SEMGROUP CORP, 10-Q filed on 8/15/2011
Quarterly Report
Document And Entity Information
6 Months Ended
Jun. 30, 2011
Document Type
10-Q 
Amendment Flag
FALSE 
Document Period End Date
Jun. 30, 2011 
Entity Central Index Key
0001489136 
Document Fiscal Year Focus
2011 
Document Fiscal Period Focus
Q2 
Entity Registrant Name
SemGroup Corp 
Current Fiscal Year End Date
--12-31 
Entity Filer Category
Non-accelerated Filer 
Class A
 
Entity Common Stock, Shares Outstanding
41,541,285 
Class B
 
Entity Common Stock, Shares Outstanding
167,890 
Condensed Consolidated Balance Sheets (USD $)
In Thousands
Jun. 30, 2011
Dec. 31, 2010
ASSETS
 
 
Cash and cash equivalents
$ 88,737 
$ 90,159 
Restricted cash
46,546 
65,455 
Accounts receivable (net of allowance of $6,318 at June 30, 2011 and $11,178 at December 31, 2010)
236,118 
238,026 
Inventories
89,393 
129,846 
Current assets of discontinued operations
171 
787 
Other current assets
31,913 
38,818 
Total current assets
492,878 
563,091 
Property, plant and equipment (net of accumulated depreciation of $69,215 at June 30, 2011 and $45,491 at December 31, 2010)
801,022 
781,815 
Investment in White Cliffs (Note 3)
147,734 
152,020 
Goodwill
110,016 
107,823 
Other intangible assets (net of accumulated amortization of $9,629 at June 30, 2011 and $6,677 at December 31, 2010)
30,022 
32,264 
Other assets, net
18,780 
30,175 
Total assets
1,600,452 
1,667,188 
LIABILITIES AND OWNERS' EQUITY
 
 
Accounts payable
157,514 
153,785 
Accrued liabilities
50,810 
63,355 
Payables to pre-petition creditors
43,989 
74,817 
Other current liabilities
30,297 
27,619 
Current liabilities of discontinued operations
1,163 
1,208 
Current portion of long-term debt
9,150 
12 
Total current liabilities
292,923 
320,796 
Long-term debt
307,456 
348,431 
Deferred income taxes
92,262 
85,139 
Other noncurrent liabilities
55,811 
57,754 
Commitments and contingencies (Note 8)
 
 
Owners' equity:
 
 
Common stock (Note 9)
416 
415 
Additional paid-in capital
1,026,287 
1,023,727 
Accumulated deficit
(182,456)
(170,189)
Accumulated other comprehensive income
7,753 
1,115 
Total owners' equity
852,000 
855,068 
Total liabilities and owners' equity
$ 1,600,452 
$ 1,667,188 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands
Jun. 30, 2011
Dec. 31, 2010
Condensed Consolidated Balance Sheets
 
 
Accounts receivable, allowance
$ 6,318 
$ 11,178 
Property, plant and equipment, accumulated depreciation
69,215 
45,491 
Other intangible assets, accumulated amortization
$ 9,629 
$ 6,677 
Condensed Consolidated Statements Of Operations And Comprehensive Loss (USD $)
In Thousands, except Per Share data
3 Months Ended
Jun. 30,
6 Months Ended
Jun. 30,
2011
2010
2011
2010
Revenues:
 
 
 
 
Product
$ 281,393 
$ 243,953 
$ 634,757 
$ 652,227 
Service
37,210 
48,525 
68,610 
99,622 
Other
25,616 
23,421 
47,806 
40,056 
Total revenues
344,219 
315,899 
751,173 
791,905 
Expenses:
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
264,371 
238,148 
588,370 
609,564 
Operating
39,427 
40,460 
75,628 
73,267 
General and administrative
18,798 
20,369 
40,380 
47,633 
Depreciation and amortization
13,258 
19,552 
26,260 
39,518 
Loss (gain) on disposal or impairment of long-lived assets, net
(72)
91,369 
(136)
91,389 
Total expenses
335,782 
409,898 
730,502 
861,371 
Equity in earnings of White Cliffs
4,086 
6,150 
Operating income (loss)
12,523 
(93,999)
26,821 
(69,466)
Other expenses (income):
 
 
 
 
Interest expense
29,765 
26,003 
43,370 
45,397 
Foreign currency transaction loss (gain)
(79)
3,164 
(556)
1,595 
Other expense (income), net
(7,062)
2,063 
(5,591)
(747)
Total other expenses
22,624 
31,230 
37,223 
46,245 
Loss from continuing operations before income taxes
(10,101)
(125,229)
(10,402)
(115,711)
Income tax expense (benefit)
2,218 
(3,357)
1,894 
(2,514)
Loss from continuing operations
(12,319)
(121,872)
(12,296)
(113,197)
Income from discontinued operations, net of income taxes
20 
894 
29 
1,376 
Net loss
(12,299)
(120,978)
(12,267)
(111,821)
Less: net income attributable to noncontrolling interests
56 
117 
Net loss attributable to SemGroup Corporation
(12,299)
(121,034)
(12,267)
(111,938)
Net loss
(12,299)
(120,978)
(12,267)
(111,821)
Other comprehensive income (loss), net of income taxes
(335)
(7,197)
6,638 
(7,457)
Comprehensive loss
(12,634)
(128,175)
(5,629)
(119,278)
Less: comprehensive income attributable to noncontrolling interests
56 
117 
Comprehensive loss attributable to SemGroup Corporation
$ (12,634)
$ (128,231)
$ (5,629)
$ (119,395)
Net loss attributable to SemGroup Corporation per common share (Note 10):
 
 
 
