Attached files
file | filename |
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8-K/A - FORM 8-K/A - PAA NATURAL GAS STORAGE LP | h81092e8vkza.htm |
EX-23.1 - EX-23.1 - PAA NATURAL GAS STORAGE LP | h81092exv23w1.htm |
EX-99.2 - EX-99.2 - PAA NATURAL GAS STORAGE LP | h81092exv99w2.htm |
Exhibit 99.1
Financial Statements and Report of
Independent Certified Public Accountants
SG Resources Mississippi, L.L.C.
December 31, 2010 and 2009
Contents
Page | ||||
Report of Independent Certified Public Accountants |
2 | |||
Balance Sheets |
3 | |||
Statements of Operations |
4 | |||
Statements of Members Capital (Deficit) |
5 | |||
Statements of Cash Flows |
6 | |||
Notes to Financial Statements |
7 |
1
Report of Independent Certified Public Accountants
Board of Directors
SG Resources Mississippi, L.L.C.
SG Resources Mississippi, L.L.C.
We have audited the accompanying balance sheets of SG Resources Mississippi, L.L.C. (a Delaware
limited liability corporation) as of December 31, 2010 and 2009, and the related statements of
operations, members capital (deficit), and cash flows for each of the three years in the period
ended December 31, 2010. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America as established by the American Institute of Certified Public Accountants. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of SG Resources Mississippi, L.L.C. as of December 31, 2010 and
2009, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2010 in conformity with accounting principles generally accepted in the
United States of America.
Houston, Texas
January 21, 2011
2
SG Resources Mississippi, L.L.C.
BALANCE SHEETS
December 31,
December 31,
2010 | 2009 | |||||||
(In thousands) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Restricted cash |
$ | 17,184 | $ | 21,750 | ||||
Accounts receivable |
3,193 | 2,014 | ||||||
Prepaid insurance |
190 | 297 | ||||||
Total current assets |
20,567 | 24,061 | ||||||
Margin deposit, pad gas |
1,687 | 1,851 | ||||||
Property and equipment: |
||||||||
Construction in progress |
187,350 | 193,124 | ||||||
Gas storage facility and other |
195,968 | 106,612 | ||||||
Less: Accumulated depreciation |
(8,778 | ) | (4,161 | ) | ||||
Net property, plant and equipment |
374,540 | 295,575 | ||||||
Other assets |
13,096 | 7,331 | ||||||
Total |
$ | 409,890 | $ | 328,818 | ||||
LIABILITIES AND MEMBERS CAPITAL |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 4,360 | $ | 5,970 | ||||
Risk management liabilities |
3,775 | 5,837 | ||||||
Current maturities of long-term debt |
1,420 | 1,350 | ||||||
Total current liabilities |
9,555 | 13,157 | ||||||
Risk management liabilities, long-term |
2,245 | 2,603 | ||||||
Long-term debt, net of current portion |
339,870 | 287,425 | ||||||
Total liabilities |
351,670 | 303,185 | ||||||
Members capital |
58,220 | 25,633 | ||||||
Total |
$ | 409,890 | $ | 328,818 | ||||
The accompanying notes are an integral part of these statements.
3
SG Resources Mississippi, L.L.C.
STATEMENTS OF OPERATIONS
Years ended December 31,
Years ended December 31,
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Revenues |
$ | 37,534 | $ | 21,058 | $ | 11,017 | ||||||
Total revenues |
37,534 | 21,058 | 11,017 | |||||||||
Operating expenses: |
||||||||||||
Operations and maintenance |
2,532 | 1,919 | 1,223 | |||||||||
General and administrative |
2,607 | 1,516 | 780 | |||||||||
Property taxes |
489 | 802 | 286 | |||||||||
Depreciation and amortization |
4,643 | 3,113 | 1,139 | |||||||||
Total operating expenses |
10,271 | 7,350 | 3,428 | |||||||||
Operating income |
27,263 | 13,708 | 7,589 | |||||||||
Interest cost incurred |
16,022 | 14,678 | 13,237 | |||||||||
Interest cost capitalized |
(8,695 | ) | (10,280 | ) | (10,522 | ) | ||||||
Interest income |
(70 | ) | (199 | ) | (2,017 | ) | ||||||
Financing costs |
264 | 265 | 559 | |||||||||
Other income |
(34 | ) | (763 | ) | (4,102 | ) | ||||||
Net income before risk management activities |
19,776 | 10,007 | 10,434 | |||||||||
Net gain (loss) on pad gas hedges |
10,390 | (9,458 | ) | (9,360 | ) | |||||||
Net gain (loss) on interest rate swaps |
2,421 | 3,840 | (10,319 | ) | ||||||||
Net income (loss) |
$ | 32,587 | $ | 4,389 | $ | (9,245 | ) | |||||
The accompanying notes are an integral part of these statements.
