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Variable Interest Entities | 12 Months Ended
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Dec. 31, 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 December 31, 2015 and 2014 for each Royalty Trust are as follows:
|  | Mississippian Trust I (1) |  | Permian Trust |  | Mississippian Trust II
Total outstanding common units |  | 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 on July 1, 2014.
(2) | All outstanding subordinated units are owned by SandRidge.
The Company’s beneficial interest in the Royalty Trusts at December 31, 2015 and 2014 were as follows:
Mississippian Trust I | 26.9 | %
Permian Trust | 25.0 | %
Mississippian Trust II | 37.6 | %
Royalty Interests. The Royalty Trusts own royalty interests in oil and natural gas wells that were either (i) conveyed to the Royalty Trusts by SandRidge concurrent with the closing of each Royalty Trust’s initial public offering or (ii) drilled within a defined area of mutual interest during a specified period of time as discussed further below. 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 of each 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 by the Company 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 that may be recovered by each Royalty Trust under its respective lien was proportionately reduced as the Company has 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. While 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 during the subordination period. Quarterly distributions declared and paid by the Royalty Trusts during the years ended December 31, 2015, 2014 and 2013 as follows (in thousands):
|  | Year Ended December 31,
|  | 2015(1) |  | 2014(2) |  | 2013(3)
Total distributions |  | $ | 158,632 |  |  | $ | 234,326 |  |  | $ | 299,674 |
Distributions to third-party unitholders |  | $ | 138,305 |  |  | $ | 193,807 |  |  | $ | 206,470 |
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(1) | Subordination thresholds were not met for the Permian Trust and Mississippian Trust II’s distributions for the year ended December 31, 2015, resulting in reduced distributions to the Company on its subordinated units for this period.
(2) | Subordination thresholds were not met for the Mississippian Trust I’s first or second quarter 2014 distributions, the Permian Trust’s second, third or fourth quarter 2014 distributions or for the Mississippian Trust II’s distributions for the year ended December 31, 2014, resulting in reduced distributions to the Company on its subordinated units for these periods.
(3) | Subordination thresholds were not met for the Mississippian Trust I’s second, third or fourth quarter 2013 distributions, the Permian Trust’s second quarter 2013 distribution or for the Mississippian Trust II’s fourth quarter 2013 distribution, resulting in reduced distributions to the Company on its subordinated units for these periods.
See Note 22 for discussion of the Royalty Trusts’ distributions announced in January 2016. 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 agreements governing the Royalty Trusts, the Company 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 the Company 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 December 31, 2015 or 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, which included hedge management services to the Permian Trust and the Mississippian Trust II during the terms of the respective derivative agreements. Derivatives Agreements. The Company had a derivatives agreement with each Royalty Trust, pursuant to which the Company provided to the Royalty Trust the economic effects of certain of the Company’s derivative contracts covering production through December 31, 2015 for the Mississippian Trust I and the Mississippian Trust II and through March 31, 2015 for the Permian Trust. These agreements expired upon expiration of the underlying derivative contracts. See Note 13 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 December 31, 2015 and 2014, $510.2 million and $1.3 billion, respectively, of noncontrolling interest in the accompanying 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 consolidated balance sheets at December 31, 2015 and 2014 consisted of the following (in thousands):
| December 31,
| 2015 |  | 2014
Cash and cash equivalents(1) | $ | 7,824 |  |  | $ | 9,387 |
Accounts receivable | 4,457 |  |  | 17,660 |
Derivative contracts | — |  |  | 6,589 |
Total current assets | 12,281 |  |  | 33,636 |
Investment in royalty interests(2) | 1,325,942 |  |  | 1,325,942 |
Less: accumulated depletion and impairment(3) | (1,248,957 | ) |  | (284,094 | )
| 76,985 |  |  | 1,041,848 |
Total assets | $ | 89,266 |  |  | $ | 1,075,484 |
Accounts payable and accrued expenses | $ | 1,060 |  |  | $ | 2,852 |
Total liabilities | $ | 1,060 |  |  | $ | 2,852 |
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(1) | Includes $3.0 million held by the trustee at December 31, 2015 and 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 consolidated balance sheets.
(3) | Includes cumulative full cost ceiling limitation impairment of $976.2 million and $42.3 million at December 31, 2015 and 2014, respectively.
