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Variable Interest Entities | 9 Months Ended
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Sep. 30, 2013
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Variable Interest Entities | Variable Interest Entities The Company consolidates the activities of VIEs of which it is the primary beneficiary. The primary beneficiary of a VIE is that variable interest holder possessing a controlling financial interest through (i) its power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) its obligation to absorb losses or its right to receive benefits from the VIE that could potentially be significant to the VIE. In order to determine whether the Company owns a variable interest in a VIE and the significance of the variable interest, the Company performs a qualitative analysis of the entity’s design, organizational structure, primary decision makers and related financial agreements. The Company’s significant associated VIEs, including those for which the Company has determined it is the primary beneficiary and those for which it has determined it is not, are described below. Grey Ranch Plant, L.P. Primarily engaged in treating and transportation of natural gas, Grey Ranch Plant, L.P. (“GRLP”) is a limited partnership that operates the Company’s Grey Ranch plant (the “Plant”) located in Pecos County, Texas. The Company has long-term operating and gathering agreements with GRLP and also owns a 50% interest in GRLP, which represents a variable interest. Income or loss of GRLP is allocated to the partners based on ownership percentage and any operating or cash shortfalls require contributions from the partners. The Company has determined that GRLP qualifies as a VIE because certain equity holders lack the ability to participate in decisions impacting GRLP. Agreements related to the ownership and operation of GRLP provide for GRLP to pay management fees to the Company to operate the Plant and lease payments for the Plant. Under the operating agreements, lease payments are reduced if throughput volumes are below those expected. The Company determined that it is the primary beneficiary of GRLP as it has both (i) the power to direct the activities of GRLP that most significantly impact its economic performance as operator of the Plant and (ii) the obligation to absorb losses, as a result of the operating and gathering agreements, that could potentially be significant to GRLP and, therefore, consolidates the activity of GRLP in its consolidated financial statements. The 50% ownership interest not held by the Company is presented as noncontrolling interest in the consolidated financial statements. GRLP’s assets can only be used to settle its own obligations and not other obligations of the Company. GRLP’s creditors have no recourse to the general credit of the Company. Although GRLP is included in the Company’s consolidated financial statements, the Company’s legal interest in GRLP’s assets is limited to its 50% ownership. At September 30, 2013 and December 31, 2012, $0.6 million and $1.1 million, respectively, of noncontrolling interest in the accompanying condensed consolidated balance sheets were related to GRLP. GRLP’s assets and liabilities, after considering the effects of intercompany eliminations, included in the accompanying unaudited condensed consolidated balance sheets at September 30, 2013 and December 31, 2012 consisted of the following (in thousands):
| September 30, 2013 |  | December 31, 2012
Cash and cash equivalents | $ | 111 |  |  | $ | 1,080 |
Accounts receivable, net | 16 |  |  | 20 |
Prepaid expenses | 33 |  |  | 64 |
Other current assets | 109 |  |  | 109 |
Total current assets | 269 |  |  | 1,273 |
Other property, plant and equipment, net | 1,184 |  |  | 1,246 |
Total assets | $ | 1,453 |  |  | $ | 2,519 |
Accounts payable and accrued expenses | $ | 165 |  |  | $ | 274 |
Total liabilities | $ | 165 |  |  | $ | 274 |
Grey Ranch Plant Genpar, LLC. The Company owns a 50% interest in Grey Ranch Plant Genpar, LLC (“Genpar”), the managing partner and 1% owner of GRLP. Additionally, the Company serves as Genpar’s administrative manager. Genpar’s ownership interest in GRLP is its only asset. As managing partner of GRLP, Genpar has the sole right to manage, control and conduct the business of GRLP. However, Genpar is restricted from making certain major decisions, including the decision to remove the Company as operator of the Plant. The rights afforded the Company under the Plant operating agreement and the restrictions on Genpar limit Genpar’s ability to make decisions on behalf of GRLP. Therefore, Genpar is considered a VIE. Although both the Company and Genpar’s other equity owner share equally in Genpar’s economic losses and benefits and also have agreements that may be considered variable interests, the Company