 
Basic and Diluted
$ (0.30)
$ (2.92)
$ (0.29)
$ (2.70)
Condensed Consolidated Statements Of Cash Flows (USD $)
In Thousands
6 Months Ended
Jun. 30,
2011
2010
Condensed Consolidated Statements Of Cash Flows
 
 
Net cash provided by operating activities
$ 70,597 
$ 120,613 
Cash flows from investing activities:
 
 
Capital expenditures
(32,868)
(20,752)
Proceeds from sale of long-lived assets
1,091 
1,053 
Investments in White Cliffs
(2,237)
Distributions from White Cliffs in excess of equity in earnings
6,523 
Proceeds from surrender of life insurance
7,016 
Net cash used in investing activities
(27,491)
(12,683)
Cash flows from financing activities:
 
 
Debt issuance costs
(10,070)
(992)
Borrowings on debt and other obligations
26,434 
11,669 
Principal payments on debt and other obligations
(60,172)
(77,923)
Distributions
(163)
Net cash used in financing activities
(43,808)
(67,409)
Effect of exchange rate changes on cash and cash equivalents
(720)
53 
Net increase (decrease) in cash and cash equivalents
(1,422)
40,574 
Cash and cash equivalents at beginning of period
90,159 
41,917 
Cash and cash equivalents at end of period
$ 88,737 
$ 82,491 
Overview
Overview

1. OVERVIEW

SemGroup Corporation is a Delaware corporation with its headquarters 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.

During 2008, SemGroup, L.P. and many of its subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Also during 2008, certain of SemGroup, L.P.'s subsidiaries filed applications for creditor protection in Canada under the Companies' Creditors Arrangement Act. While in bankruptcy, SemGroup, L.P. filed a Plan of Reorganization with the court, which 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 on November 30, 2009 (the "Emergence Date").

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. 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. Certain reclassifications have been made to conform previously reported balances to the current presentation.

The accompanying condensed consolidated financial statements are unaudited. The condensed consolidated balance sheet at December 31, 2010 is derived from audited financial statements.

Our 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 six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

Pursuant to the rules and regulations of the Securities and Exchange Commission, 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 financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2010, which are included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission.

Reportable segments

We own a portfolio of businesses in the energy industry. Our segments include the following:

 

   

SemCrude, which conducts crude oil transportation, storage, terminalling, gathering, blending and marketing operations in the United States. SemCrude's assets include:

 

   

an approximate 640-mile pipeline network in Kansas and Oklahoma that transports crude oil from producing wells and third-party pipeline connections to several refineries and to a storage facility in Cushing, Oklahoma;

 

   

a crude oil storage facility in Cushing, Oklahoma with a capacity of 4.7 million barrels with an additional 350,000 barrels placed in service in July 2011 and an additional 1.95 million barrels contracted for construction and expected to be placed in service throughout 2012; and

 

   

a 51% ownership 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 ("White Cliffs Pipeline").

 

   

SemStream, which purchases, stores, and sells natural gas liquids in the United States. SemStream operates twelve terminals in the United States and leases a fleet of approximately 350 rail cars.

 

   

SemCAMS, which provides natural gas gathering and processing services in Alberta, Canada. SemCAMS owns working interests in, and operates, four natural gas processing plants and a network of over 600 miles of natural gas gathering and transportation pipelines.

 

   

SemGas, which provides natural gas gathering and processing services in the United States. SemGas owns and operates over 800 miles of gathering pipeline in Kansas, Oklahoma and Texas and three processing plants in Oklahoma and Texas.

 

   

SemLogistics, which provides refined products and crude oil storage services in the United Kingdom. SemLogistics owns a facility in Wales that has a storage capacity of approximately 8.7 million barrels.

 

   

SemMexico, which purchases, produces, stores and distributes liquid asphalt cement products in Mexico. SemMexico operates eleven manufacturing plants and two emulsion distribution terminals.

We previously had a seventh business segment, SemCanada Crude, which aggregated and blended crude oil in Western Canada. Due to adverse market conditions impacting this segment, we sold the property, plant and equipment of SemCanada Crude in late 2010 and began winding down its operations. During the three months ended June 30, 2010, we recorded an impairment loss of $91.8 million related to the goodwill and other intangible assets attributable to SemCanada Crude.

Inventories
Inventories

2. INVENTORIES

Inventories consist of the following (in thousands):

 

     June 30,
2011
     December 31,
2010
 

Natural gas and natural gas liquids

   $  62,186       $  104,134   

Crude oil

     15,068         18,608   

Asphalt and other

     12,139         7,104   
  

 

 

    

 

 

 
   $ 89,393       $ 129,846
  

 

 

    

 

 

 
Investment In White Cliffs
Investment In White Cliffs

3. INVESTMENT IN WHITE CLIFFS

White Cliffs

Until the end of September 2010, we owned 99.17% of White Cliffs and the remaining interests were held by two unaffiliated parties. During 2010, these parties purchased additional ownership interests in White Cliffs, which reduced our ownership percentage in White Cliffs to 51%. Upon purchasing these ownership interests, the other owners gained substantive rights to participate in the management of White Cliffs. Because of this, we deconsolidated White Cliffs at the end of September 2010 and began accounting for it under the equity method.