4
SG Resources Mississippi, L.L.C.
STATEMENTS OF MEMBERS CAPITAL (DEFICIT)
Years ended December 31, 2008, 2009 and 2010
Years ended December 31, 2008, 2009 and 2010
SGRH | SPEIC | Total | ||||||||||
(In thousands) | ||||||||||||
BALANCE, January 1, 2008 |
$ | (20,899 | ) | $ | 51,388 | $ | 30,489 | |||||
Net loss |
(5,547 | ) | (3,698 | ) | (9,245 | ) | ||||||
BALANCE, January 1, 2009 |
(26,446 | ) | 47,690 | 21,244 | ||||||||
Net income |
2,633 | 1,756 | 4,389 | |||||||||
BALANCE, December 31, 2009 |
(23,813 | ) | 49,446 | 25,633 | ||||||||
Net income |
19,552 | 13,035 | 32,587 | |||||||||
BALANCE, December 31, 2010 |
$ | (4,261 | ) | $ | 62,481 | $ | 58,220 | |||||
The accompanying notes are an integral part of these statements.
5
SG Resources Mississippi, L.L.C.
STATEMENTS OF CASH FLOWS
Years ended December 31,
Years ended December 31,
2010 | 2009 | 2008 | ||||||||||
(In thousands) | ||||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | 32,587 | $ | 4,389 | $ | (9,245 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities: |
||||||||||||
Depreciation and amortization |
4,643 | 3,113 | 1,139 | |||||||||
Loss on miscellaneous sale |
| 4 | 18 | |||||||||
Unrealized loss on risk management activities |
(12,810 | ) | 5,618 | 19,679 | ||||||||
Increase in accounts receivable |
(1,179 | ) | (815 | ) | (705 | ) | ||||||
Increase (decrease) in accounts payable and accrued liabilities |
(67 | ) | 743 | (228 | ) | |||||||
Increase (decrease) in prepaid expenses |
107 | (297 | ) | | ||||||||
Net cash provided by operating activities |
23,281 | 12,755 | 10,658 | |||||||||
Cash flows from investing activities: |
||||||||||||
Restricted cash |
4,566 | 13,820 | 49,134 | |||||||||
Construction in progress |
(74,692 | ) | (46,724 | ) | (50,668 | ) | ||||||
Capitalized interest costs |
(8,695 | ) | (10,280 | ) | (10,522 | ) | ||||||
Margin deposit, pad gas |
10,553 | (9,298 | ) | (9,060 | ) | |||||||
Net cash used in investing activities |
(68,268 | ) | (52,482 | ) | (21,116 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from term loan borrowings |
9,700 | | | |||||||||
Proceeds from Gulf Opportunity Zone Industrial Development Revenue Bonds |
100,000 | | | |||||||||
Revolver borrowings |
23,100 | 41,500 | 14,300 | |||||||||
Repayment of revolver borrowings |
(78,900 | ) | | | ||||||||
Repayment of construction term loan borrowings |
(1,385 | ) | (1,350 | ) | (675 | ) | ||||||
Payment of financing costs |
(7,528 | ) | (423 | ) | (3,617 | ) | ||||||
Proceeds from interest rate cap |
| | 450 | |||||||||
Net cash provided by financing activities |
44,987 | 39,727 | 10,458 | |||||||||
Net increase (decrease) in cash and cash equivalents |
| | | |||||||||
Cash and cash equivalents at beginning of period |
| | | |||||||||
Cash and cash equivalents at end of period |
$ | | $ | | $ | | ||||||
Capital expenditures included in accounts payable |
$ | 2,949 | $ | 4,492 | $ | 6,137 | ||||||
The accompanying notes are an integral part of these statements.
