SEMGROUP CORP, 10-Q filed on 11/7/2014
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2014
Oct. 31, 2014
Common Class A [Member]
Oct. 31, 2014
Class B
Document Type
10-Q 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Sep. 30, 2014 
 
 
Document Fiscal Period Focus
Q3 
 
 
Document Fiscal Year Focus
2014 
 
 
Entity Registrant Name
SemGroup Corp 
 
 
Entity Central Index Key
0001489136 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
43,491,466 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 67,049 
$ 79,351 
Restricted cash
7,254 
5,119 
Accounts receivable (net of allowance of $3,220 and $3,661, respectively)
414,109 
323,965 
Receivable from affiliates
38,179 
67,273 
Inventories
62,783 
44,295 
Other current assets
19,757 
14,011 
Total current assets
609,131 
534,014 
Property, plant and equipment (net of accumulated depreciation of $229,607 and $188,720, respectively)
1,239,356 
1,105,728 
Equity method investments
609,807 
565,124 
Goodwill
58,837 
62,021 
Other intangible assets (net of accumulated amortization of $22,510 and $12,655, respectively)
179,165 
174,838 
Other noncurrent assets, net
38,849 
28,889 
Total assets
2,735,145 
2,470,614 
Current liabilities:
 
 
Accounts payable
336,162 
254,467 
Payable to affiliates
30,498 
62,279 
Accrued liabilities
96,328 
83,429 
Payables to pre-petition creditors
3,135 
3,177 
Warrant liability
81,238 
58,134 
Deferred revenue
20,959 
25,538 
Other current liabilities
3,500 
12,153 
Current portion of long-term debt
40 
37 
Total current liabilities
571,860 
499,214 
Long-term debt
793,058 
615,088 
Deferred income taxes
153,513 
100,945 
Other noncurrent liabilities
45,504 
41,504 
Commitments and contingencies (Note 9)
   
   
SemGroup owners’ equity:
 
 
Common stock, $0.01 par value (authorized - 100,000 shares; issued - 43,136 and 42,898 shares, respectively)
427 
425 
Additional paid-in capital
1,184,982 
1,154,516 
Treasury stock, at cost (486 and 437 shares, respectively)
(1,332)
(613)
Accumulated deficit
(76,406)
(97,572)
Accumulated other comprehensive loss
(9,472)
(2,854)
Total SemGroup Corporation owners’ equity
1,098,199 
1,053,902 
Noncontrolling interests in consolidated subsidiaries
73,011 
159,961 
Total owners’ equity
1,171,210 
1,213,863 
Total liabilities and owners’ equity
$ 2,735,145 
$ 2,470,614 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 3,220 
$ 3,661 
Accumulated depreciation
229,607 
188,720 
Accumulated amortization
$ 22,510 
$ 12,655 
Common stock, $0.01 par value
$ 0.01 
$ 0.01 
Common stock shares authorized
100,000 
100,000 
Common stock shares issued
43,136 
42,898 
Treasury stock shares
486 
437 
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Revenues:
 
 
 
 
Product
$ 495,436 
$ 288,452 
$ 1,325,452 
$ 765,334 
Service
65,219 
36,402 
167,176 
95,737 
Other
33,580 
32,894 
82,714 
108,617 
Total revenues
594,235 
357,748 
1,575,342 
969,688 
Expenses:
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
458,063 
255,554 
1,211,703 
680,632 
Operating
69,377 
52,360 
179,579 
162,813 
General and administrative
23,296 
20,952 
63,882 
54,887 
Depreciation and amortization
25,200 
16,113 
70,899 
41,563 
Loss (gain) on disposal of long-lived assets, net
1,376 
408 
20,633 
(130)
Total expenses
577,312 
345,387 
1,546,696 
939,765 
Earnings from equity method investments
14,223 
7,483 
48,372 
39,689 
Gain on issuance of common units by equity method investee
18,772 
26,899 
Operating income
49,918 
19,844 
103,917 
69,612 
Other expenses (income), net:
 
 
 
 
Interest expense
14,807 
9,080 
34,394 
15,971 
Foreign currency transaction loss (gain)
128 
(457)
(388)
(973)
Other expense (income), net
(21,303)
4,671 
(3,388)
36,771 
Total other expense (income), net
(6,368)
13,294 
30,618 
51,769 
Income from continuing operations before income taxes
56,286 
6,550 
73,299 
17,843 
Income tax expense (benefit)
24,090 
3,413 
33,944 
(41,305)
Income from continuing operations
32,196 
3,137 
39,355 
59,148 
Income (loss) from discontinued operations, net of income taxes
(2)
(5)
65 
Net income
32,196 
3,135 
39,350 
59,213 
Less: net income attributable to noncontrolling interests
6,934 
5,054 
18,184 
14,429 
Net income (loss) attributable to SemGroup
25,262 
(1,919)
21,166 
44,784 
Other comprehensive income (loss), net of income taxes
(10,331)
6,105 
(6,618)
(4,307)
Comprehensive income
21,865 
9,240 
32,732 
54,906 
Less: comprehensive income attributable to noncontrolling interests
6,934 
5,054 
18,184 
14,429 
Comprehensive income attributable to SemGroup
$ 14,931 
$ 4,186 
$ 14,548 
$ 40,477 
Net income (loss) per common share (Note 11):
 
 
 
 
Basic
$ 0.59 
$ (0.05)
$ 0.50 
$ 1.06 
Diluted
$ 0.59 
$ (0.05)
$ 0.49 
$ 1.05 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Cash flows from operating activities:
 
 
Net income
$ 39,350 
$ 59,213 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Net unrealized gain related to derivative instruments
(656)
(1,759)
Depreciation and amortization
70,899 
41,563 
Loss (gain) on disposal of long-lived assets, net
20,633 
(107)
Earnings from equity method investments
(48,372)
(39,689)
Gain on issuance of common units by equity method investee
(26,899)
Gain on sale of common units of equity method investee
(26,748)
Distributions from equity investments
61,757 
39,714 
Amortization of debt issuance costs
2,580 
1,943 
Deferred tax expense (benefit)
25,193 
(49,448)
Non-cash equity compensation
6,480 
5,311 
Excess tax benefit from equity-based awards
(1,650)
Loss on fair value of warrants
23,499 
37,028 
Provision for uncollectible accounts receivable, net of recoveries
153 
(357)
Currency gain
(388)
(973)
Changes in operating assets and liabilities (Note 12)
(39,931)
4,080 
Net cash provided by operating activities
105,900 
96,519 
Cash flows from investing activities:
 
 
Capital expenditures
(194,227)
(131,650)
Proceeds from sale of long-lived assets
4,083 
1,048 
Contributions to equity method investments
(70,730)
(143,463)
Payments to acquire businesses
(44,508)
(356,201)
Proceeds from sale of common units of equity method investee
59,744 
Distributions in excess of equity in earnings of affiliates
6,565 
13,091 
Net cash used in investing activities
(239,073)
(617,175)
Cash flows from financing activities:
 