Under the equity method, we do not report the individual assets and liabilities of White Cliffs on our consolidated balance sheets. Instead, our ownership interest is reflected in one line as a noncurrent asset on our consolidated balance sheets. Certain summarized unaudited balance sheet information of White Cliffs is shown below (amounts in thousands):

 

     June 30,
2011
     December 31,
2010
 

Current assets

   $ 10,373       $ 9,797   

Property, plant and equipment, net

     228,607         234,300   

Goodwill

     17,000         17,000   

Other intangible assets, net

     36,961         40,848   
  

 

 

    

 

 

 

Total assets

   $ 292,941       $ 301,945   
  

 

 

    

 

 

 

Current liabilities

   $ 3,225       $ 3,824   

Members' equity

     289,716         298,121   
  

 

 

    

 

 

 

Total liabilities and members' equity

   $ 292,941       $ 301,945   
  

 

 

    

 

 

 

Certain summarized unaudited income statement information of White Cliffs for the three months and six months ended June 30, 2011 is shown below (amounts in thousands):

 

     Three Months
Ended

June 30, 2011
     Six Months
Ended

June  30, 2011
 

Revenue

   $ 16,870       $ 30,363   

Operating, general and administrative expenses

     2,994         6,205   

Depreciation and amortization expense

     5,203         10,408   

Net income

     8,673         13,750   

The equity in earnings of White Cliffs for the three months and six months ended June 30, 2011 reported in our consolidated statements of operations 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 interests.

Segments
Segments

4. SEGMENTS

As described in Note 1, we own a portfolio of energy-related businesses. These businesses are organized based on the nature and location of the services they provide. Certain summarized information related to these segments is shown in the tables below. None of the operating segments have been aggregated, other than White Cliffs, which has been included within the SemCrude 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. We sold the property, plant and equipment of SemCanada Crude during fourth quarter 2010 and began winding down its operations. SemCanada Crude ceased to be an operating segment and is therefore included within "Corporate and Other" in the tables below. 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 were allocated to the segments, based on our allocation policies in effect at the time. During fourth quarter 2010 we completed a detailed study of these expenses and developed a more refined allocation methodology, which we applied to the allocation of these expenses for the three months and six months ended June 30, 2011.

 

     Three Months Ended June 30, 2011  
     SemCrude     SemStream     SemCAMS     SemGas     SemLogistics      SemMexico     Corporate
and Other
    Consolidated  
     (dollars in thousands)  

Revenues:

                 

External

   $ 112,683      $ 109,472      $ 45,879      $ 15,030      $ 6,604       $ 54,551      $ —        $ 344,219   

Intersegment

     (1,969     16,607        —          10,325        —           —          (24,963     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     110,714        126,079        45,879        25,355        6,604         54,551        (24,963     344,219   

Expenses:

     —          —          —          —          —           —         

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

     96,144        128,829        —          17,447        —           46,917        (24,966     264,371   

Operating

     4,491        2,605        27,862        2,009        1,740         715        5        39,427   

General and administrative

     2,111        2,655        2,448        1,412        1,840         3,363        4,969        18,798   

Depreciation and amortization

     2,700        1,734        2,613        1,453        2,324         1,627        807        13,258   

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

     10        67        —          —          —           (143     (6     (72
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     105,456        135,890        32,923        22,321        5,904         52,479        (19,191     335,782   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of White Cliffs

     4,086        —          —          —          —           —          —          4,086   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     9,344        (9,811     12,956        3,034        700         2,072        (5,772     12,523   

Other expenses (income), net

     2,299        11,779        8,434        1,361        262         (332     (1,179     22,624   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   $ 7,045      $ (21,590   $ 4,522      $ 1,673      $ 438       $ 2,404      $ (4,593   $ (10,101
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total assets at June 30, 2011
(excluding intersegment receivables)

   $ 541,105      $ 254,223      $ 282,191      $ 80,054      $ 236,795       $ 107,155      $ 98,929      $ 1,600,452   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Three Months Ended June 30, 2010  
     SemCrude     SemStream     SemCAMS     SemGas     SemLogistics      SemMexico     Corporate
and
Other
    Consolidated  
     (dollars in thousands)  

Revenues:

                 

External

   $ 34,599      $ 78,452      $ 37,973      $ 11,166      $ 8,599       $ 39,834      $ 105,276      $ 315,899   

Intersegment

     694        12,653        —          6,802        —           —          (20,149     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     35,293        91,105        37,973        17,968        8,599         39,834        85,127        315,899   

Expenses:

     —          —          —          —          —           —          —          —     

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

     12,780        97,626        91        11,987        —           34,079        81,585        238,148   

Operating

     7,952        2,629        23,867        1,551        2,050         1,157        1,254        40,460   

General and administrative

     4,085        3,519        4,434        2,285        1,269         3,048        1,729        20,369   

Depreciation and amortization

     8,676        1,635        1,957        1,381        1,907         1,516        2,480        19,552   

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

     3        (11     (15     (19     —           (14     91,425        91,369   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     33,496        105,398        30,334        17,185        5,226         39,786        178,473        409,898   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     1,797        (14,293     7,639        783        3,373         48        (93,346     (93,999

Other expenses, net

     11,959        2,745        6,395        1,749        529         283        7,570        31,230   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   $ (10,162   $ (17,038   $ 1,244      $ (966   $ 2,844       $ (235   $ (100,916   $ (125,229
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

 

     Six Months Ended June 30, 2011  
     SemCrude     SemStream     SemCAMS     SemGas     SemLogistics      SemMexico     Corporate
and
Other
    Consolidated  
     (dollars in thousands)  

Revenues:

                 

External

   $ 195,688      $ 332,495      $ 80,636      $ 27,731      $ 14,585       $ 99,281      $ 757      $ 751,173   

Intersegment

     (1,183     29,524        —          18,595        —           —          (46,936     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     194,505        362,019        80,636        46,326        14,585         99,281        (46,179     751,173   

Expenses:

                 

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

     162,144        354,441        10        31,638        —           86,555        (46,418     588,370   

Operating

     9,153        5,389        50,766        3,849        3,565         2,848        58        75,628   

