SEMGROUP CORP, 10-Q filed on 11/12/2013
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2013
Oct. 31, 2013
Class A
Oct. 31, 2013
Class B
Document Type
10-Q 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Sep. 30, 2013 
 
 
Document Fiscal Period Focus
Q3 
 
 
Document Fiscal Year Focus
2013 
 
 
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
 
42,445,841 
28,235 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 64,718 
$ 80,029 
Restricted cash
34,182 
34,678 
Accounts receivable, net
368,246 
346,169 
Receivable from affiliates
13,039 
6,178 
Inventories
46,609 
34,433 
Other current assets
15,167 
18,516 
Total current assets
541,961 
520,003 
Property, plant and equipment, net
1,057,116 
814,724 
Equity method investments
518,149 
387,802 
Goodwill
60,676 
9,884 
Other intangible assets, net
179,897 
7,585 
Other noncurrent assets, net
32,603 
8,181 
Total assets
2,390,402 
1,748,179 
Current liabilities:
 
 
Accounts payable
303,672 
253,623 
Payable to affiliates
2,102 
Accrued liabilities
81,509 
63,831 
Payables to pre-petition creditors
32,372 
32,933 
Deferred revenue
18,835 
18,973 
Other current liabilities
9,120 
4,960 
Current portion of long-term debt
26 
24 
Total current liabilities
447,636 
374,344 
Long-term debt
540,043 
206,062 
Deferred income taxes
53,588 
65,620 
Other noncurrent liabilities
95,418 
80,625 
Commitments and contingencies (Note 9)
   
   
SemGroup owners' equity:
 
 
Common stock (Note 10)
425 
420 
Additional paid-in capital
1,108,041 
1,039,189 
Treasury stock, at cost (Note 10)
(613)
(242)
Accumulated deficit
(100,890)
(145,674)
Accumulated other comprehensive loss
(5,606)
(1,299)
Total SemGroup owners' equity
1,001,357 
892,394 
Noncontrolling interests in consolidated subsidiaries
252,360 
129,134 
Total owners' equity
1,253,717 
1,021,528 
Total liabilities and owners' equity
$ 2,390,402 
$ 1,748,179 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2013
Dec. 31, 2012
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 3,728 
$ 3,687 
Accumulated depreciation
167,584 
130,886 
Accumulated amortization
$ 9,521 
$ 6,701 
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, 2013
Sep. 30, 2012
Sep. 30, 2013
Sep. 30, 2012
Revenues:
 
 
 
 
Product
$ 288,452 
$ 209,202 
$ 765,334 
$ 708,408 
Service
36,402 
29,800 
95,737 
86,727 
Other
32,894 
38,850 
108,617 
126,525 
Total revenues
357,748 
277,852 
969,688 
921,660 
Expenses:
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
255,554 
189,830 
680,632 
651,283 
Operating
52,360 
52,367 
162,813 
172,750 
General and administrative
20,952 
16,680 
54,887 
53,073 
Depreciation and amortization
16,113 
12,081 
41,563 
35,687 
Loss (gain) on disposal of long-lived assets, net
408 
(3,615)
(130)
(3,496)
Total expenses
345,387 
267,343 
939,765 
909,297 
Earnings from equity method investments
7,483 
3,116 
39,689 
22,903 
Operating income
19,844 
13,625 
69,612 
35,266 
Other expenses (income):
 
 
 
 
Interest expense
9,080 
1,992 
15,971 
7,763 
Foreign currency transaction (gain) loss
(457)
355 
(973)
358 
Other expense, net
4,671 
9,354 
36,771 
16,783 
Total other expenses, net
13,294 
11,701 
51,769 
24,904 
Income (loss) from continuing operations before income taxes
6,550 
1,924 
17,843 
10,362 
Income tax expense (benefit)
3,413 
2,091 
(41,305)
985 
Income (loss) from continuing operations
3,137 
(167)
59,148 
9,377 
Income (loss) from discontinued operations, net of income taxes
(2)
(265)
65 
(456)
Net income (loss)
3,135 
(432)
59,213 
8,921 
Less: net income attributable to noncontrolling interests
5,054 
2,336 
14,429 
7,915 
Net income (loss) attributable to SemGroup
(1,919)
(2,768)
44,784 
1,006 
Other comprehensive income (loss), net of income taxes
6,105 
12,072 
(4,307)
14,930 
Comprehensive income (loss)
9,240 
11,640 
54,906 
23,851 
Less: comprehensive income attributable to noncontrolling interests
5,054 
2,336 
14,429 
7,915 
Comprehensive income (loss) attributable to SemGroup
4,186 
9,304 
40,477 
15,936 
Net income per common share (Note 11):
 
 
 
 
Basic
$ (0.05)
$ (0.07)
$ 1.06 
$ 0.02 
Diluted
$ (0.05)
$ (0.07)
$ 1.05 
$ 0.02 
Accumulated Deficit [Member]
 
 
 
 
Other expenses (income):
 
 
 
 
Net income (loss)
 
 
44,784 
 
Other comprehensive income (loss), net of income taxes
 
 
$ 0 
 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2013
Sep. 30, 2012
Cash flows from operating activities:
 
 
Net income
$ 59,213 
$ 8,921 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Net unrealized (gain) loss related to derivative instruments
(1,759)
(432)
Depreciation and amortization
41,563 
35,687 
Depreciation, Depletion and Amortization, Nonproduction
 