See Note 15 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 years ended December 31, 2014 and 2013, the Company sold Royalty Trust common units it owned in transactions exempt from registration pursuant to Rule 144 under the Securities Act for proceeds of approximately $22.1 million and $29.0 million, respectively. The unit sales were accounted for as equity transactions with no gain or loss recognized. The Company continued to be the primary beneficiary of the Royalty Trusts after consideration of these transactions and continues to consolidate the activities of the Royalty Trusts. Grey Ranch Plant, L.P. Primarily engaged in treating and transportation of natural gas, Grey Ranch Plant, L.P. (“GRLP”) was a limited partnership that operated the Company’s Grey Ranch plant (the “Plant”) located in Pecos County, Texas. As of December 31, 2013, the Company owned a 50% interest in GRLP, which represented a variable interest. Income or loss of GRLP was allocated to the partners based on ownership percentage and any operating or cash shortfalls required contributions from the partners. GRLP was considered a VIE because certain equity holders lacked the ability to participate in decisions impacting GRLP. Agreements related to the ownership and operation of GRLP provided 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 were reduced if throughput volumes were below those expected. The Company determined that it was the primary beneficiary of GRLP as it had both (i) the power, as operator of the Plant, to direct the activities of GRLP that most significantly impact its economic performance 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, consolidated the activity of GRLP in its consolidated financial statements. The 50% ownership interest not held by the Company as of December 31, 2013 is presented as noncontrolling interest in the consolidated financial statements. In the first quarter of 2014, one of the Company’s wholly owned subsidiaries acquired from a third party the remaining 50% ownership interest of GRLP. 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 As of December 31, 2013, the Company owned a 50% interest in Grey Ranch Plant Genpar, LLC (“Genpar”), the managing partner and 1% owner of GRLP. The Company served as Genpar’s administrative manager. Genpar’s ownership interest in GRLP was its only asset. As managing partner of GRLP, Genpar had the sole right to manage, control and conduct the business of GRLP. However, Genpar was 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 limited Genpar’s ability to make decisions on behalf of GRLP. Therefore, Genpar was considered a VIE. Although both the Company and Genpar’s other equity owner shared equally in Genpar’s economic losses and benefits and also had 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 impacted 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 have been significant to Genpar. As the primary beneficiary, the Company consolidated Genpar’s activity. However, its sole asset, the investment in GRLP, was eliminated in consolidation. Genpar had no liabilities. In the first quarter of 2014, one of the Company’s wholly owned subsidiaries acquired from a third party the remaining 50% ownership interest of Genpar. 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 PGC’s assets consist of approximately 370 miles of gathering lines that support the Company’s production in the Piñon field in West Texas. The Company acquired PGC in October 2015, and upon acquisition, terminated a gas gathering and operations and maintenance agreement with PGC, which required the Company to compensate PGC for any throughput shortfalls below a required minimum volume through June 30, 2029. By guaranteeing a minimum throughput, the Company absorbed the risk that lower than projected volumes would be gathered by the PGC’s gathering system. Therefore, prior to its acquisition, PGC was a VIE. Other than as required under the gas gathering and operations and maintenance agreements, the Company did not provide any support to PGC. While the Company operated the assets of PGC as directed under the operations and management agreement, the member and managers of PGC had 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 did not have the ability to control the activities of PGC that most significantly impact PGC’s economic performance, the Company was not the primary beneficiary of PGC and, therefore, and did not consolidate the results of PGC’s activities into the Company’s financial statements prior to its acquisition. As a wholly owned subsidiary, PGC is no longer considered a VIE for reporting purposes. Amounts due from and due to PGC as of December 31, 2014 included in the accompanying consolidated balance sheet are as follows (in thousands):
| December 31, 2014
Accounts receivable due from PGC | $ | 1,141 |
Accounts payable due to PGC | $ | 4,163 |

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- Definition The entire disclosure for a variable interest entity (VIE), including but not limited to, judgments and assumptions in determining whether to consolidate and in identifying the primary beneficiary, gain (loss) recognized on the initial consolidation of the VIE, terms of arrangements, amounts and classification of the VIE's assets and liabilities, and the entity's maximum exposure to loss. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 5A -URI http://asc.fasb.org/extlink&oid=52262685&loc=SL6759159-111685 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=52262685&loc=d3e5728-111685 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=52262685&loc=d3e5710-111685 + Details
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