General and administrative

     4,468        5,382        9,359        3,239        3,672         6,158        8,102        40,380   

Depreciation and amortization

     5,383        3,422        5,169        2,882        4,604         3,259        1,541        26,260   

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

     12        64        —          —          —           (206     (6     (136
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     181,160        368,698        65,304        41,608        11,841         98,614        (36,723     730,502   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Equity in earnings of White Cliffs

     6,150        —          —          —          —           —          —          6,150   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     19,495        (6,679     15,332        4,718        2,744         667        (9,456     26,821   

Other expenses (income), net

     2,268        15,023        14,671        1,747        428         (624     3,710        37,223   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   $ 17,227      $ (21,702   $ 661      $ 2,971      $ 2,316       $ 1,291      $ (13,166   $ (10,402
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Six Months Ended June 30, 2010  
     SemCrude     SemStream     SemCAMS     SemGas     SemLogistics      SemMexico     Corporate
and
Other
    Consolidated  
     (dollars in thousands)  

Revenues:

                 

External

   $ 96,117      $ 324,358      $ 68,479      $ 26,009      $ 18,384       $ 66,874      $ 191,684      $ 791,905   

Intersegment

     4,068        24,698        —          13,225        —           —          (41,991     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     100,185        349,056        68,479        39,234        18,384         66,874        149,693        791,905   

Expenses:

                 

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

     51,290        332,140        94        26,882        —           56,881        142,277        609,564   

Operating

     14,396        5,061        42,930        2,745        4,109         2,089        1,937        73,267   

General and administrative

     9,986        7,430        10,964        5,278        2,743         6,072        5,160        47,633   

Depreciation and amortization

     16,713        3,230        4,652        2,682        3,871         3,072        5,298        39,518   

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

     46        (34     (15     (19     —           (14     91,425        91,389   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     92,431        347,827        58,625        37,568        10,723         68,100        246,097        861,371   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income (loss)

     7,754        1,229        9,854        1,666        7,661         (1,226     (96,404     (69,466

Other expenses, net

     19,059        4,319        8,164        3,205        1,292         301        9,905        46,245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

   $ (11,305   $ (3,090   $ 1,690      $ (1,539   $ 6,369       $ (1,527   $ (106,309   $ (115,711 )
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

Financial Instruments
Financial Instruments

5. FINANCIAL INSTRUMENTS

Fair value of financial instruments

We record certain financial assets and liabilities at fair value at each balance sheet date. The table below summarizes the balances of these assets and liabilities (in thousands):

 

     June 30, 2011     December 31, 2010  
     Level 1      Level 2     Level 3     Netting*     Total     Level 1     Level 2     Level 3     Netting*     Total  

Assets:

                     

Commodity derivatives

   $ 3,617       $ 2,244      $ 7,127      $ (2,764   $ 10,224      $ 97,857      $ 1,993      $ 2,499      $ (97,981   $ 4,368   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,617       $ 2,244      $ 7,127      $ (2,764   $ 10,224      $ 97,857      $ 1,993      $ 2,499      $ (97,981   $ 4,368   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

                     

Commodity derivatives

   $ 2,678       $ 4,110      $ 8,863      $ (2,764   $ 12,887      $ 101,563      $ 7,494      $ 3,046      $ (97,981   $ 14,122   

Warrants

     —           —          13,618        —          13,618        —          —          17,192        —          17,192   

Interest rate swaps

     —           323        —          —          323        —          —          —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     2,678         4,433        22,481        (2,764     26,828        101,563        7,494        20,238        (97,981     31,314   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities at fair value

   $ 939       $ (2,189   $ (15,354   $ —        $ (16,604   $ (3,706   $ (5,501   $ (17,739   $ —        $ (26,946
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* 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 were obtained using 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.

"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 were obtained using information from a pricing service and internal valuation models incorporating observable and unobservable market data. These include commodity derivatives, such as forward contracts and swaps for which there is not a highly liquid market, and therefore are not included in Level 2 above. Level 3 measurements also include common stock warrants. We use a Black-Scholes pricing model to estimate the fair value of the warrants.

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.

The following tables summarize changes in the fair value of our net financial liabilities classified as Level 3 in the fair value hierarchy (in thousands):

 

     Three Months
Ended
June 30, 2011
    Three Months
Ended
June 30, 2010
 
     Warrants     Commodity
Derivatives
    Total     Warrants     Commodity
Derivatives
    Total  

Net liabilities – beginning balance

   $ (18,412   $ (1,792   $ (20,204   $ (16,168   $ (378   $ (16,546

Transfers out of Level 3(*)

     —          (247     (247     —          —          —     

Total gain or loss (realized and unrealized) included in earnings(**)

     4,794        320        5,114        1,242        (7,279     (6,037

Settlements

     —          (17     (17     —          6,490        6,490   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities – ending balance

   $ (13,618   $ (1,736   $ (15,354   $ (14,926   $ (1,167   $ (16,093
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of total gain or loss included in earnings for the period attributable to the change in unrealized gain or loss relating to assets and liabilities still held at the reporting date

   $ 4,794      $ 302      $ 5,096      $ 1,242      $ (5,501   $ (4,259

 

     Six Months
Ended
June 30, 2011
    Six Months
Ended
June 30, 2010
 
     Warrants     Commodity
Derivatives
    Total     Warrants     Commodity
Derivatives
    Total  

Net liabilities—beginning balance

   $ (17,192   $ (547   $ (17,739   $ (16,909   $ (23,438   $ (40,347

Transfers out of Level 3(*)

     —          (425     (425     —          —          —     

Total gain or loss (realized and unrealized) included in earnings(**)

     3,574        (374     3,200        1,983        (6,466     (4,483

Settlements

     —          (390     (390     —          28,737        28,737   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities—ending balance

   $ (13,618   $ (1,736   $ (15,354   $ (14,926   $ (1,167   $ (16,093
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of total gain or loss included in earnings for the period attributable to the change in unrealized gain or loss relating to assets and liabilities still held at the reporting date

   $ 3,574      $ (765   $ 2,809      $ 1,983      $ (4,579   $ (2,596

(*) 

Our policy is to recognize transfers in and transfers out as of the end of the reporting period.