36,123 
Loss (gain) on disposal of long-lived assets, net
(107)
(3,496)
Earnings from equity method investments
(39,689)
(22,903)
Distributions from equity investments
39,714 
25,053 
Amortization of debt issuance costs
1,943 
2,078 
Deferred tax benefit
(49,448)
(3,738)
Non-cash equity compensation
5,311 
4,832 
Fair value adjustment of warrants
37,028 
17,082 
Provision for uncollectible accounts receivable, net of recoveries
(357)
(828)
Foreign currency transaction (gain) loss
(973)
358 
Changes in operating assets and liabilities (Note 12)
4,080 
(11,292)
Net cash provided by operating activities
96,519 
51,758 
Cash flows from investing activities:
 
 
Capital expenditures
(131,650)
(82,123)
Proceeds from sale of long-lived assets
1,048 
347 
Investments in non-consolidated subsidiaries
(143,463)
(63,999)
Payments to acquire businesses
(356,201)
Proceeds from sale of non-consolidated affiliate
3,500 
Distributions in excess of equity in earnings of affiliates
13,091 
10,569 
Net cash used in investing activities
(617,175)
(131,706)
Cash flows from financing activities:
 
 
Debt issuance costs
(11,865)
(694)
Borrowings on credit facilities
928,474 
260,500 
Principal payments on credit facilities and other obligations
(594,403)
(179,001)
Proceeds from issuance of Rose Rock Midstream, L.P. common units, net of offering costs
210,226 
Distributions to noncontrolling interests
(11,458)
(5,754)
Proceeds from warrant exercises
225 
Repurchase of stock-based awards for payment of statutory taxes due on stock-based compensation
(371)
(242)
Payments of dividends
(16,387)
Net cash provided by financing activities
504,441 
74,809 
Effect of exchange rate changes on cash and cash equivalents
904 
(977)
Change in cash and cash equivalents
(15,311)
(6,116)
Change in cash and cash equivalents included in discontinued operations
(36)
Change in cash and cash equivalents from continuing operations
(15,311)
(6,152)
Cash and cash equivalents at beginning of period
80,029 
73,613 
Cash and cash equivalents at end of period
$ 64,718 
$ 67,461 
Overview
OVERVIEW
OVERVIEW
SemGroup Corporation is a Delaware corporation headquartered in Tulsa, Oklahoma. SemGroup Corporation is the successor entity of SemGroup, L.P., which was an Oklahoma limited partnership. 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, SemGroup, L.P., and their subsidiaries.
Basis of presentation
The accompanying condensed consolidated 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.
The accompanying condensed consolidated financial statements are unaudited. The condensed consolidated balance sheet at December 31, 2012, is derived from audited financial statements.
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, 2013, are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
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. 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, 2012, which are included in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC.
Certain reclassifications have been made to conform previously reported balances to the current presentation.
Our significant accounting policies are consistent with those described in our Annual Report on Form 10-K for the year ended December 31, 2012.
Recent accounting pronouncements
On January 31, 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," which clarifies the scope of the offsetting disclosure requirements in ASU 2011-11, "Disclosures About Offsetting Assets and Liabilities." Under ASU 2013-01, the disclosure requirements apply to derivative instruments accounted for in accordance with Accounting Standards Codification ("ASC") 815, "Derivatives and Hedging," including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those years. Retrospective application is required for all comparative periods presented. We adopted this guidance in the first quarter of 2013. The impact of adoption was not material.
On February 5, 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." This ASU adds new disclosure requirements for items reclassified out of accumulated other comprehensive income ("AOCI"). The ASU is intended to help entities improve the transparency of changes in other comprehensive income ("OCI") and items reclassified out of AOCI in their financial statements. It does not amend any existing requirements for reporting net income or OCI in the financial statements. We adopted this guidance in the first quarter of 2013. The impact of adoption was not material.
On February 28, 2013, the FASB issued ASU 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force)." The ASU requires entities to “measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following:
the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors; and
any additional amount the reporting entity expects to pay on behalf of its co-obligors.”
Required disclosures include a description of the joint and several arrangement and the total outstanding amount of the obligation for all joint parties. The ASU permits entities to aggregate disclosures (as opposed to providing separate disclosures for each joint and several obligation). These disclosure requirements are incremental to the existing related-party disclosure requirements in ASC 850, "Related Party Disclosures." The ASU is effective for public entities for all prior periods in fiscal years beginning on or after December 15, 2013, and interim reporting periods within those years. The Company will adopt this guidance in the first quarter of 2014. The impact is not expected to be material.
On March 4, 2013, the FASB issued 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 will adopt this guidance in the first quarter of 2014. The impact is not expected to be 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 will adopt this guidance in the first quarter of 2014. The impact is not expected to be material.
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, 2013, we own the 2% general partner interest and a 46.7% limited partner interest made up of 2.9 million common units, 8.4 million subordinated units and 1.25 million Class A units.
In August 2013, Rose Rock sold 4.75 million common limited partner units to third-party purchasers for $152.5 million, net of underwriting discounts and commissions. Proceeds were used to repay borrowings on the Rose Rock credit facility.
On January 11, 2013, we contributed a 33% interest in SemCrude Pipeline, L.L.C. ("SCPL") to Rose Rock in exchange for (i) cash of approximately $189.5 million, (ii) the issuance of 1.5 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 of Rose Rock and a related issuance of general partner interest, to allow the general partner of Rose Rock to maintain its 2% general partner interest. SCPL owns a 51% membership interest in White Cliffs Pipeline, L.L.C. ("White Cliffs"), which owns a 527-mile pipeline that transports crude oil from Platteville, Colorado to Cushing, Oklahoma (the "White Cliffs Pipeline"), giving Rose Rock an indirect 17% interest in 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 this transaction was between parties under common control, Rose Rock recorded its interest in SCPL at SemGroup's historical value and, as such, no gain on the sale was recognized by SemGroup. Proceeds in excess of the historical value were accounted for as an equity transaction between Rose Rock and SemGroup and resulted in a $90.5 million reduction to noncontrolling interests in consolidated subsidiaries and an offsetting increase to additional paid-in capital of $56.8 million (net of tax impact of $33.7 million). This non-cash entry represents the portion of the proceeds in excess of historical cost which were attributed to Rose Rock's third-party unitholders.
In connection with this transaction, Rose Rock issued and sold 2.0 million common units to third-party purchasers in a private placement for aggregate consideration of $59.3 million. In addition, Rose Rock exercised the accordion feature of its revolving credit facility and increased the total borrowing capacity under the credit facility from $150 million to $385 million and made a borrowing of $133.5 million under the credit facility. The proceeds from the private placement and the borrowing were used by Rose Rock to fund the cash consideration in the transaction with us and to pay certain related transaction costs and expenses.
SemGroup incurred $1.4 million of general and administrative expense associated with the transaction including amounts expensed by Rose Rock. Rose Rock incurred $3.7 million of cost, of which $1.6 million of equity issuance costs were offset against proceeds, $1.6 million was related to the borrowing and was deferred and $0.5 million was expensed as general and administrative expense in the condensed consolidated statement of operations and comprehensive income.
Outside ownership interests in Rose Rock are reflected in “noncontrolling interests in consolidated subsidiaries” on our condensed consolidated balance sheets at September 30, 2013 and December 31, 2012. The portion of Rose Rock’s net income attributable to outside owners is reflected within “net income attributable to noncontrolling interests” in our condensed consolidated statements of operations and comprehensive income for the three months and nine months ended September 30, 2013.
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. Rose Rock’s partnership agreement requires Rose Rock to distribute all of its available cash each quarter in the following manner:
 