6
SG Resources Mississippi, L.L.C.
NOTES TO FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008
(All amounts in thousands, unless otherwise noted)
December 31, 2010, 2009 and 2008
(All amounts in thousands, unless otherwise noted)
NOTE A ORGANIZATION
SG Resources Mississippi, L.L.C. (SGRM or the Company) is a Delaware limited liability
company which was formed on April 20, 2001 as a development company for the purpose of acquiring
the property necessary to develop and permit the construction of the Southern Pines Energy
Center, a high deliverability salt cavern natural gas storage facility located in Greene County,
Mississippi (the Project). In 2006, SGR Holdings, L.L.C. (SGRH) sold a 40% membership
interest in SGRM to Southern Pines Energy Investment Company, L.L.C. (SPEIC), a wholly-owned
subsidiary of ArcLight Capital Partners, L.L.C. SGRM is now owned 60% by SGRH and 40% by SPEIC.
The Company owns land that will support the development of up to five storage caverns of 10
billion cubic feet (Bcf) each for a total working storage capacity of 50 Bcf. SGRM is
developing the Project over several phases of construction. Phase I of the construction of the
Southern Pines Energy Center began in 2006, and the Company placed Phase I into commercial
operation on May 1, 2008. Phases II and III were placed into commercial operation on May 1, 2009
and May 1, 2010, respectively. The Company continues to leach all three cavern wells toward the
planned working storage capacity of 30 Bcf for Phases I, II and III, and currently has a gas
handling facility with 48,000 horsepower of compression, and direct interconnects to five
pipelines with indirect access to four pipelines which serve the U.S. northeast and southeast
markets.
The Company began development of its Phase IV Expansion in August 2010 and is currently expected
to be placed into commercial operation by the end of 2012. Upon completion of Phase IV, the
Southern Pines Energy Center will have 40 Bcf of working storage capacity.
The Southern Pines Energy Center is currently authorized to provide 40 billion cubic feet (Bcf)
of natural gas storage capacity in four cavern wells on an open-access basis, at market-based
rates, subject to authorizations granted by the Federal Energy Regulatory Commission (FERC).
Under its FERC certificate order, the Company is not certificated to engage in merchant
functions, including natural gas trading activities.
The Company owns all of the facilities and equipment necessary to support its Phases I IV gas
storage and development operations and continues to develop storage capacity. Revenues and
expenses should increase in the future as storage capacity for each of these Phases is completed
and placed into commercial operation.
The Southern Pines Energy Center provides high flow rates for injection and withdrawal of natural
gas inventories. Because of this capability, SGRMs midstream assets have become key components
in supporting the commercial functions of power generators, pipelines, local distribution
companies, producers, LNG re-gasification terminal operators and energy merchants throughout the
United States. The Companys revenues, profitability, and future growth are dependent upon the
supply and demand for natural gas, and the demand for natural gas storage and related services.
7
SG Resources Mississippi, L.L.C.
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Restricted Cash
The Southern Pines Energy Center Gas Storage Facility is being financed through a project
financing structure as discussed in Note E. Under the financing agreement, the Company is
required to maintain certain cash accounts restricted in their use for certain purposes. The
restricted cash amounts will be used as required primarily to fund construction, service debt,
acquire pad gas, and fund operations.
2. Allowance for Doubtful Accounts
The Companys source of revenues is derived from demand storage contracts and other related
services. The Company has under its FERC tariff several remedies to collect any unpaid balances
with respect to its accounts receivable from its storage customers. Since the commencement of
operations, the Companys accounts receivable have been collected according to the contract
provisions and no bad debt losses have been realized for the years ended December 31, 2010, 2009
and 2008.
3. Property, Plant and Equipment
As various construction Phases of the Project are completed and put in service, depreciation
schedules of the storage facilities and equipment are established and calculated using the
straight-line depreciation method over the estimated useful lives of the depreciable assets
(which range from five (5) to fifty (50) years). Additions, renewals, and betterments that
materially add to the productive capacity or extend the life of an asset are capitalized.
Construction in progress represents costs related to the construction of the storage facility
and are attributed to the appropriate natural gas storage facilities and depreciation is
commenced once such components of the storage facility are completed and placed into commercial
operation. For the three years ended December 31, 2010, 2009 and 2008, the Company recorded
$4.64 million, $3.11 million and $1.13 million of depreciation, respectively.