(**) Gains and losses related to commodity derivatives are reported in product revenue. Gains and losses related to warrants are recorded in other expense (income).

Commodity derivatives

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.

SemCrude manages commodity price risk by limiting its net open positions subject to outright price risk and basis risk resulting from grade, location or time differences. SemCrude does so by selling and purchasing like quantities of crude oil with purchase and sale transactions or by entering into future delivery and purchase obligations with futures contracts or other commodity derivatives at locations along its pipeline and Cushing storage systems, with the effect that many of these purchases and sales become "back-to-back" transactions (purchases and sales of crude oil are predominantly matched). SemCrude storage and transportation assets also can be used to mitigate location and time basis risk. In addition, when SemCrude engages in back-to-back purchases and sales, the sales and purchase prices are intended to lock in positive margins for SemCrude, e.g., the sales price is intended to exceed purchase costs and all other fixed and variable costs. All marketing activities are subject to our risk management policy which establishes limits at SemCrude and SemGroup Corporation levels, to manage risk and mitigate financial exposure.

SemStream manages commodity price risk by limiting its net open positions subject to outright price risk and basis risk resulting from grade, location or time differences. SemStream does so by selling and purchasing similar quantities of natural gas liquids with purchase and sale transactions for current or future delivery, by entering into future delivery and purchase obligations with futures contracts or other commodity derivatives and employing its storage and transportation assets. SemStream may hedge its natural gas liquids commodity price exposure with derivatives on commodities other than natural gas liquids due to the limited size of the market for natural gas liquids derivatives. In addition, physical transaction sale and purchase strategies are intended to lock in positive margins for SemStream, e.g., the sales price is sufficient to cover purchase costs, any other fixed and variable costs and SemStream's profit. All marketing activities are subject to our risk management policy, which establishes limits both at the SemStream segment and consolidated SemGroup levels to manage risk and mitigate financial exposure.

Our commodity derivatives were comprised of swaps, future contracts, and forward contracts of crude oil and natural gas liquids. These are defined as follows:

Swaps – Over the counter 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 – Over the counter 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 derivatives entered into (amounts in thousands of barrels):

 

     Three Months
Ended
June 30, 2011
     Three Months
Ended
June 30, 2010
     Six Months
Ended
June 30, 2011
     Six Months
Ended
June 30, 2010
 

Sales

     6,168         3,153         12,811         4,463   

Purchases

     6,508         2,463         13,372         3,152   

We have not designated any of our commodity derivatives as accounting hedges. The following table shows the fair value of commodity derivatives recorded to other current assets and other current liabilities on our consolidated balance sheets as of June 30, 2011 and December 31, 2010 (amounts in thousands):

 

     June 30, 2011      December 31, 2010  
     Assets      Liabilities      Assets      Liabilities  

Commodity contracts

   $ 10,224       $ 12,887       $ 4,368       $ 14,122   

The following table shows the realized and unrealized gains (losses) related to commodity derivatives recorded as increases (decreases) to product revenue in our consolidated statements of operations for the three months and six months ended June 30, 2011 and 2010 (amounts in thousands):

 

     Three Months
Ended
June 30, 2011
    Three Months
Ended
June 30, 2010
    Six Months
Ended
June 30, 2011
    Six Months
Ended
June 30, 2010
 

Commodity contracts

   $ (878   $ (1,431   $ (2,898   $ 6,247   

Warrants

As described in Note 9, upon emergence from bankruptcy, we issued certain common stock warrants. These warrants are recorded at fair value in other noncurrent liabilities on the consolidated balance sheets.

Interest swaps

As described in Note 7, we entered into certain interest swaps during February 2011. The swaps are recorded at fair value in other noncurrent liabilities on the consolidated balance sheet, with changes in the fair value (net of income taxes) recorded to other comprehensive income (loss).

Income Taxes
Income Taxes

6. INCOME TAXES

Due to our emergence from bankruptcy and overall restructuring, we have recorded a full valuation allowance on all U.S. federal and state deferred tax assets. We have determined that no accruals related to uncertainty in tax positions are required. The effective tax rate was (22)% for the three months ended June 30, 2011 and 3% for the three months ended June 30, 2010. The effective tax rate was (18)% for the six months ended June 30, 2011 and 2% for the six months ended June 30, 2010. 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 and the full valuation allowance which was 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.

Debt
Debt

7. DEBT

Our debt consists of the following (in thousands):

 

     June 30,
2011
     December 31,
2010
 

SemGroup revolving credit facility

   $ 11,000       $ —     

SemGroup Term Loan A

     75,000         —     

SemGroup Term Loan B

     200,000         —     

Previous SemGroup credit facilities

     —           324,065   

SemLogistics credit facility

     24,027         24,289   

SemMexico credit facility

     6,494         —     

Capital leases

     85         89   
  

 

 

    

 

 

 

Total long-term debt

     316,606         348,443   

Less: current portion of long-term debt

     9,150         12   
  

 

 

    

 

 

 

Noncurrent portion of long-term debt

   $ 307,456       $ 348,431   
  

 

 

    

 

 

 

SemGroup credit agreement

During June 2011, we entered into a new credit agreement that consists of a revolving facility and two term loans. We used the proceeds from the new credit facilities to retire our previous revolving credit facility and term loan.

