Lawsuits Against Semgroup Mounting

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The stock market speculation that lost SemGroup L.P. at least $3.2 billion is not common, the Arizona Corporation Commission said Monday.

"Hedging is a normal activity within certain boundaries," said Commissioner Kris Mayes. "That large of a hedging position seems very unusual and in this case it had catastrophic consequences for the parent (company)," Mayes added.

"It clearly turned out to be a very dangerous move on their part."

SemGroup, parent company of SemStream, filed for bankruptcy on July 22 after failed bets on purchasing oil futures resulted in massive debt, according to court documents. SemStream provides 9,000 northern Gila County residents with propane.

The company bought futures on margin, allowing them to purchase commodities without paying the entire purchase price up front. As oil prices rose, the company needed more money to hedge its bets. In 2007, the company paid $1.7 billion to cover the margin -- 159 percent increase over 2006, according to court documents.

Stock for SemGroup Energy Partners, the public subsidiary of the private SemGroup, dropped by nearly 52 percent on July 17, the same day news of SemGroup's financial meltdown broke, Reuters reported.

Reuters also reported that some creditors suspected fraud.

The corporation commission and the federal Securities and Exchange Commission are investigating why the company didn't alert any regulating agencies concerning its risky investments.

Investors are wondering the same thing and the list of lawsuits is lengthening.

On Friday, Bank of America filed a lawsuit in Delaware, where SemGroup is incorporated, seeking $12.9 million plus interest from a $15 million loan acquired in 2006. The suit claims SemGroup co-founder and ex-Chief Executive Officer Thomas Kivisto, defaulted on a loan.

July 17, the day the company announced its financial difficulties, Kivisto began an "administrative leave of absence."

According to court documents, Kivisto also owned a trading company that owed SemGroup $290 million. The amount is included in the approximately $3.2 billion trading losses earlier announced.

Allegations swirled in Payson this past winter that SemStream was manipulating the price of propane. The Arizona Corporation Commission at the time said a full investigation would be necessary to determine if prices were manipulated, but concluded there was not sufficient evidence to undertake such a project.

Mayes said Monday that while re-examining the allegations was a possibility, "according to our staff, there's no existing evidence of it."

But, she added, "these are all issues we should look at with fresh eyes."

One issue Mayes does want to investigate is the extended January billing period. In January, bills covered 37 days instead of 30, which breached ACC rules.

"I disagree with our staff that we should leave that issue alone," Mayes said.

She said she asked Southwest Gas whether it would be willing to extend natural gas lines into Payson. Southwest is in the middle of a rate request and Mayes said rate cases offer prime opportunities to examine issues like expanding services.

At press time, Southwest Gas has not provided Mayes with an answer to the question.

In the next week or two, the commission will vote on scheduling a public meeting for SemGroup to begin answering questions. Mayes said she did not yet know where the meeting would be conducted, though a Payson location was possible.

She said her biggest question concerns why SemGroup did not inform the commission of its risky hedging.

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