determined it was the primary beneficiary of Genpar due to (i) its ability, as administrative manager and operator of the Plant, to direct the activities of Genpar that most significantly impact its economic performance and (ii) its obligation or right, as operator of the Plant, to absorb the losses of or receive benefits from Genpar that could potentially be significant to Genpar. As the primary beneficiary, the Company consolidates Genpar’s activity. However, its sole asset, the investment in GRLP, is eliminated in consolidation. Genpar has no liabilities. Royalty Trusts. SandRidge owns beneficial interests in three Delaware statutory trusts. SandRidge Mississippian Trust I (the “Mississippian Trust I”), the Permian Trust and the Mississippian Trust II (each individually, a “Royalty Trust” and collectively, the “Royalty Trusts”) completed initial public offerings of their common units in April 2011, August 2011 and April 2012, respectively. Concurrent with the closing of each offering, the Company conveyed certain royalty interests to each Royalty Trust in exchange for the net proceeds of the offering and units representing beneficial interests in the Royalty Trust. Royalty interests conveyed to the Royalty Trusts are in certain existing wells and wells to be drilled on oil and natural gas properties leased by the Company in defined areas of mutual interest. The following table summarizes information about each Royalty Trust upon completion of its initial public offering:
|  | Mississippian Trust I |  | Permian Trust |  | Mississippian Trust II
Net proceeds of offering (in millions) |  | $ | 336.9 |  |  | $ | 580.6 |  |  | $ | 587.1 |
Total outstanding common units |  | 21,000,000 |  |  | 39,375,000 |  |  | 37,293,750 |
Total outstanding subordinated units |  | 7,000,000 |  |  | 13,125,000 |  |  | 12,431,250 |
Beneficial interest owned by Company(1) |  | 38.4 | % |  | 34.3 | % |  | 39.9 | %
Liquidation date(2) |  | 12/31/2030 |  |  | 3/31/2031 |  |  | 12/31/2031 |
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(1) | Subsequent to the initial public offerings, the Company sold common units of the Royalty Trusts it owned in transactions exempt from registration under Rule 144 under the Securities Act. These transactions decreased the Company’s beneficial interests in the Royalty Trusts. See further discussion of the unit sales below.
(2) | At the time each Royalty Trust terminates, 50% of the royalty interests conveyed to the Royalty Trust will automatically revert to the Company, and the remaining 50% will be sold with the proceeds distributed to the Royalty Trust unitholders.
The Royalty Trusts make quarterly cash distributions to unitholders based on calculated distributable income. In order to provide support for cash distributions on the common units, the Company agreed to subordinate a portion of the units it owns in each Royalty Trust (the “subordinated units”), which constitute 25% of the total outstanding units of each Royalty Trust. The subordinated units are entitled to receive pro rata distributions from the Royalty Trusts each quarter if and to the extent there is sufficient cash to provide a cash distribution on the common units that is no less than the applicable quarterly subordination threshold. If there is not sufficient cash to fund such a distribution on all common units, the distribution to be made with respect to the subordinated units will be reduced or eliminated for such quarter in order to make a distribution, to the extent possible, of up to the subordination threshold amount on all common units, including common units held by the Company. In exchange for agreeing to subordinate a portion of its Royalty Trust units, SandRidge is entitled to receive incentive distributions equal to 50% of the amount by which the cash available for distribution on all of the Royalty Trust units exceeds the applicable quarterly incentive threshold. The Royalty Trusts declared and paid quarterly distributions during the three and nine-month periods ended September 30, 2013 and 2012 as follows (in thousands):
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2013(1) |  | 2012 |  | 2013(1) |  | 2012(2)
Total distributions |  | $ | 81,594 |  |  | $ | 75,246 |  |  | $ | 226,404 |  |  | $ | 193,262 |
Distributions to third-party unitholders |  | $ | 54,287 |  |  | $ | 50,222 |  |  | $ | 153,002 |  |  | $ | 127,023 |
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(1) | Subordination thresholds were not met for the Mississippian Trust I’s second and third quarter 2013 distributions and for the Permian Trust’s second quarter 2013 distribution, resulting in reduced distributions to the Company on its subordinated units for these periods.
(2) | The Company received incentive distributions from the Mississippian Trust I during the nine-month period ended September 30, 2012.