The revolving credit facility had a capacity of $325 million at June 30, 2011. This capacity was increased by $25 million in July 2011 when another bank joined the syndicate. This capacity may be used either for cash borrowings or letters of credit, although the maximum letter of credit capacity is $250 million. At June 30, 2011, we had outstanding cash borrowings of $11 million on this facility and outstanding letters of credit of $93.6 million. The principal is due on June 20, 2016, and any letters of credit expire on June 13, 2016. Earlier principal payments may be required if we enter into certain transactions to sell assets or obtain new borrowings. We have the right to make additional principal payments without incurring any penalties for early repayment.

The term loans include a loan with a principal balance of $75 million (the "Term Loan A") and a loan with a principal balance of $200 million (the "Term Loan B"). We are required to make quarterly principal payments on both of the Term Loans beginning on September 30, 2011. The Term Loan A matures on June 20, 2016 and the Term Loan B matures on June 20, 2018. Earlier principal payments may be required if we enter into certain transactions to sell assets or obtain new borrowings. We have the right to make additional principal payments, generally without incurring any penalties for early repayment (although a premium of 1% may apply if we refinance the Term Loan B prior to June 20, 2012). The following table summarizes the scheduled principal payments on the Term Loans (amounts in thousands):

 

 

     Term
Loan A
     Term
Loan B
 

Year ended December 31, 2011

   $ 1,875       $ 1,000   

Year ended December 31, 2012

     4,500         2,000   

Year ended December 31, 2013

     6,375         2,000   

Year ended December 31, 2014

     9,375         2,000   

Year ended December 31, 2015

     16,875         2,000   

Year ended December 31, 2016

     36,000         2,000   

Year ended December 31, 2017

     —           2,000   

Year ended December 31, 2018

     —           187,000   
  

 

 

    

 

 

 

Total

   $ 75,000       $ 200,000   
  

 

 

    

 

 

 

Interest on revolving credit cash borrowings and on the Term Loan A will be charged at either a Eurodollar rate or an alternate base rate, at our election. The Eurodollar rate is calculated as:

 

   

the London Interbank Offered Rate ("LIBOR") for U.S. dollar deposits adjusted for currency requirements; plus

 

   

a margin that can range from 2.5% to 4.0%, depending on a leverage ratio specified in the agreement.

The alternate base rate is calculated as:

 

   

The greater of i) the U.S. Prime Rate, ii) the Federal Funds Effective Rate plus 0.5%, or iii) one-month LIBOR plus 1%; plus

 

   

a margin that can range from 1.5% to 3.0%, depending on a leverage ratio specified in the agreement.

The interest rate in effect at June 30, 2011 on revolving cash borrowings was 5.75%, determined under the alternate base rate. This was calculated as 3.25% plus a margin of 2.5%. The interest rate in effect at June 30, 2011 on the Term Loan A was 3.69%, determined under the Eurodollar rate. This was calculated as 0.19% plus a margin of 3.5%.

Interest on the Term Loan B is charged at either a Eurodollar rate or an alternate base rate, at our election. The Eurodollar rate is calculated as:

 

   

The greater of i) LIBOR for U.S. dollar deposits adjusted for currency requirements, or ii) 1.25%; plus

 

   

a margin of 4.5%.

The alternate base rate is calculated as:

 

   

The greater of i) the U.S. Prime Rate, ii) the Federal Funds Effective Rate plus 0.5%, iii) one-month LIBOR plus 1%, or iv) 2.25%; plus

 

   

a margin of 3.5%.

The interest rate in effect at June 30, 2011 on the Term Loan B was 5.75%, determined under the Eurodollar rate. This was calculated as 1.25% plus a margin of 4.5%.

At each interest payment date, we have the option of electing whether interest will be charged at the Eurodollar rate or at the alternate base rate for the following interest period. If we elect the alternate base rate, the following interest payment date will be at the end of the calendar quarter. If we elect the Eurodollar rate, we may elect for the next interest payment date to occur after one, two, three, or six months.

 

Under the terms of the credit agreement, we will be required to enter into a derivative instrument, such as an interest swap or cap agreement, designed to mitigate our risk associated with future increases in market interest rates. We will be required to enter into such an agreement prior to December 31, 2011, or sooner if the three year swap rate closing price exceeds 2.0%.

Fees are charged on any outstanding letters of credit at a rate that ranges from 2.5% to 4.0%, depending on a leverage ratio specified in the credit agreement. 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. In addition, we are charged an annual administrative fee of $0.1 million.

We paid $11.0 million of fees to lenders and advisors at the inception of the credit agreement, which were recorded in other noncurrent assets and are being amortized over the life of the agreement. We paid an additional $0.4 million of fees in July 2011 when we increased the capacity of the revolver.

We recorded interest expense related to the new SemGroup revolving credit facility of $0.3 million for the three and six months ended June 30, 2011, including amortization of debt issuance costs. We recorded interest expense related to the recently retired revolving credit facility of $22.5 million during the three months ended June 30, 2011, $29.0 million during the six months ended June 30, 2011, $10.9 million for the three months ended June 30, 2010, and $20.7 million for the six months ended June 30, 2010, including amortization of debt issuance costs.

We recorded interest expense related to the new SemGroup term loans of $0.4 million for the three and six months ended June 30, 2011, including amortization of debt issuance costs. We recorded interest expense related to the recently retired term loan of $6.2 million during the three months ended June 30, 2011, $13.0 million during the six months ended June 30, 2011, $10.2 million for the three months ended June 30, 2010, and $16.9 million for the six months ended June 30, 2010, including amortization of debt issuance costs.