Total Quarterly Distributions
Per Unit Target Amount
 
Marginal Percentage
Interest in Distributions
 
Unitholders
 
General
Partner
 
Incentive
Distribution
Rights
Minimum Quarterly Distributions
 
 
 
 
 
 
$
0.362500

 
98.0
%
 
2.0
%
 

First Target Distribution
above
 
$
0.362500

 
up to
 
$
0.416875

 
98.0
%
 
2.0
%
 

Second Target Distribution
above
 
$
0.416875

 
up to
 
$
0.453125

 
85.0
%
 
2.0
%
 
13.0
%
Third Target Distribution
above
 
$
0.453125

 
up to
 
$
0.543750

 
75.0
%
 
2.0
%
 
23.0
%
Thereafter
 
 
 
 
above
 
$
0.543750

 
50.0
%
 
2.0
%
 
48.0
%
 
The following table shows the cash distributions paid or declared during 2013 and 2012 (in thousands, except for per unit amounts):
 
 
Record Date
Payment Date
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, 2011
*
February 3, 2012
February 13, 2012
$
0.0670

$
23

$

$
93

$
561

$
470

$
1,147

March 31, 2012
 
May 7, 2012
May 15, 2012
$
0.3725

  
$
128

$

$
517

$
3,125

$
2,607

$
6,377

June 30, 2012
 
August 6, 2012
August 14, 2012
$
0.3825

 
$
131

$

$
532

$
3,209

$
2,678

$
6,550

September 30, 2012
 
November 5, 2012
November 14, 2012
$
0.3925

 
$
134

$

$
545

$
3,294

$
2,748

$
6,721

December 31, 2012
 
February 4, 2013
February 14, 2013
$
0.4025

 
$
167

$

$
1,163

$
3,377

$
3,624

$
8,331

March 31, 2013
 
May 6, 2013
May 15, 2013
$
0.4300

 
$
179

$
41

$
1,242

$
3,607

$
3,872

$
8,941

June 30, 2013
 
August 5, 2013
August 14, 2013
$
0.4400


$
183

$
72

$
1,271

$
3,692

$
3,962

$
9,180

September 30, 2013
**
November 5, 2013
November 14, 2013
$
0.4500

**
$
232

$
127

$
1,301

$
3,775

$
6,189

$
11,624

*Minimum quarterly distribution for quarter ended December 31, 2011 was prorated for the period beginning immediately after the closing of Rose Rock’s IPO, December 14, 2011 through December 31, 2011.
**Expected payment date and amounts for distributions related to the quarter ended September 30, 2013.