 
Debt issuance costs
(8,670)
(11,865)
Borrowings on credit facilities and issuance of senior unsecured notes
1,074,244 
928,474 
Principal payments on credit facilities and other obligations
(896,261)
(594,403)
Proceeds from issuance of Rose Rock Midstream, L.P. common units, net of offering costs
210,226 
Distributions to noncontrolling interests
(20,571)
(11,458)
Proceeds from warrant exercises
86 
225 
Repurchase of common stock for payment of statutory taxes due on equity-based compensation
(719)
(371)
Dividends paid
(31,149)
(16,387)
Proceeds from issuance of common stock under employee stock purchase plan
340 
Excess tax benefit from equity-based awards
1,650 
Intercompany borrowings (advances), net
Net cash provided by financing activities
118,950 
504,441 
Effect of exchange rate changes on cash and cash equivalents
1,921 
904 
Change in cash and cash equivalents
(12,302)
(15,311)
Cash and cash equivalents at beginning of period
79,351 
80,029 
Cash and cash equivalents at end of period
$ 67,049 
$ 64,718 
Overview
OVERVIEW
OVERVIEW
SemGroup Corporation is a Delaware corporation headquartered in Tulsa, Oklahoma. The terms "we," "our," "us," "SemGroup," "the Company" and similar language used in these notes to the unaudited condensed consolidated financial statements refer to SemGroup Corporation and its subsidiaries.
Basis of presentation
The accompanying condensed consolidated balance sheet at December 31, 2013, which is derived from audited financial statements, and the unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission ("SEC"). These financial statements include all normal and recurring adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of its operations and its cash flows.
Our condensed consolidated financial statements include the accounts of our controlled subsidiaries. All significant transactions between our consolidated subsidiaries have been eliminated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Although management believes these estimates are reasonable, actual results could differ materially from these estimates. The results of operations for the three months and nine months ended September 30, 2014, are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.
Pursuant to the rules and regulations of the SEC, the accompanying condensed consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States. Certain reclassifications have been made to conform previously reported balances to the current presentation. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2013, which are included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC.
Our significant accounting policies are consistent with those described in our Annual Report on Form 10-K for the year ended December 31, 2013.
Recent accounting pronouncements
In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity - a consensus of the FASB Emerging Issues Task Force," which indicates that the entire amount of a cumulative translation adjustment ("CTA") related to an entity's investment in a foreign entity should be released when there has been a:
sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity;
loss of a controlling financial interest in an investment in a foreign entity (i.e., the foreign entity is deconsolidated); or
step acquisition for a foreign entity (i.e., when an entity has changed from applying the equity method for an investment in a foreign entity to consolidating the foreign entity).
The ASU does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2013, and interim periods within those years. The Company adopted this guidance in the first quarter of 2014. The impact was not material.
In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which requires an unrecognized tax benefit to be classified as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2013, and interim periods within those years. The Company adopted this guidance in the first quarter of 2014. The impact was not material.
In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The Company will adopt this guidance in the first quarter of 2015. The impact is not expected to be material.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers", which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.
Rose Rock Midstream, L.P.
ROSE ROCK MIDSTREAM, L.P.
ROSE ROCK MIDSTREAM, L.P.
We control the operations of our consolidated subsidiary, Rose Rock Midstream, L.P. ("Rose Rock"), through our ownership of the general partner interest. As of September 30, 2014, we own the 2% general partner interest and a 56.8% limited partner interest made up of 6.8 million common units, 8.4 million subordinated units and 3.75 million Class A units.
On June 23, 2014, we contributed the remaining 33% interest in SemCrude Pipeline, L.L.C. ("SCPL") to Rose Rock for (i) cash of approximately $114.4 million, (ii) the issuance of 2.425 million common units, (iii) the issuance of 1.25 million Class A units, and (iv) an increase of the capital account of the general partner and a related issuance of general partner interest, to allow the general partner to maintain its 2% general partner interest. Subsequent to this transaction, Rose Rock owns 100% of SCPL, which owns a 51% membership interest in White Cliffs Pipeline, L.L.C. ("White Cliffs").
The Class A units are not entitled to receive any distribution of available cash (other than upon liquidation) prior to the first day of the month immediately following the first month for which the average daily throughput volumes on the White Cliffs Pipeline for such month are 125,000 barrels per day or greater. Upon such date, the Class A units will automatically convert into common units.
As the transaction was between entities under common control, Rose Rock recorded its investment in SCPL based on SemGroup's historical cost. The purchase price in excess of historical cost was treated as an equity transaction with SemGroup, which reduced the partners' capital accounts of Rose Rock's general and limited partners on a pro-rata basis.
We receive distributions from Rose Rock on our common and subordinated units, our 2% general partner interest and incentive distribution rights. Rose Rock intends to pay a minimum quarterly distribution of $0.3625 per unit, to the extent it has sufficient available cash, as defined in Rose Rock’s partnership agreement.  
The following table shows the cash distributions paid or declared during 2014 and 2013 (in thousands, except for per unit amounts):
 
Distribution
Per Unit
 
Distributions Paid/To Be Paid
Quarter Ended
SemGroup
Noncontrolling
Interest
Common Units
Total
Distributions
General
Partner
Incentive
Distributions
Common
Units
Subordinated
Units
December 31, 2012
$
0.4025

 
$
167

$

$
1,163

$
3,377

$
3,624

$
8,331

March 31, 2013
$
0.4300

 
$
179

$
41

$
1,242

$
3,607

$
3,872

$
8,941

June 30, 2013
$
0.4400


$
183

$
72

$
1,271

$
3,692

$
3,962

$
9,180

September 30, 2013
$
0.4500

 
$
232

$
127

$
1,301

$
3,775

$
6,189

$
11,624

December 31, 2013
$
0.4650

 
$
257

$
244

$
2,041

$
3,901

$
6,398

$
12,841

March 31, 2014
$
0.4950


$
278

$
488

$
2,173

$
4,153

$
6,811

$
13,903

June 30, 2014
$
0.5350

 
$
334

$
888

$
3,646

$
4,488

$
7,362

$
16,718

September 30, 2014
$
0.5750

*
$
377

$
1,835

$
3,918

$
4,824

$
7,912

$
18,866


*Expected distributions related to the quarter ended September 30, 2014, which will be paid on November 14, 2014 to unitholders of record as of November 4, 2014.

Certain summarized balance sheet information of Rose Rock is shown below (in thousands):
 
(Unaudited)
 
 
 
September 30,
2014
 
December 31,
2013
Cash
$
8,582

 
$
15,459

Other current assets
381,072

 
306,128

Property, plant and equipment, net
332,902

 
311,616

Equity method investment
273,201

 
224,095

Goodwill
36,116

 
28,322

Other noncurrent assets, net
33,438

 
11,627

Total assets
$
1,065,311

 
$
897,247

 
 
 
 
Current liabilities
$
338,923

 
$
293,031

Long-term debt
473,058

 
245,088

Partners’ capital attributable to SemGroup
180,319

 
120,610

Partners’ capital attributable to noncontrolling interests
73,011

 
159,961

Noncontrolling interests in consolidated subsidiary retained by SemGroup

 
78,557

Total liabilities and equity
$
1,065,311

 
$
897,247


Certain summarized income statement information of Rose Rock for the three months and nine months ended September 30, 2014 and 2013 is shown below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
374,945

 
$
181,831

 
$
956,300

 
$
514,485

Cost of products sold
$
333,646

 
$
157,550

 
$
843,928

 
$
446,507

Operating, general and administrative expenses
$
25,903

 
$
12,394

 
$
67,412

 
$
30,434

Depreciation and amortization expense
$
7,418

 
$
4,130

 
$
24,219

 
$
11,327

Earnings from equity method investment
$
16,289

 
$
3,527

 
$
39,660

 
$
10,431

Net income
$
16,493

 
$
9,411

 
$
47,782

 
$
30,539

Noncontrolling interests in consolidated subsidiary retained by SemGroup
$

 
$

 
$
7,758

 
$

Net income attributable to Rose Rock Midstream, L.P.
$
16,493

 
$
9,411

 
$
40,024

 
$
30,539

Equity Method Investments
EQUITY METHOD INVESTMENTS

Our investments in affiliates over which we have significant influence, but for which we do not control the operating decisions of the investee, are accounted for under the equity method. Under the equity method, we do not report the individual assets and liabilities of our investees on our condensed consolidated balance sheets. Instead, our ownership interest is reflected in one line as a noncurrent asset on our condensed consolidated balance sheets. Our equity method investments consist of the following (in thousands):
 