The credit agreement includes customary affirmative and negative covenants, including limitations on the creation of new indebtedness, liens, sale and lease-back transactions, new investments, making fundamental changes including mergers and consolidations, making of dividends and other distributions, making material changes in our business, modifying certain documents and maintenance of a consolidated leverage ratio and an interest coverage ratio. In addition, the credit agreement prohibits any commodity transactions that are not permitted by our Comprehensive Risk Management Policy.

The credit agreement includes customary events of default, including events of default relating to non-payment of principal and other amounts owing under the credit agreement from time to time, including in respect of letter of credit disbursement obligations, inaccuracy of representations and warranties in any material respect when made or when deemed made, violation of covenants, cross payment-defaults to any material indebtedness, cross acceleration to any material indebtedness, bankruptcy and insolvency events, the occurrence of a change of control, certain unsatisfied judgments, certain ERISA events, certain environmental matters and certain assertions of or actual invalidity of certain loan documents. A default under the credit agreement would permit the participating banks to terminate commitments, require immediate repayment of any outstanding loans with interest and any unpaid accrued fees, and require the cash collateralization of outstanding letter of credit obligations.

The credit agreement restricts our ability to make certain types of payments related to our capital stock, including the declaration or payment of dividends. The credit agreement is guaranteed by all of our material domestic subsidiaries and secured by a lien on substantially all of our property and assets, subject to customary exceptions.

At June 30, 2011, we were in compliance with the terms of the credit agreement.

Previous term loan and revolving credit facilities

Pursuant to the Plan of Reorganization, on November 30, 2009, we entered into a revolving credit facility and a term loan. We retired these facilities in June 2011 upon entering into a new credit agreement (described above). The revolving credit facility included capacity for cash borrowings and letters of credit.

 

We paid $27 million in fees to the lenders at the inception of the agreement, which was recorded in other noncurrent assets and was amortized over the life of the agreement.

Interest on revolving cash borrowings was charged at a floating rate, which was calculated as 5.5% plus whichever of the following yielded the highest rate: a) the Federal Funds Effective Rate plus 0.5%; b) the Prime Rate; c) the three-month LIBOR rate plus 1.5%, or d) 2.5%. In addition, a facility fee of $0.4 million was charged each year.

The facility included a fee that was payable at maturity. Interest was charged on this fee at a floating rate, which was calculated as 7.0% plus the greater of LIBOR or 1.5%.

Certain of the letters of credit were prefunded. Fees were charged on this prefunded tranche at a range of 7.0% to 8.5%. Fees on additional outstanding letters of credit were charged at a rate of 7.0%.

Fees ranging from 1.5% to 2.5% were charged on any lender commitments that we did not utilize.

Interest was charged on the term loan at a rate of 9%. We had the option under certain circumstances to defer interest on the term loan; when we selected this option, interest was charged during that period at a rate of 11%.

At March 31, 2011, the remaining unamortized other noncurrent asset associated with fees payable at inception or maturity was $19.3 million. This balance was amortized to interest expense during second quarter 2011.

SemLogistics credit facilities

SemLogistics entered into a credit agreement in December 2010, which includes a £15 million term loan and a £15 million revolving credit facility (U.S. $24 million each, at the June 30, 2011 exchange rate). The proceeds from this new facility were used to retire SemLogistics' previous credit facility.

The term loan is to be repaid with quarterly payments of £250,000 (U.S. $0.4 million at the June 30, 2011 exchange rate) during 2013, quarterly payments of £750,000 (U.S. $1.2 million at the June 30, 2011 exchange rate) during 2014 and 2015, and a final payment of £8,750,000 ($14.0 million at the June 30, 2011 exchange rate) on December 31, 2015. SemLogistics has the right to make early principal payments without incurring any penalties for early repayment. In the event of a change in control of SemLogistics, the outstanding balance will be due and payable within 30 days.

The revolving credit facility can be utilized either for cash borrowings or letters of credit. The number of cash borrowings may not exceed five at any point in time and the number of outstanding letters of credit may not exceed ten at any point in time. Borrowings under the revolving facility may be repaid at any time up to the expiration of the facility on December 31, 2015. At June 30, 2011, no cash borrowings were outstanding under the revolving facility and no letters of credit were utilized.

Interest is charged on both the term loan and the revolving loans (including letters of credit) at a floating rate, which is calculated as LIBOR plus a margin that ranges from 1.75% to 2.5%, depending on whether SemLogistics meets certain financial ratios specified in the agreement. The interest rate in effect at June 30, 2011 was 2.58%, which was calculated as 1.75% plus the LIBOR rate of 0.83%. Interest on the term loan and revolving facility are payable quarterly. In addition, a commitment fee of 0.50% is charged on any unused commitments under the facility and is payable quarterly. In addition, SemLogistics paid fees of $1.3 million upon inception of the facility, which were recorded to other noncurrent assets and are being amortized over the life of the facility.

During February 2011, we entered into three interest swap agreements. The intent of the swaps is to offset a portion of the variability in interest payments due under the term loan. The swaps require us to pay a fixed rate of 2.49% on a combined notional amount of £7.5 million (which declines during the final year of the swap until it reaches £7.0 million) each quarter through March 31, 2014. The swaps entitle us to receive a floating rate equal to LIBOR on the same notional amount.

 

Failure to comply with the provisions of the agreement could cause events of default, which could result in increases in interest rates, the debt becoming due and payable, or other adverse consequences. The events of default include the failure to pay fees, interest, or principal when due, a breach of any material representation or warranty contained in the credit agreement, a breach of certain covenants, any default under any of the agreements entered into in connection with the loan, bankruptcy, judgments and attachments, any event of default under our other credit agreements, default events relating to employee benefit plans, the guarantees, or collateral documents or the credit agreement failing to be in full force and effect or being declared null and void, or the occurrence of an event that is reasonably likely to have a material adverse effect on our ability to meet our obligations under the facility. In addition, cross acceleration will occur if we do not pay any other debt facility.