Certain summarized balance sheet information of Rose Rock is shown below (in thousands):
 
(unaudited)
 
 
 
September 30,
2013
 
December 31,
2012
Cash
$
1,914

 
$
108

Other current assets
292,386

 
250,509

Property, plant and equipment, net
313,193

 
291,530

Equity method investment
77,449

 

Goodwill
27,261

 

Other noncurrent assets, net
10,536

 
2,579

Total assets
$
722,739

 
$
544,726

 
 
 
 
Current liabilities
$
254,491

 
$
231,843

Long-term debt
85,043

 
4,562

Partners’ capital attributable to SemGroup
130,845

 
179,187

Partners’ capital attributable to noncontrolling interests
252,360

 
129,134

Total liabilities and partners’ capital
$
722,739

 
$
544,726


Certain summarized income statement information of Rose Rock for the three months and nine months ended September 30, 2013 and 2012 is shown below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
181,831

 
$
131,554

 
$
514,485

 
$
468,687

Cost of products sold
$
157,550

 
$
111,790

 
$
446,507

 
$
412,847

Operating, general and administrative expenses
$
12,394

 
$
9,779

 
$
30,434

 
$
25,976

Depreciation and amortization expense
$
4,130

 
$
3,066

 
$
11,327

 
$
9,032

Earnings from equity method investment
$
3,527

 
$

 
$
10,431

 
$

Net income
$
9,411

 
$
6,469

 
$
30,539

 
$
19,353

Investments in Non-Consolidated Subsidiaries
INVESTMENTS IN NON-CONSOLIDATED SUBSIDIARIES
INVESTMENTS IN NON-CONSOLIDATED SUBSIDIARIES

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, 2013
 
December 31, 2012
White Cliffs
$
228,076

 
$
138,970

NGL Energy
187,632

 
174,398

Glass Mountain
102,441

 
74,434

Total equity method investments
$
518,149

 
$
387,802


    
Under the equity method, we do not report the individual revenues and expenses of our investees in our condensed consolidated statements of income. Instead, our interest in the earnings of our investees is reflected in one line item on our condensed consolidated statement 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,
 
2013
 
2012
 
2013
 
2012
White Cliffs
$
10,786

 
$
10,021

 
$
31,886

 
$
25,053

NGL Energy
(3,288
)
 
(6,905
)
 
7,828

 
(2,150
)
Glass Mountain
(15
)
 

 
(25
)
 

Total earnings from equity method investments
$
7,483

 
$
3,116

 
$
39,689

 
$
22,903



Cash distributions received from equity methods investments consist of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
White Cliffs
$
12,755

 
$
10,794

 
$
39,436

 
$
30,561

NGL Energy
4,671

 
2,090

 
13,369

 
5,063

Glass Mountain

 

 

 

Total cash distributions received from equity method investments
$
17,426

 
$
12,884

 
$
52,805

 
$
35,624


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 2012, the owners of White Cliffs approved an expansion project to construct a 12" pipeline from Platteville, Colorado to Cushing, Oklahoma. The project is expected to cost approximately $300 million, which will be funded by capital calls to owners. Our funding requirement will be 51% of the total cost. We have contributed approximately $97.8 million for project funding up through September 30, 2013, including $35.9 million and $95.5 million for the three months and nine months ended September 30, 2013, respectively, and estimate our expected remaining contributions to be $53.3 million, which will be made in 2014.
Certain summarized income statement information of White Cliffs for the three months and nine months ended September 30, 2013 and 2012 is shown below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
31,453

 
$
28,522

 
$
92,238

 
$
76,910

Operating, general and administrative expenses
$
5,141

 
$
3,857

 
$
14,433

 
$
11,382

Depreciation and amortization expense
$
4,720

 
$
4,995

 
$
14,150

 
$
14,964

Net income
$
21,579

 
$
19,670

 
$
63,642

 
$
50,564


The equity in earnings of White Cliffs for the three months and nine months ended September 30, 2013 and 2012 reported in our condensed consolidated statement of operations and comprehensive income is less than 51% of the net income of White Cliffs for the same period. 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 $0.5 million and $24 thousand of such general and administrative expense for the three months ended September 30, 2013 and 2012, respectively, and $1.2 million and $1.5 million for the nine months ended September 30, 2013 and 2012, respectively.
NGL Energy Partners LP
We own 9,133,409 common units representing limited partner interests in NGL Energy Partners LP (NYSE: NGL) (“NGL Energy”), which represents approximately 17.0% of the total 53,622,659 limited partner units of NGL Energy outstanding at June 30, 2013, and a 11.78% interest in the general partner of NGL Energy.
At September 30, 2013, the fair market value of our 9,133,409 common unit investment in NGL Energy was $281.7 million, based on a September 30, 2013 closing price of $30.84 per common unit. This does not reflect our 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, 2013 and 2012, relates to the earnings of NGL Energy for the three months and nine months ended June 30, 2013 and 2012, prorated for the period of time we held our ownership interest in NGL Energy.
Certain unaudited summarized income statement information of NGL Energy for the three months and nine months ended June 30, 2013 and 2012 is shown below (in thousands):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2013

2012
 
2013
 
2012
Revenue
$
1,385,957

 
$
326,436

 
$
4,341,778

 
$
1,236,023

Cost of products sold
$
1,303,076

 
$
298,985

 
$
3,989,511

 
$
1,128,581

Operating, general and administrative expenses
$
67,499

 
$
33,298

 
$
206,824

 
$
76,015

Depreciation and amortization expense
$
22,724

 
$
9,227

 
$
68,989

 
$
21,260

Net income
$
(17,508
)
 
$
(24,710
)
 
$
45,310

 
$
(4,678
)
 