September 30, 2014
 
December 31, 2013
White Cliffs
$
273,201

 
$
224,095

NGL Energy Partners LP
189,366

 
208,848

Glass Mountain Pipeline, LLC
147,240

 
132,181

Total equity method investments
$
609,807

 
$
565,124


    
Under the equity method, we do not report the individual revenues and expenses of our investees in our condensed consolidated statements of operations and comprehensive income. Instead, our interest in the earnings of our investees is reflected in one line item on our condensed consolidated statements of operations and comprehensive income. Our earnings from equity method investments consist of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
White Cliffs
$
16,289

 
$
10,786

 
$
39,660

 
$
31,886

NGL Energy Partners LP*
(4,482
)
 
(3,288
)
 
4,077

 
7,828

Glass Mountain Pipeline, LLC
2,416

 
(15
)
 
4,635

 
(25
)
Total earnings from equity method investments
$
14,223

 
$
7,483

 
$
48,372

 
$
39,689


* Excluding gain on issuance of common units of $18.8 million and $26.9 million for the three months and nine months ended September 30, 2014, respectively.
Cash distributions received from equity method investments consist of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
White Cliffs
$
17,029

 
$
12,755

 
$
45,081

 
$
39,436

NGL Energy Partners LP
6,450

 
4,671

 
17,462

 
13,369

Glass Mountain Pipeline, LLC
2,842

 

 
5,779

 

Total cash distributions received from equity method investments
$
26,321

 
$
17,426

 
$
68,322

 
$
52,805


White Cliffs
We account for our 51% ownership of White Cliffs under the equity method, as the other owners have substantive rights to participate in its management.
In August 2014, White Cliffs completed an expansion project adding a 12" pipeline from Platteville, Colorado to Cushing, Oklahoma. For the three months and nine months ended September 30, 2014, we contributed $2.3 million and $53.3 million to White Cliffs, respectively. This expansion increased White Cliffs’ capacity to about 150,000 barrels per day and became fully operational in the third quarter of 2014.
Certain unaudited summarized income statement information of White Cliffs for the three months and nine months ended September 30, 2014 and 2013 is shown below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
42,211

 
$
31,453

 
$
110,018

 
$
92,238

Operating, general and administrative expenses
$
4,055

 
$
5,141

 
$
16,362

 
$
14,433

Depreciation and amortization expense
$
5,807

 
$
4,720

 
$
14,737

 
$
14,150

Net income
$
32,349

 
$
21,579

 
$
78,919

 
$
63,642


The equity in earnings of White Cliffs for the three months and nine months ended September 30, 2014 and 2013 is less than 51% of the net income of White Cliffs for the same periods. This is due to certain general and administrative expenses we incur in managing the operations of White Cliffs that the other owners are not obligated to share. Such expenses are recorded by White Cliffs and are allocated to our ownership interest. White Cliffs recorded $0.4 million and $0.5 million of such general and administrative expense for the three months ended September 30, 2014 and 2013, respectively, and $1.2 million and $1.2 million for the nine months ended September 30, 2014 and 2013, respectively.
NGL Energy Partners LP
At September 30, 2014, we owned 7,652,568 common units representing limited partner interests in NGL Energy Partners LP (NYSE: NGL) ("NGL Energy"), which represents approximately 8.8% of the total 87,347,267 limited partner units of NGL Energy outstanding at June 30, 2014, and an 11.78% interest in the general partner of NGL Energy.
At September 30, 2014, the fair market value of our 7,652,568 common unit investment in NGL Energy was $301.3 million, based on a September 30, 2014 closing price of $39.37 per common unit. This does not reflect our 11.78% interest in the general partner of NGL Energy. The fair value of our limited partner investment in NGL Energy is categorized as a Level 1 measurement, as it is based on quoted market prices.
Our policy is to record our equity in earnings of NGL Energy on a one-quarter lag, as we do not expect information on the earnings of NGL Energy to always be available in time to consistently record the earnings in the quarter in which they are generated. Accordingly, the equity in earnings from NGL Energy, which is reflected in our condensed consolidated statements of operations and comprehensive income for the three months and nine months ended September 30, 2014 and 2013, relates to the earnings of NGL Energy for the three months and nine months ended June 30, 2014 and 2013, respectively.
Our limited partnership interest was diluted as a result of the issuance of NGL common units in a private placement in connection with the completion of an acquisition and the issuance of common units in an underwritten public offering. Accordingly, we recorded non-cash gains of $18.8 million and $26.9 million for the three months and nine months ended September 30, 2014, respectively, which are included in "Gain on issuance of common units by equity method investee" in our condensed consolidated statement of operations and comprehensive income.
In the third quarter of 2014, we sold 1,480,841 of our NGL Energy common units for $59.7 million, net of related costs of $2.8 million. We recorded a net gain of approximately $26.7 million in the third quarter of 2014 in Other expense (income) in our condensed consolidated statement of operations and comprehensive income.
On October 27, 2014, we agreed to terminate our right to appoint two representatives to the Board of Directors of NGL Energy Holdings LLC, the general partner of NGL Energy, and our current representatives resigned. We expect to subsequently cease accounting for our investment in NGL Energy under the equity method.
Certain unaudited summarized income statement information of NGL Energy for the three months and nine months ended June 30, 2014 and 2013 is shown below (in thousands):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
3,648,614

 
$
1,385,957

 
$
10,367,994

 
$
4,341,778

Cost of sales
$
3,534,053

 
$
1,303,076

 
$
9,874,826

 
$
3,989,511

Operating, general and administrative expenses
$
95,741

 
$
67,499

 
$
297,417

 
$
206,824

Depreciation and amortization expense
$
39,375

 
$
22,724

 
$
112,344

 
$
68,989

Net income (loss)
$
(39,910
)
 
$
(17,508
)
 
$
27,288

 
$
45,310

 
Glass Mountain Pipeline, LLC
We hold a 50% interest in Glass Mountain Pipeline, LLC ("GMP" or "Glass Mountain") which began operations of its pipeline ("the Glass Mountain Pipeline") in the first quarter of 2014. The owner of the remaining 50%, a subsidiary of NGL Energy, is a related party (Note 13). We account for our investment in GMP using the equity method. As of September 30, 2014, we have invested $147.7 million in GMP including our capital contributions, amounts paid to increase our ownership percentage and capitalized interest. We invested $16.2 million in GMP for the nine months ended September 30, 2014.
The equity in earnings of GMP for the three months and nine months ended September 30, 2014 reported in our condensed consolidated statement of operations and comprehensive income is less than 50% of the net income of GMP for the same period due to amortization of capitalized interest for the period.
Certain unaudited summarized income statement information of GMP for the three months and nine months ended September 30, 2014 is shown below (in thousands):
 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
Revenue
$
8,708

 
$
21,452

Operating, general and administrative expenses
$
23

 
$
2,031

Depreciation and amortization expense
$
3,745

 
$
9,863

Net income
$
4,939

 
$
9,554

Segments
SEGMENTS
SEGMENTS
Our businesses are organized based on the nature and location of the services they provide. Certain summarized information related to our reportable segments is shown in the tables below. None of the operating segments have been aggregated, other than White Cliffs and Glass Mountain, which have been included within the Crude segment. Our investment in NGL Energy is included within the SemStream segment. Although "Corporate and Other" does not represent an operating segment, it is included in the tables below to reconcile segment information to that of the consolidated Company. Eliminations of transactions between segments are also included within "Corporate and Other" in the tables below.
The accounting policies of each segment are the same as the accounting policies of the consolidated Company. Transactions between segments are generally recorded based on prices negotiated between the segments. Certain general and administrative and interest expenses incurred at the corporate level are allocated to the segments, based on our allocation policies in effect at the time.