See Note 19 for discussion of the Royalty Trusts’ distributions announced in October 2013. Pursuant to the trust agreements governing the Royalty Trusts, SandRidge has a loan commitment to each Royalty Trust, whereby SandRidge will loan funds to the Royalty Trust on an unsecured basis, with terms substantially the same as would be obtained in an arm’s length transaction between SandRidge and an unaffiliated party, if at any time the Royalty Trust’s cash is not sufficient to pay ordinary course administrative expenses as they become due. Any funds loaned may not be used to satisfy indebtedness of the Royalty Trust or to make distributions. There were no amounts outstanding under the loan commitments at September 30, 2013 or December 31, 2012. The Company and one of its wholly owned subsidiaries entered into a development agreement with each Royalty Trust that obligates the Company to drill, or cause to be drilled, a specified number of wells within respective areas of mutual interest, which are also subject to the royalty interests granted to the Mississippian Trust I, the Permian Trust and the Mississippian Trust II, by December 31, 2015, March 31, 2016 and December 31, 2016, respectively. At the end of the fourth full calendar quarter following satisfaction of the Company’s drilling obligation (the “subordination period”), the subordinated units of each Royalty Trust will automatically convert into common units on a one-for-one basis and the Company’s right to receive incentive distributions will terminate. One of the Company’s wholly owned subsidiaries also granted to each Royalty Trust a lien on the Company’s interests in the properties where the development wells will be drilled in order to secure the estimated amount of drilling costs for the Royalty Trust’s interests in the wells. As the Company fulfills its drilling obligation to each Royalty Trust, development wells that have been drilled and perforated for completion are released from the lien and the total amount that may be recovered by each Royalty Trust is proportionately reduced. In the second quarter of 2013, the Company fulfilled its drilling obligation to the Mississippian Trust I. As of September 30, 2013, the total maximum amount recoverable by the Permian Trust and the Mississippian Trust II under the remaining liens was approximately $167.8 million. Additionally, the Company and each Royalty Trust entered into an administrative services agreement, pursuant to which the Company provides certain administrative services to the Royalty Trust, including hedge management services to the Permian Trust and the Mississippian Trust II. The Company also entered into derivatives agreements with each Royalty Trust, pursuant to which the Company provides to the Royalty Trust the economic effects of certain of the Company’s derivative contracts. Substantially concurrent with the execution of the derivatives agreements with the Permian Trust and the Mississippian Trust II, the Company novated certain of the derivative contracts underlying the respective derivatives agreements to the Permian Trust and the Mississippian Trust II. The Company novated certain additional derivative contracts underlying the derivatives agreements to the Permian Trust in April 2012 and to the Permian Trust and the Mississippian Trust II in March 2013. The tables below present the open oil and natural gas commodity derivative contracts at September 30, 2013 underlying the derivatives agreements. The combined volume in the tables below reflects the total volume of the Royalty Trusts’ open oil and natural gas commodity derivative contracts. Oil Price Swaps Underlying the Derivatives Agreements
| Notional (MBbls) |  | Weighted Average Fixed Price
October 2013 - December 2013 | 413 |  |  | $ | 103.04 |
January 2014 - December 2014 | 1,862 |  |  | $ | 100.70 |
January 2015 - December 2015 | 630 |  |  | $ | 101.03 |
Natural Gas Collars Underlying the Derivatives Agreements
| Notional (MMcf) |  | Collar Range
October 2013 - December 2013 | 216 |  |  | $ | 4.00 |  | — | $ | 7.15 |
January 2014 - December 2014 | 937 |  |  | $ | 4.00 |  | — | $ | 7.78 |
January 2015 - December 2015 | 1,010 |  |  | $ | 4.00 |  | — | $ | 8.55 |
Oil Price Swaps Underlying the Derivatives Agreements and Novated to the Royalty Trusts
| Notional (MBbls) |  | Weighted Average Fixed Price
October 2013 - December 2013 | 302 |  |  | $ | 103.27 |
January 2014 - December 2014 | 991 |  |  | $ | 100.79 |
January 2015 - March 2015 | 141 |  |  | $ | 100.90 |
See Note 9 for further discussion of the derivatives agreement between the Company and each Royalty Trust. The Royalty Trusts are considered VIEs due to the lack of voting or similar decision-making rights of the Royalty Trusts’ equity holders regarding activities that have a significant effect on the economic success of the Royalty Trusts. The Company has determined it is the primary beneficiary of the Royalty Trusts as it has (a) the power to direct the activities that most significantly impact the economic performance of the Royalty Trusts through (i) its participation in the creation and structure of the Royalty Trusts, (ii) the manner in which it fulfills its drilling obligations to the Royalty Trusts and (iii) its operation of a majority of the oil and natural gas properties that are subject to the conveyed royalty interests and marketing of the associated production, and (b) the obligation to absorb losses and right to receive residual returns, through its variable interests in the Royalty Trusts, including ownership of common and subordinated units, that could potentially be significant to the Royalty Trusts. As a