Glass Mountain Pipeline, LLC
In May 2012, we formed a joint venture, Glass Mountain Pipeline, LLC (“Glass Mountain” or "GMP"), to construct, maintain and operate a 210-mile crude oil pipeline system ("the Glass Mountain Pipeline") originating in Alva and Arnett, Oklahoma and terminating at Cushing, Oklahoma. The Glass Mountain Pipeline is expected to be operational in January 2014. Once the pipeline is in service, it will be operated by a subsidiary of Rose Rock. Our original ownership interest in GMP was 25%. In September 2012, we acquired an additional 25% ownership interest in GMP, bringing our total ownership interest to 50% . We account for our investment in GMP using the equity method. As of September 30, 2013, we have invested $102.4 million in GMP including our capital contributions, amounts paid to acquire the additional ownership percentage, and capitalized interest. We invested $6.7 million and $28.0 million in GMP for the three months and nine months ended September 30, 2013, respectively. We expect to make additional contributions of approximately $26.5 million for the remainder of 2013 and $3.5 million in 2014.
Segments
SEGMENTS
4.
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, 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 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

Total assets at September 30, 2013 (excluding intersegment receivables)
$
1,012,535

 
$
187,632

 
$
320,431

 
$
510,129

 
$
167,741

 
$
95,317

 
$
96,617

 
$
2,390,402


For the three months ended September 30, 2013, one customer from our Crude segment accounted for 13% of our total consolidated revenue.

 
Three Months Ended September 30, 2012
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
131,616

 
$

 
$
54,301

 
$
27,627

 
$
2,213

 
$
62,095

 
$

 
$
277,852

Intersegment

 

 

 
2,251

 

 

 
(2,251
)
 

Total revenues
131,616

 


54,301


29,878


2,213


62,095


(2,251
)
 
277,852

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Costs of products sold, exclusive of depreciation and amortization shown below
111,790

 

 
309

 
24,068

 
97

 
55,817

 
(2,251
)
 
189,830

Operating
6,042

 
7

 
40,081

 
2,931

 
1,436

 
1,870

 

 
52,367

General and administrative
5,015

 
528

 
3,354

 
1,329

 
990

 
1,501

 
3,963

 
16,680

Depreciation and amortization
3,066

 

 
2,664

 
1,797

 
2,388

 
1,536

 
630

 
12,081

Gain on disposal of long-lived assets, net
(3,500
)
 

 

 
(3
)
 

 
(112
)
 

 
(3,615
)
Total expenses
122,413

 
535


46,408


30,122


4,911


60,612


2,342

 
267,343

Earnings from equity method investments
10,021

 
(6,905
)
 

 

 

 

 

 
3,116

Operating income (loss)
19,224

 
(7,440
)

7,893


(244
)

(2,698
)

1,483


(4,593
)
 
13,625

Other expenses (income), net
(119
)
 
(2,551
)
 
3,419

 
(378
)
 
337

 
(82
)
 
11,075

 
11,701

Income (loss) from continuing operations before income taxes
$
19,343

 
$
(4,889
)

$
4,474


$
134


$
(3,035
)

$
1,565


$
(15,668
)
 
$
1,924


 
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


For the nine months ended September 30, 2013, two customers from our Crude segment each accounted for 10% of our total consolidated revenue.
 
Nine Months Ended September 30, 2012
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
468,748

 
$
7

 
$
169,149

 
$
81,917

 
$
8,610

 
$
193,229

 
$

 
$
921,660

Intersegment

 

 

 
7,535

 

 

 
(7,535
)
 

Total revenues
468,748

 
7

 
169,149

 
89,452

 
8,610

 
193,229

 
(7,535
)
 
921,660

Expenses:
 
 
 
 

 

 
 
 

 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
412,847

 
33

 
499

 
70,607

 
196

 
174,636

 
(7,535
)
 
651,283

Operating
17,957

 
(18
)
 
135,165

 
9,092

 
4,521

 
6,033

 

 
172,750

General and administrative
9,796

 
582

 
10,404

 
4,564

 
4,249

 
6,730

 
16,748

 
53,073

Depreciation and amortization
9,032

 

 
7,910

 
5,153

 
7,040

 
4,614

 
1,938

 
35,687

Gain on disposal of long-lived assets, net
(3,444
)
 

 

 
(3
)
 

 
(49
)
 

 
(3,496
)
Total expenses
446,188

 
597

 
153,978

 
89,413

 
16,006

 
191,964

 
11,151

 
909,297

Earnings from equity method investments
25,053

 
(2,150
)
 

 

 

 

 

 
22,903

Operating income (loss)
47,613

 
(2,740
)
 
15,171

 
39

 
(7,396
)
 
1,265

 
(18,686
)
 
35,266

Other expenses (income), net
(739
)
 
(2,507
)
 
13,974

 
924

 
1,805

 
233

 
11,214

 
24,904

Income (loss) from continuing operations before income taxes
$
48,352

 
$
(233
)
 
$
1,197

 
$
(885
)
 
$
(9,201
)
 
$
1,032

 
$
(29,900
)
 
$
10,362

Inventories
Inventories
INVENTORIES
Inventories consist of the following (in thousands):
 
September 30,
2013
 
December 31,
2012
Crude oil
$
32,720

 
$
24,840

Asphalt and other
13,889

 
9,593

Total inventories
$
46,609

 
$
34,433

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 these assets and liabilities at September 30, 2013 and December 31, 2012 (in thousands):

 
September 30, 2013
 
December 31, 2012
 
Level 1
 
Netting*
 
Total
 
Level 1
 
Netting*
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
857

 
$
(132
)
 
$
725

 
$
22

 
$
(22
)
 
$

Total assets
857

 
(132
)
 
725

 
22

 
(22
)
 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
132

 
$
(132
)
 