 
Three Months Ended September 30, 2014
 
Crude

SemStream

SemCAMS

SemGas

SemLogistics

SemMexico

Corporate
and Other

Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
376,856

 
$

 
$
53,800

 
$
87,103

 
$
1,299

 
$
75,177

 
$

 
$
594,235

Intersegment

 

 

 
9,726

 

 

 
(9,726
)
 

Total revenues
376,856

 

 
53,800

 
96,829

 
1,299

 
75,177

 
(9,726
)
 
594,235

Expenses:
 
 

 

 

 

 

 

 
 
Costs of products sold, exclusive of depreciation and amortization shown below
333,646

 

 
97

 
68,722

 

 
65,324

 
(9,726
)
 
458,063

Operating
22,057

 

 
33,537

 
8,965

 
2,148

 
2,670

 

 
69,377

General and administrative
4,696

 
30

 
3,836

 
2,312

 
1,595

 
2,928

 
7,899

 
23,296

Depreciation and amortization
8,395

 

 
5,113

 
7,064

 
2,543

 
1,655

 
430

 
25,200

Loss (gain) on disposal of long-lived assets, net
291

 

 
(35
)
 
(12
)
 
1,139

 
(7
)
 

 
1,376

Total expenses
369,085

 
30


42,548


87,051


7,425


72,570


(1,397
)

577,312

Earnings (losses) from equity method investments
18,705

 
(4,482
)
 

 

 

 

 

 
14,223

Gain on issuance of common units by equity method investee

 
18,772

 

 

 

 

 

 
18,772

Operating income (loss)
26,476

 
14,260


11,252


9,778


(6,126
)

2,607


(8,329
)

49,918

Other expenses (income), net
10,526

 
(28,041
)
 
3,920

 
2,330

 
969

 
31

 
3,897

 
(6,368
)
Income (loss) from continuing operations before income taxes
$
15,950

 
$
42,301

 
$
7,332

 
$
7,448

 
$
(7,095
)
 
$
2,576

 
$
(12,226
)

$
56,286

Total assets at September 30, 2014 (excluding intersegment receivables)
$
1,273,444

 
$
189,366

 
$
314,427

 
$
625,824

 
$
159,066

 
$
108,457

 
$
64,561

 
$
2,735,145



 
Three Months Ended September 30, 2013
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
181,831

 
$

 
$
48,979

 
$
59,220

 
$
2,169

 
$
65,549

 
$

 
$
357,748

Intersegment

 

 

 
6,575

 

 

 
(6,575
)
 

Total revenues
181,831

 


48,979


65,795


2,169


65,549


(6,575
)
 
357,748

Expenses:
 
 
 
 

 

 

 

 

 

Costs of products sold, exclusive of depreciation and amortization shown below
157,550

 

 
106

 
48,403

 

 
56,070

 
(6,575
)
 
255,554

Operating
9,098

 

 
33,980

 
5,436

 
1,616

 
2,230

 

 
52,360

General and administrative
3,360

 
114

 
3,446

 
1,923

 
1,679

 
2,510

 
7,920

 
20,952

Depreciation and amortization
4,130

 

 
2,631

 
4,992

 
2,334

 
1,529

 
497

 
16,113

Loss (gain) on disposal of long-lived assets, net

 

 

 
679

 

 
(271
)
 

 
408

Total expenses
174,138

 
114


40,163


61,433


5,629


62,068


1,842

 
345,387

Earnings (losses) from equity method investments
10,771

 
(3,288
)
 

 

 

 

 

 
7,483

Operating income (loss)
18,464

 
(3,402
)

8,816


4,362


(3,460
)

3,481


(8,417
)
 
19,844

Other expenses (income), net
3,634

 
(1,238
)
 
4,720

 
880

 
(217
)
 
(21
)
 
5,536

 
13,294

Income (loss) from continuing operations before income taxes
$
14,830

 
$
(2,164
)

$
4,096


$
3,482


$
(3,243
)

$
3,502


$
(13,953
)
 
$
6,550

 
Nine Months Ended September 30, 2014
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
961,526

 
$

 
$
133,037

 
$
260,951

 
$
10,070

 
$
209,758

 
$

 
$
1,575,342

Intersegment

 

 

 
29,410

 

 

 
(29,410
)
 

Total revenues
961,526

 

 
133,037

 
290,361

 
10,070

 
209,758

 
(29,410
)
 
1,575,342

Expenses:
 
 
 
 

 

 
 
 

 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
843,928

 

 
235

 
215,535

 
615

 
180,800

 
(29,410
)
 
1,211,703

Operating
54,885

 

 
86,039

 
24,421

 
6,168

 
8,066

 

 
179,579

General and administrative
15,076

 
91

 
11,390

 
6,524

 
4,546

 
8,791

 
17,464

 
63,882

Depreciation and amortization
27,153

 

 
11,021

 
19,312

 
7,593

 
4,538

 
1,282

 
70,899

Loss (gain) on disposal of long-lived assets, net
230

 

 
(950
)
 
20,092

 
(2,495
)
 
(35
)
 
3,791

 
20,633

Total expenses
941,272

 
91

 
107,735

 
285,884

 
16,427

 
202,160

 
(6,873
)
 
1,546,696

Earnings from equity method investments
44,295

 
4,077

 

 

 

 

 

 
48,372

Gain on issuance of common units by equity method investee

 
26,899

 

 

 

 

 

 
26,899

Operating income (loss)
64,549

 
30,885


25,302


4,477


(6,357
)

7,598


(22,537
)
 
103,917

Other expenses (income), net
20,367

 
(30,582
)
 
11,825

 
6,032

 
1,303

 
(70
)
 
21,743

 
30,618

Income (loss) from continuing operations before income taxes
$
44,182

 
$
61,467

 
$
13,477

 
$
(1,555
)
 
$
(7,660
)
 
$
7,668

 
$
(44,280
)
 
$
73,299

 
Nine Months Ended September 30, 2013
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
514,485

 
$

 
$
151,219

 
$
135,782

 
$
7,827

 
$
160,375

 
$

 
$
969,688

Intersegment

 

 

 
15,678

 

 

 
(15,678
)
 

Total revenues
514,485

 

 
151,219

 
151,460

 
7,827

 
160,375

 
(15,678
)
 
969,688

Expenses:
 
 
 
 

 

 
 
 

 

 
 
Costs of products sold, exclusive of depreciation and amortization shown below
446,507

 

 
290

 
111,141

 

 
138,372

 
(15,678
)
 
680,632

Operating
20,527

 
1

 
116,372

 
13,869

 
5,303

 
6,741

 

 
162,813

General and administrative
10,778

 
430

 
10,933

 
5,112

 
4,285

 
7,175

 
16,174

 
54,887

Depreciation and amortization
11,327

 

 
7,925

 
9,353

 
6,987

 
4,467

 
1,504

 
41,563

Loss (gain) on disposal of long-lived assets, net
(25
)
 
6

 

 
673

 

 
(784
)
 

 
(130
)
Total expenses
489,114

 
437

 
135,520

 
140,148

 
16,575

 
155,971

 
2,000

 
939,765

Earnings from equity method investments
31,861

 
7,828

 

