400
    
    
    
    10,800
    
    
    
    89
    %Average Sales Prices:Weighted average realized natural gas price (Mcf)
    
    $
    9.74
    
    
    $
    5.84
    
    
    
    67
    %Weighted average realized price (Mcfe)
    
    
    9.72
    
    
    
    5.85
    
    
    
    66
    %
  Hedging Activities
  Expenses
  For the Three Months Ended
    
    
    PercentageMarch 31,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Operating expenses per Mcfe
    
    $
    1.63
    
    
    $
    1.87
    
    
    
    (13
    )%
  19




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##### Table of Contents



For the Three Months Ended
    
    
    PercentageMarch 31,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)General and administrative expenses per Mcfe
    
    $
    0.97
    (1)
    
    $
    0.49
    
    
    
    98
    %
     Liquidity and Capital Resources
 Sales and Issuances of Securities.
    Credit Facility.
 20




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##### Table of Contents



Off Balance Sheet Arrangements
  21




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##### Table of Contents



NON-GAAP FINANCIAL MEASURE
 Adjusted EBITDA
  
    
    Interest expense;
    
    Depreciation, depletion and amortization;
    
    Write-off of deferred financing fees;
    
    (Gain) loss on sale of assets;
    
    (Gain) loss from equity investment;
    
    Accretion of asset retirement obligation;
    
    Unrealized (gain) loss on natural gas derivatives;
    
    Realized (gain) loss on cancelled natural gas derivatives;
    
    Unit-based compensation expense;
    
    IPO bonuses; and
    
    Income tax provision.
    Three Months EndedMarch 31,2006
    
    
    2005(Unaudited)(in
thousands)Net income (loss)
    
    $
    21,977
    
    
    $
    (12,399
    )Plus:Interest expense
    
    
    2,639
    
    
    
    (20
    )Depreciation, depletion and amortization
    
    
    3,700
    
    
    
    1,181Write-off of deferred financing fees
    
    
    374
    
    
    
    Loss on sale of assets
    
    
    18
    
    
    
    22Loss from equity investment
    
    
    
    
    
    
    10Accretion of asset retirement obligation
    
    
    58
    
    
    
    25Unrealized (gain) loss on natural gas derivatives
    
    
    (20,923
    )
    
    
    6,580Realized (gain) loss on cancelled natural gas
derivatives(1)
    
    
    
    
    
    
    7,977Unit-based compensation expense
    
    
    5,680
    
    
    
    IPO bonuses
    
    
    2,039
    
    
    
    Income tax provision(2)
    
    
    119
    
    
    
    Adjusted EBITDA
    
    $
    15,681
    
    
    $
    3,376
 
 (1)
    
    During the three months ended March 31, 2005, we cancelled (before their original settlement date) a portion of
out-of-the-money natural gas swaps and realized a loss of $8.0 million. We subsequently hedged
similar volumes at higher prices.(2)
    
    Linn Operating, LLC was not subject to federal income tax
before converting to a subchapter C-corporation on June 1, 2005. Prior to the conversion, there was no tax provision included in
our consolidated financial statements because all of our taxable income or loss was included
in the income tax returns of the individual members. 22




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##### Table of Contents



Cautionary Statement
  
    
    business strategy;
    
    financial strategy;
    
    drilling locations;
    
    natural gas and oil reserves;
    
    realized natural gas and oil prices;
    
    production volumes;
    
    lease operating expenses, general and administrative expenses and finding and development costs;
    
    future operating results; and
    
    plans, objectives, expectations and intentions.
   
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Commodity Price Risk
  23




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##### Table of Contents



Interest Rate Risks
       
 Item 4. Controls and Procedures.
 (a) Evaluation of disclosure controls and procedures
  24




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##### Table of Contents



Material weaknesses in internal control
 (b) Changes and Remediation in the Companys Internal Control over Financial Reporting
 Remediation activities.
 1.
    
    We engaged outside consultants with extensive natural gas and oil financial reporting
experience to augment our current accounting resources to assist with the 2005 10-K, this
quarterly report and future filings.2.
    
    We performed additional analysis and other post closing procedures to enable the
preparation of accurate consolidated financial statements, including all required
disclosures.
   Changes in internal control over financial reporting.
 25




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##### Table of Contents



PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 10.1
    
    Form of Unit Option Agreement pursuant to the Linn Energy, LLC Long-Term Incentive Plan (incorporated
herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Linn Energy, LLC on February
21, 2006)10.2
    
    Memorandum of Understanding Regarding Compensation Arrangements for Members of the Linn Energy, LLC Board of
Directors (incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Linn
Energy, LLC on February 21, 2006)10.3
    
    Employment Agreement, dated effective as of April 3, 2006 between Linn Operating, Inc. and Thomas A. Lopus
(incorporation herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Linn Energy,
LLC on April 18, 2006 ( the April 18, 2006 Form 8-K)10.4
    
    Linn Energy, LLC Long-Term Incentive Plan Restricted Unit Agreement, dated effective as of April 13, 2006
between Linn Energy, LLC and Thomas A. Lopus (incorporated herein by reference to Exhibit 10.2 to the April
18, 2006 Form 8-K)10.5
    
    Linn Energy, LLC Long-Term Incentive Plan Option Agreement, dated effective as of April 13, 2006 between
Linn Energy, LLC and Thomas A. Lopus (incorporated herein by reference to Exhibit 10.3 to the April 18, 2006
Form 8-K)10.6
    
    Separation Agreement and General Release, dated effective as of April 7, 2006 between Linn Energy, LLC and
its subsidiaries and Gerald Merriam (incorporated herein by reference to Exhibit 10.4 to the April 18, 2006
Form 8-K)10.7
    
    Separation Agreement and General Release, dated effective as of April 7, 2006 between Linn Energy, LLC and
its subsidiaries and Gerald Merriam (incorporated herein by reference to Exhibit 10.4 to the April 18, 2006
Form 8-K)10.8
    
    First Amendment to Amended and Restated Credit Agreement among Linn Energy, LLC as Borrower, BNP Paribas, as
Administrative Agent, and the Lender signatory thereto, effective as of May 5, 2006 (incorporated herein by
reference to Exhibit 10.23 to the Annual Report on Form 10-K filed by Linn Energy, LLC on May 31, 2006)31.1
    
    Certification of Michael C. Linn, Chairman, President and Chief Executive Officer of Linn Energy, LLC.31.2
    
    Certification of Kolja Rockov, Executive Vice President and Chief Financial Officer of Linn Energy, LLC.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, of Michael C. Linn, Chairman, President and Chief Executive Officer of Linn
Energy, LLC.32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, of Kolja Rockov, Executive Vice President and Chief Financial Officer of Linn
Energy, LLC.
 
 
    
    Management contract or compensatory plan or arrangement. 26




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##### Table of Contents



SIGNATURES
  LINN ENERGY, LLCBy:

/s/ Michael C. LinnMichael C. LinnChairman, President and Chief Executive OfficerBy:

/s/ Kolja RockovKolja RockovExecutive Vice President and Chief Financial Officer 27