The Company reviews property, plant and equipment for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be recoverable. If such a
review should indicate that the carrying amount of long-lived assets is not recoverable, SGRM
reduces the carrying amount of such assets to fair value. No impairment of long-lived assets was
required during the periods presented.
The Company records the fair value of an asset retirement obligation as a liability in the
period a legal obligation for the retirement of tangible long-lived assets is incurred.
Management has determined the liability amount to be immaterial.
4. Other Assets
Other assets consist primarily of deferred financing costs associated with construction
financing. The deferred financing costs include legal and other services which are capitalized
through completion of the Project at which time the remaining balance on the deferred assets will
be amortized using the effective interest method over the life of the underlying loan.
8
SG Resources Mississippi, L.L.C.
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
5. Revenue Recognition
The Companys primary source of revenues is firm storage contracts. Customers lease storage
capacity and related injection and withdrawal rights for which they pay a monthly reservation
fee. When the customers use the storage service they also incur usage fees for the actual use of
injection and withdrawal from the facility. The Company offers a variety of load management
services to its customers on a short-term and interruptible basis to supplement its firm
storage revenues. These Hub services include (i) balancing services, which allow customers to
park or borrow gas for a limited time, (ii) wheeling services, which allow customers to transfer
gas from one pipeline to another through the Companys facility interconnects, (iii) title
transfers, which allow customers to effect the transfer of gas from one to another, (iv)
imbalance services, which allow customers to trade an imbalance on a particular pipeline or
between pipelines with others and (v) loaning services, which allow customers to borrow natural
gas from the facility. These interruptible services remain limited during the development phases
of the project. Demand fees are recognized as revenue over the term of the related storage
agreement while the usage fees and hub services revenues are recognized as services are
performed. There have been no disputes regarding the collection of the Companys accounts
receivable. As a result, no provisions were made for allowance for doubtful accounts.
6. Income Taxes
The Company is a limited liability company and, for federal tax purposes, is treated as a
partnership. The Companys taxable income or loss is therefore passed through to its members and
reported on each members tax return. Accordingly, there is no federal tax provision in these
financial statements.
Pursuant to FASB guidance related to accounting for uncertainty in income taxes, the Company
must recognize the tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained upon examination by the taxing authorities, based on the
technical merits of the tax position and also the past administrative practices and precedents
of the taxing authority. If incurred, the Company would record interest and penalties to general
and administrative expense. As of December 31, 2010 and 2009, we have not recognized any
material amounts in connection with uncertainty in income taxes.
7. Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of
America requires Company management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements. Actual results
could differ from those estimates. Significant estimates with regard
to these financial statements relate to the anticipated completion
date of construction activities for the Project. Once the Project is
placed in commercial operation, significant estimates with regard to
these financial statements will relate primarily to the depreciable
lives of property and equipment.
9
SG Resources Mississippi, L.L.C.
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Continued
8. Recent Accounting Pronouncements
We adopted FASB ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements (ASU 2010-06) on January 1, 2010. ASU 2010-06
requires, among other items, reporting entities to provide information about movements of assets
among all levels of the three-tier fair value hierarchy established by FASB ASC 820. The
adoption of this ASU did not have a material impact on our financial position, results of
operations or cash flows.
NOTE C FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET RISK
The carrying value of the financial instruments, consisting of cash and cash equivalents,
receivables, and payables approximate the fair value of these instruments as of December 31,
2010 and 2009. The carrying value of long-term debt approximates the fair value based upon its
variable rate terms.
NOTE D PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment (in thousands) as of December 31, 2010 and 2009 is as
follows:
2010 | 2009 | |||||||
Construction-in-progress |
$ | 187,350 | $ | 193,124 | ||||
Gas storage facility and other |
195,968 | 106,612 | ||||||
Property, plant and equipment |
383,318 | 299,736 | ||||||
Less: Accumulated depreciation |
(8,778 | ) | (4,161 | ) | ||||
Total property, plant and equipment |
$ | 374,540 | $ | 295,575 | ||||
10
SG Resources Mississippi, L.L.C.