 

 

 

 

 
39,689

Operating income (loss)
57,232

 
7,391

 
15,699

 
11,312

 
(8,748
)
 
4,404

 
(17,678
)
 
69,612

Other expenses (income), net
10,925

 
(3,399
)
 
14,179

 
2,149

 
896

 
(339
)
 
27,358

 
51,769

Income (loss) from continuing operations before income taxes
$
46,307

 
$
10,790

 
$
1,520

 
$
9,163

 
$
(9,644
)
 
$
4,743

 
$
(45,036
)
 
$
17,843

Inventories
Inventories
INVENTORIES
Inventories consist of the following (in thousands):
 
September 30,
2014
 
December 31,
2013
Crude oil
$
48,987

 
$
30,779

Asphalt and other
13,796

 
13,516

Total inventories
$
62,783

 
$
44,295

Financial Instruments
FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS
Fair value of financial instruments
We record certain financial assets and liabilities at fair value at each balance sheet date. The tables below summarize the balances of commodity derivative assets and liabilities at September 30, 2014 and December 31, 2013 (in thousands):

 
September 30, 2014
 
December 31, 2013
 Derivatives subject to netting arrangements:
Level 1
 
Netting*
 
Total
 
Level 1
 
Netting*
 
Total
Commodity derivatives:
 
 
 
 

 
 
 
 
 

Assets
$
621

 
$
(24
)
 
$
597

 
$
36

 
$
(36
)
 
$

Liabilities
$
24

 
$
(24
)
 
$

 
$
96

 
$
(36
)
 
$
60

*Relates primarily to exchange traded futures. Gain and loss positions on multiple contracts are settled net on a daily basis with the exchange.
"Level 1" measurements are based on inputs consisting of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. These include commodity futures contracts that are traded on an exchange. The valuation of our common stock warrants (Note 10) which are traded on the New York Stock Exchange are also classified as Level 1.
"Level 2" measurements are based on inputs consisting of market observable and corroborated prices for similar derivative contracts. Assets and liabilities classified as Level 2 include over the counter ("OTC") traded physical fixed priced purchases and sales forward contracts.
"Level 3" measurements are based on inputs from a pricing service and/or internal valuation models incorporating observable and unobservable market data. These include commodity derivatives, such as forwards and swaps for which there is not a highly liquid market and therefore are not included in Level 2 above.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value levels. At September 30, 2014, all of our physical fixed price forward purchases and sales contracts were being accounted for as normal purchases and normal sales.
There were no financial assets or liabilities classified as Level 2 or Level 3 during the three months and nine months ended September 30, 2014 and 2013, as such no rollforward of activity has been presented.
Commodity derivative contracts
Our consolidated results of operations and cash flows are impacted by changes in market prices for petroleum products. This exposure to commodity price risk is managed, in part, by entering into various commodity derivatives.
We seek to manage the price risk associated with our marketing operations by limiting our net open positions through (i) the concurrent purchase and sale of like quantities of petroleum products to create back-to-back transactions that are intended to lock in positive margins based on the timing, location or quality of the petroleum products purchased and delivered or (ii) derivative contracts. Our storage and transportation assets can also be used to mitigate location and time basis risk. All marketing activities are subject to our Comprehensive Risk Management Policy, which establishes limits in order to manage risk and mitigate financial exposure.
Our commodity derivatives can be comprised of swaps, futures contracts and forward contracts of crude oil and natural gas liquids. These are defined as follows:
Swaps – OTC transactions where a floating price, basis or index is exchanged for a fixed (or a different floating) price, basis or index at a preset schedule in the future, according to an agreed-upon formula.
Futures contracts – Exchange traded contracts to buy or sell a commodity. These contracts are standardized by the exchange in terms of quality, quantity, delivery period and location for each commodity.
Forward contracts – OTC contracts to buy or sell a commodity at an agreed upon future date. The buyer and seller agree on specific terms (price, quantity, delivery period and location) and conditions at the inception of the contract.
The following table sets forth the notional quantities for commodity derivative instruments entered into (in thousands of barrels):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Sales
1,525

 
695

 
3,475

 
2,025

Purchases
1,313

 
805

 
3,128

 
2,095


We have not designated any of our commodity derivative instruments as accounting hedges. We have recorded the fair value of our commodity derivative instruments on our condensed consolidated balance sheets in other current assets and other current liabilities in the following amounts (in thousands):
 
September 30, 2014
 
December 31, 2013
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
$
597

 
$

 
$

 
$
60


We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. Our margin deposit balances were $3.0 million and $0.8 million at September 30, 2014 and December 31, 2013, respectively. These margin account balances have not been offset against our net commodity derivative instrument (contract) positions. Had these margin deposits been netted against our net commodity derivative instrument (contract) positions as of September 30, 2014 and December 31, 2013, we would have had net asset positions of $3.6 million and $0.8 million, respectively.
Realized and unrealized gains (losses) from our commodity derivatives were recorded to product revenue in the following amounts (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Commodity contracts
$
4,047

 
$
(1,652
)
 
$
1,298

 
$
(2,430
)

Warrants
In addition to the commodity derivatives above, we have $81.2 million and $58.1 million of derivative liabilities related to common stock warrants at September 30, 2014 and December 31, 2013, which are not subject to netting arrangements. The warrants were issued upon emergence from bankruptcy and are recorded at fair value as current liabilities on the condensed consolidated balance sheets, with changes in the fair value recorded to other expense (income). The warrants expire on November 30, 2014. See Note 10 for additional information.
Concentrations of risk
During the three months ended September 30, 2014, one customer of our Crude segment accounted for more than 10% of our consolidated revenue at approximately 38%. We purchased approximately $121 million of product from one third-party supplier of our Crude segment, which represented approximately 26% of our costs of products sold.
During the nine months ended September 30, 2014, one customer of our Crude segment accounted for more than 10% of our consolidated revenue at approximately 36%. We purchased approximately $310 million of product from one third-party supplier of our Crude segment, which represented approximately 26% of our costs of products sold.
At September 30, 2014, one third-party customer of our Crude segment accounted for approximately 26% of our consolidated accounts receivable.
Income Taxes
INCOME TAXES
INCOME TAXES

The effective tax rate was 43% and 52% for the three months ended September 30, 2014 and 2013, respectively, and 46% and (231)% for the nine months ended September 30, 2014 and 2013, respectively. The rate for the three months ended September 30, 2014 is impacted by the disallowance of an intercompany foreign gain on subsidiary dissolution. The rate for the nine months ended September 30, 2014 is impacted by disallowance of a foreign loss on cross jurisdictional intercompany debt waivers which had no net impact to U.S. taxes, by the net favorable resolution of Canadian income tax audits for periods through December 2009 and by $3.1 million Canadian withholding tax paid on remittances to the U.S. The rate for the nine months ended September 30, 2013 is impacted by a discrete tax benefit of $50.9 million for the partial release of our valuation allowance which was recorded for the three months ended March 31, 2013. Significant items that impacted the effective tax rate for each period, as compared to the U.S. federal statutory rate of 35%, include earnings in foreign jurisdictions taxed at lower rates, a noncontrolling interest in Rose Rock for which taxes are not provided, warrant expense which is not deductible for tax purposes, and the impact of the valuation allowance or release recorded against our deferred tax assets. Further, the foreign earnings are taxed in foreign jurisdictions as well as in the U.S., since they are disregarded entities for U.S. federal income tax purposes. Deferred tax liabilities, with the exception of those related to certain long-lived assets, have been considered as a source of future taxable income in establishing the amount of the valuation allowance. These combined factors, and the magnitude of permanent items impacting the tax rate relative to income from continuing operations before income taxes, result in rates that are not comparable between the periods.

