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Variable Interest Entities | 9 Months Ended
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Sep. 30, 2015
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Variable Interest Entities | Variable Interest Entities 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. Royalty Trusts SandRidge owns beneficial interests in the SandRidge Mississippian Trust I (the “Mississippian Trust I”), the SandRidge Permian Trust (the “Permian Trust”) and SandRidge Mississippian Trust II (the “Mississippian Trust II”) (each individually, a “Royalty Trust” and collectively, the “Royalty Trusts”). 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 fulfilled its drilling obligations to the Royalty Trusts as discussed below 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/or subordinated units, that could potentially be significant to the Royalty Trusts. As a result, the Company consolidates the activities of the Royalty Trusts. The common units of the Royalty Trusts owned by third parties are reflected as noncontrolling interest in the consolidated financial statements. Common and subordinated units outstanding as of September 30, 2015 and December 31, 2014 for each Royalty Trust are as follows:
|  | Mississippian Trust I |  | Permian Trust |  | Mississippian Trust II
Total outstanding common units(1) |  | 28,000,000 |  |  | 39,375,000 |  |  | 37,293,750 |
Total outstanding subordinated units(2) |  | — |  |  | 13,125,000 |  |  | 12,431,250 |
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(1) | The Mississippian Trust I’s previously outstanding subordinated units, all of which were held by SandRidge, converted to common units in the third quarter of 2014.
(2) | All outstanding subordinated units are owned by SandRidge.
The Company’s beneficial interests in the Royalty Trusts at September 30, 2015 and December 31, 2014 were as follows:
Mississippian Trust I | 26.9 | %
Permian Trust | 25.0 | %
Mississippian Trust II | 37.6 | %
Royalty Interests. Concurrent with the closing of the Mississippian Trust I and the Permian Trust initial public offerings in 2011 and the closing of the Mississippian Trust II initial public offering in 2012, the Company conveyed certain royalty interests to each Royalty Trust in exchange for (i) the net proceeds of the offering and (ii) common and subordinated units representing beneficial interests in the Royalty Trust. Royalty interests conveyed to the Royalty Trusts were 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. Pursuant to the agreements governing the Royalty Trusts, the Mississippian Trust I will terminate in 2030 and the Permian Trust and Mississippian Trust II will terminate in 2031. Upon termination, 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. Drilling Obligations. The Company and one of its wholly owned subsidiaries entered into a development agreement with each Royalty Trust upon conveyance of the royalty interests that obligated the Company to drill, or cause to be drilled, a specified number of wells which are also subject to the royalty interests within respective areas of mutual interest by a specified date. 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 were to be drilled in order to secure the estimated amount of drilling costs for the Royalty Trust’s interests in the wells. The total amount recoverable by each Royalty Trust under its respective lien was proportionately reduced as the Company drilled and completed the associated development wells. The Company fulfilled its drilling obligation to the Mississippian Trust I in the second quarter of 2013, to the Permian Trust in the fourth quarter of 2014 and to the Mississippian Trust II in the first quarter of 2015 and the related liens were automatically released. Distributions. The Royalty Trusts make quarterly cash distributions to unitholders based on calculated distributable income. Outstanding subordinated units, which constitute 25% of each Royalty Trust’s total outstanding units during the subordination period as described below, 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 made with respect to the subordinated units is 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. As holder of the subordinated 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. Quarterly distributions declared and paid by the Royalty Trusts during the three and nine-month periods ended September 30, 2015 and 2014 were as follows (in thousands):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2015(1) |  | 2014(2) |  | 2015(1) |  | 2014(2)
Total distributions | $ | 34,444 |  |  | $ | 56,191 |  |  | $ | 131,943 |  |  | $ | 184,176 |
Distributions to third-party unitholders | $ | 30,611 |  |  | $ | 47,298 |  |  | $ | 115,301 |  |  | $ | 150,440 |
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(1) | Subordination thresholds were not met for the Permian Trust and Mississippian Trust II’s distributions for the three and nine-month periods ended September 30, 2015, resulting in reduced distributions to the Company on its subordinated units for these periods.
(2) | Subordination thresholds were not met for the Mississippian Trust I’s distributions for the three and nine-month periods ended September 30, 2014 and for the Mississippian Trust II’s distributions for the three-month period September 30, 2014, resulting in reduced distributions to the Company on its subordinated units for these periods.