result, the Company began consolidating the activities of the Royalty Trusts into its results of operations upon conveyance of the royalty interests to each Royalty Trust. The common units of the Royalty Trusts owned by third parties are reflected as noncontrolling interest in the consolidated financial statements. As noted above, the Company fulfilled its drilling obligation to the Mississippian Trust I in the second quarter of 2013. Accordingly, the Mississippian Trust I's subordinated units, all of which are held by SandRidge, will convert to common units at the end of the subordination period. The Company is currently assessing the impact of the conversion on its status as the primary beneficiary of the Mississippian Trust I. Each Royalty Trust’s assets can be used to settle only that Royalty Trust’s obligations and not other obligations of the Company or another Royalty Trust. The Royalty Trusts’ creditors have no contractual recourse to the general credit of the Company. Although the Royalty Trusts are included in the Company’s consolidated financial statements, the Company’s legal interest in the Royalty Trusts’ assets is limited to its ownership of the Royalty Trusts’ units. At September 30, 2013 and December 31, 2012, $1.4 billion and $1.5 billion, respectively, of noncontrolling interest in the accompanying condensed consolidated balance sheets were attributable to the Royalty Trusts. The Royalty Trusts’ assets and liabilities, after considering the effects of intercompany eliminations, included in the accompanying unaudited condensed consolidated balance sheets at September 30, 2013 and December 31, 2012 consisted of the following (in thousands):
| September 30, 2013 |  | December 31, 2012
Cash and cash equivalents(1) | $ | 8,816 |  |  | $ | 7,445 |
Accounts receivable, net | 25,518 |  |  | 28,596 |
Derivative contracts | 3,776 |  |  | 10,286 |
Total current assets | 38,110 |  |  | 46,327 |
Investment in royalty interests(2) | 1,325,942 |  |  | 1,325,942 |
Less: accumulated depletion | (168,569 | ) |  | (103,746 | )
| 1,157,373 |  |  | 1,222,196 |
Derivative contracts | 3,389 |  |  | 7,660 |
Total assets | $ | 1,198,872 |  |  | $ | 1,276,183 |
Accounts payable and accrued expenses | $ | 3,788 |  |  | $ | 1,101 |
Total liabilities | $ | 3,788 |  |  | $ | 1,101 |
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(1) | Includes $3.0 million held by the trustee at September 30, 2013 and December 31, 2012 as reserves for future general and administrative expenses.
(2) | Investment in royalty interests is included in oil and natural gas properties in the accompanying unaudited condensed consolidated balance sheets, and was determined by allocating the historical net book value of the Company’s full cost pool based on the fair value of each Royalty Trust’s royalty interests relative to the fair value of the Company’s full cost pool.
During 2012 and 2013, the Company sold Royalty Trust common units it owned in transactions exempt from registration pursuant to Rule 144 under the Securities Act, which further reduced its beneficial interest. Total proceeds from such transactions were $29.0 million for the three and nine-month periods ended September 30, 2013 and $123.5 million for the nine-month period ended September 30, 2012. The unit sales were accounted for as equity transactions with no gain or loss recognized. The Company continues to be the primary beneficiary of the Royalty Trusts, after consideration of these transactions, as discussed above, and accordingly, continues to consolidate the activities of the Royalty Trusts during the subordination period. The Company’s beneficial interests in the Royalty Trusts at September 30, 2013 and December 31, 2012 were as follows:
| September 30, 2013 |  | December 31, 2012
Mississippian Trust I | 26.9 | % |  | 26.9 | %
Permian Trust | 28.5 | % |  | 30.5 | %
Mississippian Trust II | 37.6 | % |  | 39.9 | %
See Note 11 for discussion of the Company’s legal proceedings to which the Mississippian Trust I and Mississippian Trust II are also parties. Piñon Gathering Company, LLC. The Company has a gas gathering and operations and maintenance agreement with Piñon Gathering Company, LLC (“PGC”) through June 30, 2029. Under the gas gathering agreement, the Company is required to compensate PGC for any throughput shortfalls below a required minimum volume. By guaranteeing a minimum throughput, the Company absorbs the risk that lower than projected volumes will be gathered by the gathering system. Therefore, PGC is a VIE. Other than as required under the gas gathering and operations and maintenance agreements, the Company has not provided any support to PGC. While the Company operates the assets of PGC as directed under the operations and management agreement, the member and managers of PGC have the authority to directly control PGC and make substantive decisions regarding PGC’s activities including terminating the Company as operator without cause. As the Company does not have the ability to control the activities of PGC that most significantly impact PGC’s economic performance, the Company is not the primary beneficiary of PGC. Therefore, the results of PGC’s activities are not consolidated into the Company’s financial statements. Amounts due from and due to PGC as of September 30, 2013 and December 31, 2012 included in the accompanying unaudited condensed consolidated balance sheets are as follows (in thousands):
| September 30, 2013 |  | December 31, 2012
Accounts receivable due from PGC | $ | 1,496 |  |  | $ | 1,976 |
Accounts payable due to PGC | $ | 4,249 |  |  | $ | 5,053 |

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