Due to our emergence from bankruptcy and overall restructuring, we recorded a full valuation allowance on all U.S. federal and state deferred tax assets in all periods prior to March 31, 2013. Deferred tax assets are reduced by a valuation allowance when a determination is made that it is more likely than not that some, or all, of the deferred tax assets will not be realized based on the weight of all available evidence. Evidence which is objectively verifiable carries a higher weight in the analysis. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income of the appropriate character within the carryback and carryforward period available under the tax law. Sources of taxable income include future reversals of existing taxable temporary differences, future earnings and available tax planning strategies.

The nine months ended September 30, 2013 includes a discrete tax benefit of $50.9 million for the partial release of our valuation allowance which was recorded for the three months ended March 31, 2013. Gain recognition, for tax purposes, on the contribution of a 33% interest in SCPL to Rose Rock had a material impact to the available positive and objectively verifiable evidence for that quarter and, combined with other factors, resulted in the change in our assessment of recoverability of the deferred tax assets. Under ASC 740, "Income Taxes", such evidence was not considered in the valuation allowance at December 31, 2012, due to fundamentals of the transaction which remained subject to market influence until closed. We did not release the valuation allowance attributable to a small portion of our state net operating loss carryovers which have shorter carryover periods. We have not released the valuation allowance on the foreign tax credits due to the foreign tax credit limitation and the relative subjectivity of forecasts of the relational magnitude of U.S. and foreign taxable income in future periods, as well as the shorter carryover period available for the credits.

We have determined that no accruals related to uncertainty in tax positions are required. All income tax years of the Company ending after the emergence from bankruptcy remain open for examination in all jurisdictions. In foreign jurisdictions, all tax years within the relevant statute of limitations for periods prior to the emergence from bankruptcy remain open for examination. Currently, there are no examinations in progress for our federal, state or foreign jurisdictions.
Long-Term Debt
Long-Term Debt
LONG-TERM DEBT
Our long-term debt consisted of the following (in thousands):
 
September 30,
2014
 
December 31,
2013
SemGroup 7.50% senior unsecured notes
$
300,000

 
$
300,000

SemGroup corporate revolving credit facility
20,000

 
70,000

Rose Rock 5.625% senior unsecured notes
400,000

 

Rose Rock revolving credit facility
73,000

 
245,000

SemMexico revolving credit facility

 

Capital leases
98

 
125

Total long-term debt
$
793,098

 
$
615,125

less: current portion of long-term debt
40

 
37

Noncurrent portion of long-term debt
$
793,058

 
$
615,088


SemGroup senior unsecured notes
For the three months and nine months ended September 30, 2014, we incurred $5.8 million and $17.5 million, respectively, of interest expense related to the 7.5% senior unsecured notes (the "Notes") including the amortization of debt issuance costs. For the three months and nine months ended September 30, 2013, we incurred $6.0 million and $7.1 million, respectively, of interest expense related to the Notes including amortization of debt issuance costs. At September 30, 2014, we had $5.6 million of unamortized debt issuance costs related to the Notes included in other noncurrent assets on our condensed consolidated balance sheet.
At September 30, 2014, we were in compliance with the terms of the Notes.
SemGroup corporate revolving credit facility
Our revolving credit facility has a capacity of $500 million. This capacity may be used either for cash borrowings or letters of credit, although the maximum letter of credit capacity is $250 million. At September 30, 2014, we had $20.0 million outstanding cash borrowings on this facility and outstanding letters of credit of $3.9 million.
At September 30, 2014, the interest rate in effect was 4.25% on $10.0 million of alternate base rate ("ABR") borrowings and 2.23% on $10.0 million of Eurodollar rate borrowings. At September 30, 2014, the rate in effect on letters of credit was 2.0%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit.
At September 30, 2014, $5.3 million in capitalized loan fees, net of accumulated amortization, was recorded in other noncurrent assets, which is being amortized over the life of the facility.
We recorded interest expense related to the SemGroup revolving credit facility of $1.2 million and $2.3 million for the three months ended September 30, 2014 and 2013, respectively, including amortization of debt issuance costs. We recorded interest expense related to the SemGroup revolving credit facility of $4.9 million and $5.0 million for the nine months ended September 30, 2014 and 2013, respectively, including amortization of debt issuance costs.
At September 30, 2014, we were in compliance with the terms of the credit agreement.
The credit agreement is guaranteed by all of our material domestic subsidiaries (except for Rose Rock Midstream, L.P. and its general partner and subsidiaries) and secured by a lien on substantially all of our property and assets, subject to customary exceptions.
Rose Rock senior unsecured notes
On July 2, 2014, Rose Rock and its wholly-owned subsidiary, Rose Rock Finance Corporation ("Finance Corp."), as co-issuer, sold $400 million of 5.625% senior unsecured notes due 2022 (the "Rose Rock Notes") to certain initial purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and to non-U.S. persons outside the United States pursuant to Regulation S of the Securities Act. The Rose Rock Notes are guaranteed by all of Rose Rock's existing subsidiaries other than Finance Corp.
The net proceeds from the offering of $391.9 million, after underwriters' fees and offering expenses, were used to repay amounts borrowed under Rose Rock's revolving credit facility and for general partnership purposes.
The Rose Rock Notes are governed by an indenture between Rose Rock, its subsidiary guarantors, Finance Corp. and Wilmington Trust, National Association, as trustee (the "Rose Rock Indenture"). The Rose Rock Indenture includes customary covenants, including limitations on Rose Rock's ability to incur additional indebtedness or issue certain preferred shares; pay dividends and make certain distributions, investments and other restricted payments; create certain liens; sell assets; enter into transactions with affiliates; merge, consolidate, sell or otherwise dispose of all or substantially all of its assets; and designate its subsidiaries as unrestricted under the Rose Rock Indenture.
The Rose Rock Indenture includes customary events of default. A default would permit the trustee or holders of at least 25% in aggregate principal amounts of the Rose Rock Notes then outstanding to declare all amounts owing under the Rose Rock Notes to be due and payable.
The Rose Rock Notes are effectively subordinated in right of payment to any of Rose Rock's, and the subsidiary guarantors', existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness.
Rose Rock may issue additional Rose Rock Notes under the Rose Rock Indenture from time to time, subject to the terms of the Rose Rock Indenture.
Except as described below, the Rose Rock Notes are not redeemable at Rose Rock's option prior to July 15, 2017. From and after July 15, 2017, Rose Rock may redeem the Rose Rock Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if redeemed during the twelve-month period beginning on July 15 of each of the years indicated below:
Year
 