See Note 18 for discussion of the Royalty Trusts’ distributions announced in October 2015. Following the end of the fourth full calendar quarter subsequent to the Company’s satisfaction of its drilling obligation (the “subordination period”), the subordinated units of each Royalty Trust automatically convert into common units on a one-for-one basis and the Company’s right to receive incentive distributions terminates. In the third quarter of 2014, the Mississippian Trust I’s subordinated units, all of which were held by SandRidge, converted to common units. Beginning with the distribution made in November 2014, all of the Mississippian Trust I’s common units share equally in its distributions. Similarly, as a result of the Company’s fulfillment of its drilling obligations to the Permian Trust and the Mississippian Trust II, the subordinated units of each of these Royalty Trusts will convert to common units on January 1, 2016 and April 1, 2016, respectively, and distributions made in respect of periods thereafter will be shared equally by the Royalty Trusts’ common units. The Company will continue to consolidate the activities of the Royalty Trusts as primary beneficiary subsequent to these conversions due to the Company’s original participation in the design of the Royalty Trusts and continued (a) power to direct the activities that most significantly impact the economic performance of the Royalty Trusts and (b) obligation to absorb losses and right to receive residual returns through its variable interests in the Royalty Trusts, including ownership of common units, that could potentially be significant to the Royalty Trusts. Loan Commitment. Pursuant to the trust agreements governing the Royalty Trusts, SandRidge has committed to loan funds to each 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, 2015 or December 31, 2014. Administrative Services. The Company is party to an administrative services agreement with each Royalty Trust, 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 during the terms of the respective derivatives agreements. Derivative Agreements. The Company executed 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. The tables below present the open oil and natural gas commodity derivative contracts at September 30, 2015 underlying the derivatives agreements with the Mississippian Trust I and Mississippian Trust II. The derivatives agreement with the Permian Trust contained commodity derivative contracts that covered volumes of oil production through March 31, 2015 and is no longer in effect. 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 Royalty Trust Derivatives Agreements
| Notional (MBbls) |  | Weighted Average Fixed Price
October 2015 - December 2015 | 187 |  |  | $ | 97.09 |
Natural Gas Collars Underlying the Royalty Trust Derivatives Agreements
| Notional (MMcf) |  | Collar Range
October 2015 - December 2015 | 255 |  |  | $ | 4.00 |  | — | $ | 8.55 |
See Note 8 for further discussion of the derivatives agreement between the Company and each Royalty Trust. Assets and Liabilities. 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, 2015 and December 31, 2014, $663.5 million and $1.3 billion, respectively, of noncontrolling interest in the accompanying unaudited condensed consolidated balance sheets was 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, 2015 and December 31, 2014 consisted of the following (in thousands):
| September 30, 2015 |  | December 31, 2014
Cash and cash equivalents(1) | $ | 7,702 |  |  | $ | 9,387 |
Accounts receivable, net | 6,032 |  |  | 17,660 |
Derivative contracts | — |  |  | 6,589 |
Total current assets | 13,734 |  |  | 33,636 |
Investment in royalty interests(2) | 1,325,942 |  |  | 1,325,942 |
Less: accumulated depletion and impairment(3) | (1,051,186 | ) |  | (284,094 | )
| 274,756 |  |  | 1,041,848 |
Total assets | $ | 288,490 |  |  | $ | 1,075,484 |
Accounts payable and accrued expenses | $ | 952 |  |  | $ | 2,852 |
Total liabilities | $ | 952 |  |  | $ | 2,852 |
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(1) | Includes $3.0 million held by the trustee at September 30, 2015 and December 31, 2014 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.
(3) | Includes cumulative full cost ceiling limitation impairment of $783.5 million and $42.3 million at September 30, 2015 and December 31, 2014, respectively.
See Note 10 for discussion of the Company’s legal proceedings to which the Mississippian Trust I and Mississippian Trust II are also parties. Sales of Common Units. During the nine-month period ended September 30, 2014, the Company sold Permian Trust common units it owned in a transaction exempt from registration pursuant to Rule 144 under the Securities Act for proceeds of approximately $22.1 million. The sale was accounted for as an equity transaction with no gain or loss recognized. The Company continues to be the primary beneficiary of the Permian Trust after consideration of this transaction and continues to consolidate the activities of the Permian Trust as well as the activities of the Mississippian Trust I and Mississippian Trust II. Grey Ranch Plant, L.P. The Company owned a 50% interest in Grey Ranch Plant, L.P. (“GRLP”), which represented a variable interest, prior to one of the Company’s wholly owned subsidiaries acquiring the remaining 50% ownership interest of GRLP from a third party during the first quarter of 2014. The third-party ownership interest in GRLP for the portion of the period prior to the Company's acquisition of the remaining 50% ownership interest in GRLP is reflected in loss attributable to noncontrolling interest owners in the accompanying unaudited condensed consolidated statement of operations for the nine-month period ended September 30, 2014. Because the Company was the primary beneficiary and consolidated GRLP, the acquisition of additional ownership interest was recorded as an equity transaction with no gain or loss recognized. Additionally, as a wholly owned subsidiary of the Company, GRLP is no longer considered a VIE for reporting purposes. Grey Ranch Plant Genpar, LLC The Company owned a 50% interest in Grey Ranch Plant Genpar, LLC (“Genpar”), the managing partner and 1% owner of GRLP, prior to one of the Company’s wholly owned subsidiaries acquiring the remaining 50% ownership interest of Genpar from a third party in the first quarter of 2014. Because the Company was the primary beneficiary and consolidated Genpar, the acquisition of additional ownership interest was recorded as an equity transaction with no gain or loss recognized. Additionally, as a wholly owned subsidiary of the Company, Genpar is no longer considered a VIE for reporting purposes. 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. Because 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 and does not consolidate the results of PGC’s activities into its financial statements. Amounts due from and due to PGC as of September 30, 2015 and December 31, 2014 included in the accompanying unaudited condensed consolidated balance sheets are as follows (in thousands):
| September 30, 2015 |  | December 31, 2014
Accounts receivable due from PGC | $ | 1,034 |  |  | $ | 1,141 |
Accounts payable due to PGC | $ | 3,955 |  |  | $ | 4,163 |
In October 2015, the Company purchased PGC and terminated the gathering and operations and maintenance agreement. As a wholly-owned subsidiary, PGC will no longer be considered a VIE for reporting purposes. See further discussion at Note 18.

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