$

 
$
1,056

 
$
(22
)
 
$
1,034

Warrants
46,350

 

 
46,350

 
32,858

 

 
32,858

Total liabilities
46,482

 
(132
)
 
46,350

 
33,914

 
(22
)
 
33,892

Net assets (liabilities) at fair value
$
(45,625
)
 
$

 
$
(45,625
)
 
$
(33,892
)
 
$

 
$
(33,892
)
*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 use as inputs 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. These also include common stock warrants (Note 10) which are traded on the New York Stock Exchange.
“Level 2” measurements use as inputs market observable and corroborated prices for similar commodity derivative contracts. Assets and liabilities classified as Level 2 include over-the-counter (“OTC”) traded forward contracts and swaps.
“Level 3” measurements use as inputs information from a pricing service and internal valuation models incorporating observable and unobservable market data. These may 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.
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, 2013, 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, 2013 and 2012, 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, future 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 unaudited notional quantities for commodity derivative instruments entered into (in thousands of barrels):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Sales
695

 
470

 
2,025

 
1,153

Purchases
805

 
380

 
2,095

 
1,066


We have not designated any of our commodity derivative instruments as accounting hedges. We record 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, 2013
 
December 31, 2012
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
$
725

 
$

 
$

 
$
1,034


We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. Our margin accounts were in a net liability position at September 30, 2013 of $0.1 million. At December 31, 2012, our margin deposit balance was $1.9 million. 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, 2013 and December 31, 2012, we would have had net asset positions of $0.6 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,
 
2013
 
2012
 
2013
 
2012
Commodity contracts
$
(1,652
)
 
$
(631
)
 
$
(2,430
)
 
$
(342
)

Warrants
As described in Note 10, upon emergence from bankruptcy, we issued certain common stock warrants. These warrants are recorded at fair value in other noncurrent liabilities on the condensed consolidated balance sheets, with changes in the fair value recorded to other expense (income).
Income Taxes
INCOME TAXES
INCOME TAXES
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. The tax benefit was recorded for the three months ended March 31, 2013. Gain recognition, for tax purposes, on the contribution of a 33% interest in SemCrude Pipeline, L.L.C. to Rose Rock, as disclosed in Note 2, 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 or state jurisdictions. Canada Revenue Agency has initiated an income tax audit of SemCAMS ULC for the tax year 2009, which remains in progress. We do not anticipate the SemCAMS ULC audit will have a significant impact on the results of operations or financial position. No other foreign jurisdictions are currently under audit.

The effective tax rate was 52% and 109% for the three months ended September 30, 2013 and 2012, respectively, and (231)% and 10% for the nine months ended September 30, 2013 and 2012, respectively. The rate for the three months ended September 30, 2013 is impacted by a $3.3 million discrete deferred tax benefit resulting from enactment of U.K. tax rate reductions for future periods. 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.
Long-Term Debt
Long-Term Debt
LONG-TERM DEBT
Our long-term debt consisted of the following (in thousands):
 
September 30,
2013
 
December 31,
2012
SemGroup 7.50% senior unsecured notes
$
300,000

 
$

SemGroup corporate revolving credit facility
155,000

 
201,500

Rose Rock credit facility
85,000

 
4,500

SemMexico credit facility

 

Capital leases
69

 
86

Total long-term debt
$
540,069

 
$
206,086

less: current portion of long-term debt
26

 
24

Noncurrent portion of long-term debt
$
540,043

 
$
206,062


SemGroup senior unsecured notes
On June 14, 2013, we completed an offering of $300 million of 7.50% senior unsecured notes due 2021 (the “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 Notes are guaranteed by certain of our subsidiaries: SemGas, L.P., SemCanada, L.P., SemCanada II, L.P., SemMaterials, L.P., SemStream, L.P., SemGroup Europe Holding, L.L.C., SemOperating G.P., L.L.C., SemMexico, L.L.C., SemDevelopment, L.L.C., Rose Rock Midstream Holdings, LLC, Wattenberg Holding, LLC, Glass Mountain Holding, LLC and Mid-America Midstream Gas Services, L.L.C. (collectively, the "Guarantors").
The net proceeds from the offering were $294.0 million, after deducting the initial purchasers' discount. We used the net proceeds from the offering to (i) fund a portion of our acquisition on August 1, 2013, of all the outstanding equity interests in Mid-America Midstream Gas Services, L.L.C., a subsidiary of Chesapeake Energy Corporation, and (ii) during the second quarter of 2013, repay amounts borrowed under our revolving credit facility.
The Notes are governed by an indenture, as supplemented, between the Company and its subsidiary Guarantors and Wilmington Trust, N.A., as trustee (the “Indenture”). The Indenture includes customary covenants, including limitations on our 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; enter into sale and lease-back transactions; merge, consolidate, sell or otherwise dispose of all or substantially all of our assets; and designate our subsidiaries as unrestricted under the Indenture.
The Indenture includes customary events of default, including events of default relating to non-payment of principal and other amounts owing from time to time, failure to provide required reports, failure to comply with agreements in the indenture, cross payment-defaults to any material indebtedness, bankruptcy and insolvency events, certain unsatisfied judgments, and invalidation or cessation of the subsidiary guarantee of a significant subsidiary. A default would permit holders to declare the Notes and accrued interest due and payable.
The Notes are effectively subordinated in right of payment to any of our, and the Guarantors', existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness and are structurally subordinated to the obligations of any subsidiary that is not a guarantor of the Notes.
The Company may issue additional Notes under the Indenture from time to time, subject to the terms of the Indenture.
Except as described below, the Notes are not redeemable at the Company's option prior to June 15, 2016. From and after June 15, 2016, the Company may redeem the 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 June 15 of each of the years indicated below:
Year
 