Percentage
2017
 
104.219%
2018
 
102.813%
2019
 
101.406%
2020 and thereafter
 
100.000%

Prior to July 15, 2017, Rose Rock may, at its option, on one or more occasions, redeem up to 35% of the sum of the original aggregate principal amount of the Rose Rock Notes at a redemption price equal to 105.625% of the aggregate principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings of Rose Rock, or the parent of Rose Rock to the extent such net proceeds are contributed to Rose Rock, subject to certain conditions.
Prior to July 15, 2017, Rose Rock may also redeem all or part of the Rose Rock Notes at a price equal to the principal plus a premium equal to the greater of 1% of the principal or the excess of the present value of the July 15, 2017 redemption price from the table above plus all required interest payments due through July 15, 2017, computed using a discount rate based on a published United States Treasury Rate plus 50 basis points, over the principal value of such Note.
In the event of a change of control, Rose Rock is required to offer to repurchase the Rose Rock Notes at an amount equal to 101% of the principal plus accrued and unpaid interest.
In accordance with a Registration Rights Agreement, in September 2014 Rose Rock filed a registration statement with the SEC, which was declared effective by the SEC on September 23, 2014, enabling holders of the Rose Rock Notes to exchange the Rose Rock Notes and related guarantees for registered notes (the "Exchange Notes") and guarantees that have substantially identical terms as the Rose Rock Notes and related guarantees. The exchange offer expired on October 22, 2014. All of the Notes were exchanged. The guarantees of the Exchange Notes are full and unconditional and constitute the joint and several obligations of Rose Rock and its subsidiary guarantors.
Interest on the Rose Rock Notes is payable in arrears on January 15th and July 15th to holders of record on January 1st and July 1st each year until maturity. For the three months and nine months ended September 30, 2014, we incurred $5.8 million of interest expense related to the Rose Rock Notes including amortization of debt issuance costs. At September 30, 2014, we had $8.3 million of unamortized debt issuance costs related to the Rose Rock Notes included in other noncurrent assets on our consolidated balance sheet.
At September 30, 2014, we were in compliance with the terms of the Rose Rock Indenture.
Rose Rock revolving credit facility
Our Rose Rock credit facility has a capacity of $585 million including a $150 million sub-limit for letters of credit. At September 30, 2014, there was $73.0 million outstanding cash borrowings under the Rose Rock revolving credit facility, of which $18.0 million incurred interest at the ABR plus an applicable margin and $55.0 million incurred interest at the Eurodollar rate plus an applicable margin. At September 30, 2014, the interest rate in effect was 4.75% on ABR borrowings and 2.74% on Eurodollar rate borrowings.
At September 30, 2014, Rose Rock had $86.2 million in outstanding letters of credit, and the rate in effect was 2.50%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit.
Rose Rock had $73.6 million of Secured Bilateral Letters of Credit outstanding at September 30, 2014. The interest rate in effect was 1.75%. Secured Bilateral Letters of Credit are external to the facility and do not reduce availability for borrowing on the revolving credit facility.
We recorded $2.0 million and $1.9 million of interest expense related to this facility during the three months ended September 30, 2014 and 2013, respectively, including amortization of debt issuance costs. We recorded $6.9 million and $6.1 million of interest expense related to this facility during the nine months ended September 30, 2014 and 2013, respectively, including amortization of debt issuance costs.
At September 30, 2014, $4.1 million in capitalized loan fees, net of accumulated amortization, was recorded in other noncurrent assets, which is being amortized over the life of the facility.
At September 30, 2014, we were in compliance with the terms of the credit agreement.
SemMexico revolving credit facility
At September 30, 2014, SemMexico had no outstanding borrowings on its 44 million Mexican pesos (U.S. $3.3 million at the September 30, 2014 exchange rate) revolving credit facility, which matures in May 2015. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.50%.
At September 30, 2014, SemMexico had an outstanding letter of credit of 292.8 million Mexican pesos (U.S. $21.7 million at the September 30, 2014 exchange rate) and a $3.0 million U.S. dollar letter of credit. Fees on outstanding letters of credit range from a rate of 0.45% to 0.70%.
At September 30, 2014, we were in compliance with the terms of these facilities.
Capitalized interest
During the nine months ended September 30, 2014 and 2013, we capitalized interest from our credit facilities of $1.0 million and $2.9 million, respectively.
Fair value
We estimate the fair value of the Notes to be $321 million and the fair value of the Rose Rock Notes to be $397 million at September 30, 2014, based on unadjusted, transacted market prices, which is categorized as a Level 1 measurement. We estimate that the fair value of our other long-term debt was not materially different than the recorded values at September 30, 2014. It is our belief that neither the market interest rates nor our credit profile have changed significantly enough to have had a material impact on the fair value of our other debt outstanding at September 30, 2014. This estimate is categorized as a Level 3 measurement.
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
Bankruptcy matters
On July 22, 2008 (the "Petition Date"), SemGroup, L.P. and certain subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Also on July 22, 2008, SemGroup, L.P.'s Canadian subsidiaries filed for creditor protection in Canada. Later during 2008, certain other U.S. subsidiaries filed petitions for reorganization. While in bankruptcy, SemGroup, L.P. filed a plan of reorganization with the court, which was confirmed on October 28, 2009 (the "Plan of Reorganization"). The Plan of Reorganization determined, among other things, how pre-Petition Date obligations would be settled, the equity structure of the reorganized company upon emergence, and the financing arrangements upon emergence. SemGroup Corporation emerged from bankruptcy protection on November 30, 2009 (the "Emergence Date").
(a)
Investigations
Around the time of our predecessor's bankruptcy filings, several governmental agencies launched investigations regarding the circumstances of the filings. The mandate and scope of these investigations were very broad and the investigations are ongoing.
Bankruptcy examiner. On October 14, 2008, the bankruptcy court appointed an examiner to (i) investigate the circumstances surrounding our predecessor's trading strategy prior to bankruptcy filings; (ii) investigate the circumstances surrounding certain insider transactions and the formation of SemGroup Energy Partners L.P. (a former subsidiary); (iii) investigate the circumstances surrounding the potential improper use of borrowed funds and funds generated from operations and the liquidation of assets to satisfy margin calls related to our predecessor's trading strategy and that of certain entities owned or controlled by former officers and directors of the general partner of SemGroup, L.P.; (iv) determine whether any directors, officers or employees of the general partner of SemGroup, L.P. participated in fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of our affairs; and (v) determine whether the SemGroup debtor estates have causes of action against current or former officers, directors, or employees of the general partner of SemGroup, L.P. arising from such participation. The examiner’s report was filed with the bankruptcy court on April 15, 2009.
Certain current and prior employees of the general partner of SemGroup, L.P. are referenced in the examiner’s report and the report’s conclusions may suggest possible civil or criminal liability on their part. To the extent such claims exist, they are property of a litigation trust that was established for the benefit of pre-petition creditors pursuant to the Plan of Reorganization, and are not property of the reorganized SemGroup Corporation. This litigation trust is pursuing claims against certain former officers, at its own expense. We may incur expenses, which are not expected to be material, related to information and document requests of the litigation trust related to such claims. Any indemnification obligations to such officers by SemGroup, L.P. were discharged under the Plan of Reorganization.
CFTC. On June 19, 2008, we received a request for voluntary production from the Commodity Futures Trading Commission ("CFTC"). Subsequent to the bankruptcy filings, the CFTC sent other requests for voluntary production. The CFTC has also served subpoenas upon us requiring us to produce various documents and for the depositions of our representatives. We continue to comply with the CFTC’s requests. We are unaware of any currently pending formal charges against us by the CFTC.
(b)
Claims reconciliation process
A large number of parties have made claims against us for obligations alleged to have been incurred prior to our predecessor's bankruptcy filing. On September 15, 2010, the bankruptcy court entered an order estimating the contingent, unliquidated and disputed claims and authorizing distributions to holders of allowed claims. Pursuant to that order we have begun making distributions to the claimants. We continue to attempt to settle unresolved claims.
Pursuant to the Plan of Reorganization, we committed to settle authorized and allowed bankruptcy claims by paying a specified amount of cash, issuing a specified number of warrants, and issuing a specified number of shares of SemGroup Corporation common stock. We do not believe the resolution of the remaining outstanding claims will exceed the total amount of consideration established under the Plan of Reorganization for all claimants; instead, the resolution of the remaining claims in some cases will impact the relative share of the established pool of common stock and warrants that certain claimants receive.
However, under certain circumstances we could be required to pay additional funds to settle the specified group of claims to be settled with cash. Pursuant to the Plan of Reorganization, a specified amount of restricted cash was set aside at the Emergence Date, which we expect to be sufficient to settle this group of claims. Since the Emergence Date, we have made significant progress in resolving these claims, and we continue to believe that the cash set aside at the Emergence Date will be sufficient to settle these claims. However, we have not yet reached a resolution of all of these claims, and if the total settlement amount of all of these claims exceeds the specified amount, we will be required to pay additional funds to satisfy the total settlement amount for this specified group of claims. If this were to become probable of occurring, we would be required to record a liability and a corresponding expense.
Blueknight claim
Blueknight Energy Partners, L.P. ("Blueknight"), which was formerly a subsidiary of SemGroup, together with other entities related to Blueknight, entered into a Shared Services Agreement on April 7, 2009, with SemCrude, L.P., now known as Rose Rock Midstream Crude, L.P. ("SemCrude") and SemManagement, L.L.C. (which are currently subsidiaries of SemGroup). The services provided by SemCrude to Blueknight under this agreement included assisting Blueknight with movement of crude oil belonging to Blueknight’s customers and with the operation of Blueknight’s Oklahoma pipeline system and its Cushing, Oklahoma terminal. Under the subsequent amendments to the agreements beginning in May 2010, certain of these services were phased out, and Blueknight began to perform all services necessary for the movement of its crude oil and the operation of its Cushing terminal without SemCrude’s assistance.
In a letter dated August 18, 2011, Blueknight claimed that SemCrude owes Blueknight approximately 141,000 barrels of crude oil. We responded to Blueknight’s letter denying their charges and requesting documentation from Blueknight of its claim. On February 14, 2012, after months of interaction between the parties through which Blueknight was requested to substantiate its claim, Blueknight filed suit against SemCrude and other related companies in the District Court of Oklahoma County, Oklahoma. On May 1, 2012, the case was transferred to Tulsa County, Oklahoma. On July 2, 2012, the Tulsa County District Court appointed a Special Master to review terminal operations accounting records and determine whether 141,000 barrels of crude oil owned by Blueknight is missing after three months of operations in April through June, 2010. On June 11, 2013, the Special Master’s Report was filed with the District Court finding a shortage in Blueknight’s Cushing terminal and Oklahoma pipeline system of 148,000 barrels. However, after a review of all records created during that three month time period, the Special Master was unable to determine how the shortage might have occurred and was unable to determine the ownership of the potential shortage.
We are currently seeking discovery in the District Court of documentation and testimony on the potential cause and the impact, if any, of the shortage found by the Special Master. We will continue to defend our position; however, we cannot predict the outcome.
Environmental
We may from time to time experience leaks of petroleum products from our facilities and, as a result of which, we may incur remediation obligations or property damage claims. In addition, we are subject to numerous environmental regulations. Failure to comply with these regulations could result in the assessment of fines or penalties by regulatory authorities.
The Kansas Department of Health and Environment ("the KDHE") initiated discussions during our bankruptcy proceeding regarding six of our sites in Kansas (five owned by Crude and one owned by SemGas) that KDHE believes, based on their historical use, may have soil or groundwater contamination in excess of state standards. KDHE sought our agreement to undertake assessments of these sites to determine whether they are contaminated. We reached an agreement with KDHE on this matter and entered into a Consent Agreement and Final Order with KDHE to conduct environmental assessments on the sites and to pay KDHE’s costs associated with their oversight of this matter. We have conducted Phase II investigations at all sites. Four of the sites have limited amounts of soil contamination that will be excavated and/or remediated on site. Four of the sites appeared to have ground water contamination requiring further delineation and/or ongoing monitoring. Work plans have been submitted to, and approved by, the KDHE. One site was closed and we anticipate closure in 2015 for three of the remaining five sites. We do not anticipate any penalties or fines for these historical sites.
Other matters
We are party to various other claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of our management, the ultimate resolution of these claims, legal actions and complaints, after consideration of amounts accrued, insurance coverage and other arrangements, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, the outcome of such matters is inherently uncertain, and estimates of our consolidated liabilities may change materially as circumstances develop.
Asset retirement obligations
We will be required to incur significant removal and restoration costs when we retire our natural gas gathering and processing facilities in Canada. We have recorded an asset retirement obligation liability of $42.8 million at September 30, 2014, which is included within other noncurrent liabilities on our condensed consolidated balance sheets. This amount was calculated using the $97.0 million cost we estimate we would incur to retire these facilities, discounted based on our risk-adjusted cost of borrowing and the estimated timing of remediation.
The calculation of the liability for an asset retirement obligation requires the use of significant estimates, including those related to the length of time before the assets will be retired, cost inflation over the assumed life of the assets, actual remediation activities to be required, and the rate at which such obligations should be discounted. Future changes in these estimates could result in material changes in the value of the recorded liability. In addition, future changes in laws or regulations could require us to record additional asset retirement obligations.
Our other segments may also be subject to removal and restoration costs upon retirement of their facilities. However, we are unable to predict when, or if, our pipelines, storage tanks and other facilities would become completely obsolete and require decommissioning. Accordingly, we have not recorded a liability or corresponding asset, as both the amount and timing of such potential future costs are indeterminable.
Purchase and sale commitments
We routinely enter into agreements to purchase and sell petroleum products at specified future dates. We account for derivatives at fair value with the exception of commitments which have been designated as normal purchases and sales for which we do not record assets or liabilities related to these agreements until the product is purchased or sold. At September 30, 2014, such commitments included the following (in thousands):
 