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
NOTE E LONG-TERM DEBT
Long-term debt associated with the construction and development of the Southern Pines Energy
Center (in thousands) as of December 31, 2010 and 2009 is as follows:
2010 | 2009 | |||||||
Principal amount of construction loans drawn and bearing interest at 3.27% as of December 31, 2009
under revolving credit facility (due August 12,
2014) |
$ | | $ | 55,800 | ||||
Principal amount of construction loans drawn and bearing interest at 3.27% as of December 31, 2009
(due August 12, 2015) |
141,290 | 132,975 | ||||||
Principal amount of construction loans drawn GO Zone Bonds bearing interest at 2.57% as of
December 31, 2010 (due May 9, 2032) |
200,000 | 100,000 | ||||||
Total long-term debt |
341,290 | 288,775 | ||||||
Current maturities |
(1,420 | ) | (1,350 | ) | ||||
Long-term debt, less current maturities |
$ | 339,870 | $ | 287,425 | ||||
On August 12, 2010, the Company closed a financing to amend its existing credit facilities (the
Loan Agreement) and fund the development of its Phase IV Expansion. This financing increased
the existing Term Loan of $132.3 million by $9.7 million to $142.0 million and extended the
maturity to 2015 that requires quarterly repayments of $355,000 which commenced on September 30,
2010. The Company also secured $100.0 million of additional GO Zone bonds (the GO Zone Bonds)
that will mature in 2035. The outstanding balance on the Tranche B revolver of $78.9 million was
paid down at closing and the revolver size was increased to $121.5 million, of which $20.0
million will be available for project costs. As of December 31, 2010, the Company had $20.0
million available under its revolver.
Interest on the loans shall be payable on the election of the Company at 30, 60, or 90 day
intervals at LIBOR plus an applicable margin. The Company is required under its Loan Agreement
to hedge 50% of its debt for the purpose of reducing its exposure to interest rate fluctuations
by converting variable-rate payments to fixed-rate payments. As of December 31, 2010, the
Company has hedges in place covering $171.00 million of its outstanding debt. During the years
ended December 31, 2010, 2009 and 2008, the Company incurred interest of $16.02 million, $14.68
million and $13.23 million, respectively. Correspondingly, the Company paid interest of $16.13
million, $13.92 million and $14.11 million in 2010, 2009 and 2008, respectively.
Prior to the August 12, 2010 amendments to the existing credit facilities, the Company had
entered into a $100 million revolving credit facility with a consortium of lenders to finance the
Phase III construction and expansion of the Project. The Company also had in connection with
Phases I and II of the Project construction plan, entered into one hundred million dollars ($100
million) of Gulf Opportunity Zone Industrial Development Revenue Bonds through the Mississippi
Business Finance Corporation on May 9, 2007. Interest on the Bonds is payable on the first
Wednesday of each month at a weekly set Bond rate plus an applicable margin. The principal amount
of the Bonds matures on May 9, 2032. The Company also entered into a nonrecourse senior credit
facility on April 2, 2007 in which the lenders committed to provide $135 million in construction
loans and $20 million in revolving loans. A portion of the Bond proceeds were used to repay the
revolving loans.
11
SG Resources Mississippi, L.L.C.
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
NOTE E LONG-TERM DEBT Continued
As of December 31, 2010 and 2009, the Company had on its balance sheet $13.10 million and $7.33
million, respectively, of deferred financing costs associated with its various debt instruments.
The Company amortizes these amounts over the term of the various debt instruments.
The Loan Agreement contains customary covenants including limitations on leverage ratio and debt
service coverage ratios. In addition, the Loan Agreement is collateralized by, substantially,
all the assets of the Company. As of December 31, 2010, the Company was in compliance with the
Loan Agreements covenants.
Scheduled maturities, excluding mandatory prepayments (if any), of long-term debt
outstanding at December 31, 2010, are as follows (in thousands):
Term | GO Zone | |||||||||||
Revolver | loan | Bonds | ||||||||||
2011 |
$ | | $ | 1,420 | $ | |||||||
2012 |
| 1,420 | | |||||||||
2013 |
| 1,420 | | |||||||||
2014 |
| 1,420 | | |||||||||
2015 |
| 135,610 | ||||||||||
Thereafter |
| | 200,000 |
NOTE F RISK MANAGEMENT ACTIVITIES
The Company is required to mark to market certain derivatives it has in place, including its
interest rate swaps and pad gas hedges. As discussed in Note E, the Company has in place
interest rate hedges on 50% of its debt as required under its Loan Agreement to reduce its
interest rate exposure. In addition, as required under its Loan Agreement, the Company has
hedged the cost of the pad gas that must be injected into, and maintained in, its storage
caverns to support gas storage activity, in order to eliminate the risk of upward price
movements in the cost of building the Project.
The Company does not and, under FERC regulations and policies and the terms of its FERC
certificate, may not; engage in natural gas trading or merchant activities. The following
discussions address Company Risk Management Activities involving derivatives related to
activities other than natural gas trading or merchant activities:
1. Interest Rate Protection (Swaps)
For the years ended December 31, 2010, 2009 and 2008, the Company has recorded unrealized gains
of $2.42 million, $3.84 million and an unrealized loss of $10.32 million, respectively, in
connection with the interest rate swaps it has in place as required under its Loan Agreement. As
discussed in Note E, these swaps were entered into for the purpose of reducing the Companys
exposure to interest rate fluctuations by converting variable-rate payments to fixed-rate
payments. Any fluctuations in future interest rates will increase or decrease this unrealized
gain/loss. The interest rate swaps in place terminate at various dates ranging from September
2011 to September 2012.
12
SG Resources Mississippi, L.L.C.
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
NOTE F RISK MANAGEMENT ACTIVITIES Continued
2. Pad Gas Hedges
As required under its Loan Agreement covering the construction financing for the Project, the
Company has hedged the pad gas needed for the construction of Phases I, II, and III of the
Southern Pines Energy Center. The Company entered into these hedges to eliminate the risk of
upward price movements in natural gas which would add to the cost of construction of the
Project. The Company has elected to mark-to-market these pad gas hedges.
The Company has fixed the acquisition cost of the pad gas it will require and is obligated to
pay the hedged price under the terms of the hedge agreement upon taking delivery of the pad gas.
Natural gas prices are volatile and fluctuations in natural gas prices will not increase or
decrease the acquisition cost to the Project under these hedges. The Companys remaining hedged
average price of gas to be used as pad gas is $7.38 Dth or $20.98 million. As required, the
Company recorded an unrealized gain of $10.39 million, and an unrealized loss on its pad gas
hedges of $9.46 million as of December 31, 2010 and 2009, respectively.
Margin deposit - represents the amounts funded in a margin account with a counterparty relating
to the purchase of pad gas which is required to construct and operate the Southern Pines Energy
Center. This amount is reduced by the unrealized liability relating to its pad gas risk
management activities. Upon termination of the hedges, the margin deposit will be returned to
the Company or applied against the purchase of the pad gas. As of December 31, 2010 the Company
had made payments of $9.72 million relating to these hedges. The Company recorded liabilities of
$8.04 million and $18.43 million associated with pad gas risk management activities as of
December 31, 2010 and 2009 respectively. This resulted in a remaining balance in Margin Deposit
of $1.69 million and $1.85 million as of December 31, 2010 and 2009 respectively.
Fair value positions - The Company has commodity derivatives and interest rate derivatives that
are accounted for as assets and liabilities at fair value on our Balance Sheet. We determine the
fair value of our assets and liabilities subject to fair value measurement by using appropriate
Level. Level 1 inputs are observable quotes in an active market for identical assets and
liabilities. Level 2 inputs are inputs observable for similar assets and liabilities. We
consider our pad gas derivatives entered into directly with third parties as a Level 2 valuation
since the values of these derivatives are quoted on an exchange for similar transactions. We
consider the valuation of our interest rate derivatives as Level 2 since we use a LIBOR curve
based on quotes from an active exchange of Eurodollar futures for the same period as the future
interest swap settlements and discount the future cash flows accordingly. The Company currently
does not have any fair value measurements that require the use of significant unobservable
inputs and therefore do not have any assets or liabilities considered as Level 3 valuations.
The following table sets forth by level within the fair value hierarchy our financial assets and
liabilities that were accounted for at fair value on a recurring basis as of December 31, 2010.
Assets and liabilities are classified in their entirety based on the lowest level of input that
is significant to the fair value measurement. Managements assessment of the significance of a
particular input to the fair value measurement requires judgment and may affect the valuation of
fair value of assets and liabilities and their placement with the fair value hierarchy levels.