Percentage
2016
 
105.625%
2017
 
103.750%
2018
 
101.875%
2019 and thereafter
 
100.000%

Prior to June 15, 2016, the Company may, at its option, on one or more occasions, redeem up to 35% of the sum of the original aggregate principal amount of the Notes at a redemption price equal to 107.500% of the aggregate principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings of the Company, subject to certain conditions.
Prior to June 15, 2016, the Company may also redeem all or part of the 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 June 15, 2016 redemption price from the table above plus all required interest payments due through June 15, 2016, 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, the Company is required to offer to repurchase the Notes at an amount equal to 101% of the principal plus accrued and unpaid interest.
The Notes are also subject to a Registration Rights Agreement which requires the Company to file a registration statement with the SEC and to use commercially reasonable efforts to cause the registration statement to be declared effective by the SEC so that holders of the Notes can exchange the Notes and related guarantees for registered notes (the "Exchange Notes") and guarantees that have substantially identical terms as the Notes and related guarantees. The guarantees of the Exchange Notes will be full and unconditional and will constitute the joint and several obligations of the Guarantors. Failure to meet the terms of the Registration Rights Agreement will require the Company to pay incremental interest of 0.25% per annum, increased by an additional 0.25% per annum for each 90-day period for which registration default continues (up to a maximum of 1.0% per annum).
Interest on the Notes is payable in arrears on June 15th and December 15th to holders of record on June 1st and December 1st each year until maturity. For the three and nine months ended September 30, 2013, we incurred $6.0 million and $7.1 million of interest expense related to the Notes, respectively, including the amortization of debt issuance costs. At September 30, 2013, we had $6.4 million of unamortized debt issuance costs related to the Notes included in other noncurrent assets on our condensed consolidated balance sheet.
At September 30, 2013, we were in compliance with the terms of the Notes.
SemGroup corporate credit agreement
Our revolving credit facility had a capacity of $500 million at September 30, 2013. 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, 2013, we had $155 million outstanding cash borrowings on this facility and outstanding letters of credit of $4.5 million.
The interest rate in effect at September 30, 2013, on $155 million of alternate base rate ("ABR") borrowings was 5.5%. At September 30, 2013, the rate in effect on letters of credit was 3.25%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit. A commitment fee of 0.5% is charged on any unused capacity on the revolving credit facility.
At September 30, 2013, $4.8 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 $2.3 million and $1.7 million for the three months ended September 30, 2013 and 2012, respectively, including amortization of debt issuance costs. We recorded interest expense related to the SemGroup revolving credit facility of $5.0 million and $4.9 million for the nine months ended September 30, 2013 and 2012, respectively, including amortization of debt issuance costs.
At September 30, 2013, we were in compliance with the terms of the credit agreement.
On April 22, 2013, the credit agreement was amended to (i) permit the increase of the facility by up to an additional $300 million subject to satisfaction of certain conditions, (ii) remove the restriction limiting unsecured senior or subordinated indebtedness to $200 million, while establishing certain requirements for obtaining unsecured senior or subordinated indebtedness of $200 million or more and (iii) establish less restrictive leverage covenants.
On May 3, 2013, we elected to increase the credit facility capacity by $200 million, for a total capacity of $500 million. The facility can be increased by an additional $100 million. In connection with the increase, we recorded $2.2 million of capitalized loan fees which are being amortized over the remaining life of the facility.
The credit agreement is guaranteed by all of our material domestic subsidiaries (except for SemCrude Pipeline, L.L.C. and Rose Rock Midstream, L.P. and its subsidiaries) and secured by a lien on substantially all of our property and assets, subject to customary exceptions.
Rose Rock credit facility
At September 30, 2013, there was $85.0 million outstanding cash borrowings under the Rose Rock revolving credit facility, of which $55.0 million incurred interest at the ABR plus an applicable margin, and $30 million incurred interest at the Eurodollar rate plus an applicable margin. The interest rate in effect at September 30, 2013 on $55.0 million of ABR borrowings was 4.50%. The interest rate in effect at September 30, 2013 on $30 million of Eurodollar rate borrowings was 2.53%.
Rose Rock had $31.8 million in outstanding letters of credit, and the rate in effect was 2.25%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit. A commitment fee that ranges from 0.375% to 0.50%, depending on a leverage ratio specified in the credit agreement, is charged on any unused capacity of the revolving credit facility.
On January 11, 2013, the credit facility capacity was increased to $385 million and Rose Rock borrowed $133.5 million in connection with the purchase of a 33% interest in SCPL from SemGroup and to pay transaction related expenses. Approximately $1.6 million of related costs have been capitalized and will be amortized over the remaining life of the facility.
On September 20, 2013, the credit agreement was amended to extend the agreement to September 20, 2018 and permit the increase of the facility by not more than $200 million, subject to certain conditions. The amended agreement allows the Rose Rock to incur unsecured or subordinated debt without limitation, subject to certain conditions, and provides alternative financial performance covenants at Rose Rock's election after the issuance of $200 million or more unsecured or subordinated debt, in aggregate. Additionally, the interest rate and commitment fees related to the revolving facility were lowered.
Rose Rock had $7.6 million of Secured Bilateral Letters of Credit outstanding at September 30, 2013. The interest rate in effect was 1.75% on $0.6 million and 2.0% on $7.0 million. Secured Bilateral Letters of Credit are external to the facility and do not reduce revolver availability.