Volume
(Barrels)
 
Value
Fixed price purchases
270

 
$
23,754

Fixed price sales
266

 
$
25,699

Floating price purchases
23,225

 
$
2,024,134

Floating price sales
29,590

 
$
2,316,144


Certain of the commitments shown in the table above relate to agreements to purchase product from a counterparty and to sell a similar amount of product (in a different location) to the same counterparty. Many of the commitments shown in the table above are cancellable by either party, as long as notice is given within the time frame specified in the agreement (generally 30 to 120 days).
Our SemGas segment has a take or pay contractual obligation related to the fractionation of natural gas liquids. This obligation continues through June 2023, subsequent to the extension of the agreement in the second quarter of 2013. At September 30, 2014, approximately $25.8 thousand was due under the contract and the amount of future obligation is approximately $79.6 million. SemGas further has a take or pay contractual obligation related to pipeline transportation. This obligation began in April 2014 and continues through October 2015. The amount of future obligation is approximately $2.8 million. SemGas also enters into contracts under which we are responsible for marketing the majority of the gas and natural gas liquids produced by the counterparties to the agreements. The majority of SemGas’ revenues were generated from such contracts.
Equity
EQUITY
EQUITY
Unaudited condensed consolidated statement of changes in owners’ equity
The following table shows the changes in our consolidated owners’ equity accounts from December 31, 2013 to September 30, 2014 (in thousands):
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
Total
Owners’
Equity
Balance at December 31, 2013
$
425

 
$
1,154,516

 
$
(613
)
 
$
(97,572
)
 
$
(2,854
)
 
$
159,961

 
$
1,213,863

Net income

 

 

 
21,166

 

 
18,184

 
39,350

Other comprehensive loss, net of income taxes

 

 

 

 
(6,618
)
 

 
(6,618
)
Distributions to noncontrolling interests

 

 

 

 

 
(20,571
)
 
(20,571
)
Dividends paid

 
(31,149
)


 

 

 

 
(31,149
)
Unvested dividend equivalent rights

 
(118
)
 

 

 

 
(95
)
 
(213
)
Non-cash equity compensation

 
5,713

 

 

 

 
705

 
6,418