13
SG Resources Mississippi, L.L.C.
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
NOTE F RISK MANAGEMENT ACTIVITIES Continued
Fair value measurements on a recurring basis | ||||||||||||||||
December 31, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Assets |
$ | | $ | | $ | | $ | | ||||||||
Total |
$ | | $ | | $ | | $ | | ||||||||
Liabilities: |
||||||||||||||||
Interest rate swaps |
$ | | $ | 6,020 | $ | | $ | 6,020 | ||||||||
*Pad gas hedges |
| 8,038 | | 8,038 | ||||||||||||
Total |
$ | | $ | 14,058 | $ | | $ | 14,058 | ||||||||
* | As discussed here in Note F, liabilities relating to pad gas hedges of $8.04 million are netted against amounts funded to the Margin Deposit account of $9.72 million. |
NOTE G SIGNIFICANT CUSTOMERS
Significant customers are those which individually account for more than 10% of the revenues for
the Company. The Project commenced commercial operations for Phase III on May 1, 2010, bringing
its customer total to seventeen (17), two (2) of which accounted for 34% of the total revenues
in 2010. As of December 31, 2010, three (3) customers represent 43% of the Companys accounts
receivables.
NOTE H EVALUATION OF THIRD PARTY CREDIT RISK
As of December 31, 2010, the Company had cash deposits with financial institutions in excess of
the amount insured by the FDIC. Management believes that any credit risk associated with the
excess deposits in these financial institutions is minimal.
The Companys principal customers for natural gas storage are power generators, producers, local
distribution companies, and energy merchants. The Companys overall credit risk may be affected
by these customers through changes in economic, regulatory, or other factors. Where exposed to
credit risk, the Company analyzes the counterparties financial condition prior to entering into
an agreement, obtains additional financial assurances as required under its FERC tariff through
guarantees and letters of credit, establishes credit limits, and monitors the appropriateness of
those limits on an ongoing basis.
The Company does not own the natural gas in inventory it stores for its customers; therefore,
the value of the gas storage inventory is not recorded on the balance sheet. At December 31,
2010, gas inventory held for its customers was approximately 10.14 Bcf.
14
SG Resources Mississippi, L.L.C.
NOTES TO FINANCIAL STATEMENTS CONTINUED
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
December 31, 2010 and 2009
(All amounts in thousands, unless otherwise noted)
NOTE I RELATED PARTY TRANSACTION
On April 2, 2007, the Company executed a Construction, Operation, Commercialization, and
Management Oversight Agreement (the Agreement) with SGRH, the 60% owner of SGRM. The Agreement
provides for SGRH to be an independent contractor and project consultant on behalf of the
Company. In its role as project manager, SGRH agreed to perform all pre-construction activities,
execute and manage all construction aspects of the Project, operate and maintain the facility,
and manage the commercial operation of the Project. In return for these services the Company
pays SGRH a management fee of $800,000 per year, which is to be reduced dollar-for-dollar by the
amount of any cash distributions received by SGRH in a calendar year from the Company (exclusive
of income tax distributions). In addition, the Company pays SGRH a fixed expense reimbursement
of up to $190,000 per year. For the years ended December 31, 2010 and 2009, the Company paid
SGRH $990,000 in both years. In December 2007, the Company executed an agreement with a third
party to construct a new pipeline interconnect, which was completed and placed into operation in
2008. The Company recorded these third party contributions for the cost of the construction as
other income in the period the cash was received. Contributions from the third-party were $4.1
million, $763,000 and $34,000 for the years ended December 31, 2008, 2009 and 2010,
respectively. Under the terms of the agreement, the Company paid and capitalized as a
construction cost to SGRH a one-time payment of $500,000 in 2008 and $50,000 in 2009 for
construction management.
NOTE J SUBSEQUENT EVENTS
The Company evaluated all events or transactions occurring after December 31, 2010 through
January 21, 2011, the date the financial statements were issued.
On December 28, 2010, SGRH and SPEIC entered into a Purchase and Sale Agreement with PAA Natural
Gas Storage L.P. to sell 100% of the member interests in SG Resources Mississippi, L.L.C. The
sale is expected to close during the first quarter of 2011.
15