We recorded $1.9 million and $0.5 million of interest expense related to this facility during the three months ended September 30, 2013 and 2012, respectively, including amortization of debt issuance costs. We recorded $6.1 million and $1.4 million of interest expense related to this facility during the nine months ended September 30, 2013 and 2012, respectively, including amortization of debt issuance costs.
At September 30, 2013, $3.7 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, 2013, we were in compliance with the terms of the credit agreement.
SemMexico facilities
During the third quarter, SemMexico renewed a credit agreement that allows SemMexico to borrow up to 56 million Mexican pesos (U.S. $4.3 million at the September 30, 2013 exchange rate) at any time during the term of the facility. The new maturity date of the facility is July 2014. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.70%. At September 30, 2013, there were no borrowings outstanding on this facility.
On June 13, 2012, SemMexico entered into a credit agreement that allows SemMexico to borrow up to 44 million Mexican pesos (U.S. $3.3 million at the September 30, 2013 exchange rate) at any time during the term of the facility, which matures in June 2015. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 2.0%. At September 30, 2013, there were no outstanding borrowings on this facility.
SemMexico also has outstanding letters of credit of 292.8 million Mexican pesos at September 30, 2013 (U.S. $22.3 million at the September 30, 2013 exchange rate). Fees are generally charged on outstanding letters of credit at a rate of 0.5%.
At September 30, 2013, we were in compliance with the terms of these facilities.
Capitalized interest
During the nine months ended September 30, 2013 and 2012, we capitalized interest from our credit facilities of $2.9 million and $0.2 million, respectively.
Fair value
We estimate the fair value of our senior unsecured notes to be $306 million at September 30, 2013, 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, 2013. 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, 2013. 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)
Confirmation order appeal
Luke Oil appeal. On October 21, 2009, Luke Oil Company, C&S Oil/Cross Properties, Inc., Wayne Thomas Oil and Gas and William R. Earnhardt Company (collectively, “Luke Oil”) filed an objection to the Plan of Reorganization “to the extent that the Plan of Reorganization may alter, impair, or otherwise adversely affect Luke Oil’s legal rights or other interests.” On October 28, 2009, the bankruptcy court overruled the Luke Oil objection and entered the confirmation order. On November 6, 2009, Luke Oil filed a Notice of Appeal. On December 23, 2009, Luke Oil’s appeal was docketed in the United States District Court for the District of Delaware. We filed a motion to dismiss the appeal as equitably moot. On May 21, 2012, the District Court entered an order granting our motion to dismiss Luke Oil's appeal of the confirmation order. On June 18, 2012, Luke Oil filed its Notice of Appeal, notifying the District Court and the parties to the lawsuit that it was appealing the decision of the District Court to the United States Court of Appeals for the Third Circuit. On August 27, 2013, the United States Court of Appeals for the Third Circuit issued an opinion, and on September 18, 2013 issued a judgment, reversing the District Court’s dismissal of the confirmation order and remanding the case to the District Court for consideration on the merits of Luke Oil’s appeal of the confirmation order. On October 1, 2013, at the request of the parties, the District Court entered an order staying the case and referring it to a magistrate judge for mediation. While we believe that this action is without merit and are vigorously defending this matter on appeal, an adverse ruling on this action could have a material adverse impact on us.
(b)
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.
(c)
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 she 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. Blueknight is resisting discovery and has asked for summary judgment against SemCrude and the other defendants for the entire terminal and pipeline system shortage. 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 and results indicate that four of the sites have limited amounts of soil contamination that will require remediation and ground water contamination that may require further delineation and/or ongoing monitoring. Work plans have been submitted to, and approved by, the KDHE. We do not anticipate any penalties or fines for these historical sites.
A water pipeline break occurred at a SemCAMS facility during August 2010. This resulted in a spill of material that was predominantly salt water containing a small amount of hydrocarbons. The incident was investigated by Environment Canada and Alberta Environment. On February 14, 2012, charges were filed against SemCAMS by the Federal Government of Canada (Department of Fisheries) and the Province of Alberta (Alberta Environment) in connection with this incident. SemCAMS and the Federal and Provincial Crowns are discussing a resolution of the charges on specific terms. We expect that the matter will be finally resolved by the end of the year. We accrued a liability for estimated fines and environmental contributions of $0.4 million in December 2010, which we still carry on our books at September 30, 2013.
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 $42.1 million at September 30, 2013, which is included within other noncurrent liabilities on our condensed consolidated balance sheets. This amount was calculated using the $104.6 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, 2013, such commitments included the following (in thousands):
 
Volume
(Barrels)
 
Value
Fixed price purchases
202

 
$
20,324

Fixed price sales
330

 
$
34,749

Floating price purchases
18,016

 
$
1,781,247

Floating price sales
18,600

 
$
1,814,662


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 began in July 2011 and continues through June 2023, subsequent to the extension of the agreement in the second quarter of 2013. At September 30, 2013, approximately $25.8 thousand was due under the contract and the amount of future obligation is approximately $88.2 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.
See Note 3 for commitments related to Glass Mountain Pipeline LLC and the White Cliffs expansion project.
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, 2012 to September 30, 2013 (in thousands):
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling