Semstream Files For Bankruptcy

SEC, U.S. Attorney investigating oil speculation transactions, $3.2 billon loss


Oil speculation gone awry forced SemGroup, L.P., parent company of SemStream, to file bankruptcy Tuesday. Semstream provides propane to 9,000 customers in northern Gila County.

SemGroup lost at least $3.2 billion after buying futures betting oil prices would drop, according to court filings. "Such transactions were always subject to a degree of risk," the filing read.

The company attributed the "crisis" to a volatile commodities market, compounded by the credit crisis, according to court documents.

The Financial Times reported that record high oil prices this month triggered banks to ask the company for more collateral. The credit crunch has banks wary of extending credit lines, the report stated.

Arizona Corporation Commission called the news "disturbing."

"Right now it looks as though there is not an immediate threat to propane service in Payson and Page," said state Corporation Commissioner Kris Mayes. "I'm still very concerned about this bankruptcy and we need to do everything in our power to make sure that this does not negatively affect the consumers of Payson."

The latest saga in what has been a thorny relationship between SemStream and its local users, Mayes said perhaps the incident will spur discussion of how to bring natural gas to Payson.

"That's the long-term answer," Mayes said. "In the short-term, SemStream has a lot of explaining to do, not only to the corporation commission, but also to its customers."

A company spokesperson, Lance Ignon, said, "we're trying to operate business as usual." After SemGroup announced its "severe liquidity crisis," the federal Securities and Exchange Commission and the U.S. Attorney in Oklahoma, where SemGroup is based, informed a subsidiary, SemGroup Energy Partners, L.P., they would investigate, according to SEC documents. SemGroup Energy Partners did not file for bankruptcy.

Two lawsuits filed claimed the subsidiary failed to disclose that SemGroup "was engaged in high-risk crude oil hedging transactions that could affect its ability to continue," according to SEC filings.

ACC also complained they weren't notified of the risky behavior, according to a letter Mayes wrote.

Payson Mayor Kenny Evans said the company's sheer size makes oversight difficult. The question should have been more thoroughly examined before allowing SemStream to buy Energy West in 2006, he said.

"If it was too big to be able to monitor the health of the business, then certainly that should have been a red flag for them in the acquisition phase."

He placed no fault on ACC, but said the problem is systemic in state agencies attempting to regulate massive multi-national corporations. Forbes rated the SemGroup the nation's 12th largest private company in 2007.

SemStream pays a significant amount of sales tax and franchise fees to Payson. "Their ability to pay those needs to be assured," Evans said.

Mayes said, "I think they'll continue to operate so they'll continue to pay sales tax."

The most significant effect on Payson customers is the possibility that SemStream will delay building a new storage facility in Winslow, according to ACC.

Without a new storage facility, the company would likely rely more heavily on expensive, short-term market purchase, which would exacerbate high prices, according to ACC.

"One of the things I want to ask the company is why can't you go ahead and build that facility on your current time table?" Mayes said by phone Thursday.

Ignon, when asked about the Winslow storage unit, said he was unable to provide specifics on one organization within SemGroup.

SemStream provoked furor several months ago when some residents' heating bills topped $500, according to previous reports. The company blamed rising oil prices, and said an elongated January billing cycle -- 39 days instead of 30 -- contributed.

The 39-day time-period broke ACC rules. SemStream at the time attributed the incident to employee illness. Mayes wrote in the letter that it "behooves the commission" to examine the breach.

A public meeting could be scheduled during the next month to further examine why SemStream went bankrupt and what the ramifications are.

"What the company is saying right now is that there are no short-term effects," Mayes said. While long-term effects are still unclear, Mayes said she wants to know whether the company will ask customers to help finance their bankruptcy.

"It's the company that went out and lost $3.2 billion," she said. "It should bear all burdens associated."

Ignon said the parent company will likely sell at least some of its subsidiaries. Mayes said ACC would oversee any future acquisitions.

And if winter falls with no propane in sight? "Someone will provide propane," Mayes said. "But I really don't think that's on the table."

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