SemLogistics used the proceeds from the term loan to retire its previous credit agreement, which it had entered into on November 30, 2009. The previous facility bore interest at a floating rate, which was calculated as LIBOR plus a margin ranging from 5.5% to 6.0%. In addition, SemLogistics paid $2.1 million of fees to the lender at the inception of the agreement.

SemLogistics recorded interest expense of $0.3 million for the three months ended June 30, 2011 and $0.6 million for the six months ended June 30, 2011, including amortization of debt issuance costs. SemLogistics recorded interest expense of $0.6 million for the three months ended June 30, 2010 and $1.5 million for the six months ended June 30, 2010, including amortization of debt issuance costs. SemLogistics recorded the fair value of the interest swaps as a noncurrent liability of $0.3 million at June 30, 2011, with a corresponding adjustment to other comprehensive income (net of income taxes).

SemMexico credit facilities

During 2010, SemMexico entered into a credit agreement that allowed SemMexico to borrow up to 80 million Mexican pesos (U.S. $6.8 million at the June 30, 2011 exchange rate) at any time through June 2011. Borrowings on this facility are required to be repaid with monthly payments through May 2013. At June 30, 2011, borrowings of $76.7 million pesos (U.S. $6.5 million) were outstanding on this facility. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.5%. At June 30, 2011, the interest rate in effect was 6.34%, calculated as 1.5% plus the bank prime rate of 4.84% at the time the funds were borrowed.

During 2011, SemMexico entered into an additional credit agreement that allows SemMexico to borrow up to 56 million Mexican pesos (U.S. $4.7 million at the June 30, 2011 exchange rate) at any time during the term of the facility, which matures in February 2012. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.7%. The facility also includes letter of credit capacity of 196 million Mexican pesos (U.S. $16.6 million at the June 30, 2011 exchange rate). Letters of credit of 196 million Mexican pesos (U.S. $16.6 million at the June 30, 2011 exchange rate) were outstanding under this facility at June 30, 2011. Fees are charged on outstanding letters of credit at a rate of 0.45%.

SemMexico recorded interest expense of $0.1 million during the six months ended June 30, 2011 related to these facilities.

SemCrude Pipeline credit facility

SemCrude Pipeline, L.L.C. ("SemCrude Pipeline"), which is a wholly-owned subsidiary that holds our ownership interest in White Cliffs, borrowed $125 million under a credit agreement on November 30, 2009. SemCrude Pipeline retired this facility during September 2010.

Interest was generally charged on the SemCrude Pipeline credit facility at a floating rate, which was calculated as 6% plus the greater of LIBOR or 1.5%. In addition, we paid $4.8 million in fees to the lender at the inception of the agreement, which have been fully amortized. We recorded interest expense related to this facility of $4.4 million during the three months ended June 30, 2010 and $6.9 million during the six months ended June 30, 2010.

Fair value

We estimate that the fair value of our credit agreements approximated their recorded values at June 30, 2011.

Commitments And Contingencies
Commitments And Contingencies

8. COMMITMENTS AND CONTINGENCIES

Bankruptcy matters

(a) Confirmation Order appeals

Manchester Securities appeal. On October 21, 2009, Manchester Securities Corporation, a creditor of SemGroup Holdings, L.P. (one of our subsidiaries), filed an objection to the Plan of Reorganization. In the objection, Manchester argued that the Plan of Reorganization should not be confirmed because it did not provide for an alleged $50 million claim of SemGroup Holdings, L.P. against SemCrude Pipeline, L.L.C. (another of our subsidiaries). On October 28, 2009, the bankruptcy court overruled the objection and entered the confirmation order approving the Plan of Reorganization. On November 4, 2009, Manchester filed a notice of appeal of the confirmation order. On December 4, 2009, Manchester'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 February 18, 2011, the District Court granted our motion to dismiss the appeal. On March 22, 2011, Manchester filed a notice to appeal this order. 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.

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. Luke Oil has filed a motion to stay the briefing on our motion to dismiss. On February 18, 2011, the District Court denied the stay motion and ordered the parties to complete briefing. 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 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 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 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.

SEC. On August 5, 2008 and September 5, 2008, we received requests for voluntary production from the Securities and Exchange Commission ("SEC"). On September 24, 2008, the SEC entered an Order Directing Private Investigation and Designating Officers to Take Testimony that pertains to us. The SEC has also served us with subpoenas dated October 24, 2009, December 11, 2009 and November 15, 2010, seeking further documents and information. We continue to receive requests for documents and information, including a request for our representatives to provide testimony. We continue to comply with the SEC requests and subpoenas. We are unaware of any currently pending formal charges against us by the SEC.

 

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.

DOJ. On July 15, 2008, we received a subpoena from the Department of Justice ("DOJ") directing us to produce documents responsive to the subpoena. We contacted the DOJ regarding the subpoena and the DOJ verbally voluntarily stayed compliance with the subpoena. We have not produced any documents to the DOJ and, to our knowledge, the DOJ is not currently pursuing any such production. We are unaware of any currently pending formal charges against us by the DOJ.

(c) Claims reconciliation process

A large number of parties have made claims against us for obligations alleged to have been incurred prior to our 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.

PEMEX lawsuit

On May 26, 2011, PEMEX Exploración y Producción ("PEMEX") filed a lawsuit against several defendants, including SemCrude, L.P. The lawsuit alleges that SemCrude purchased at least $10.4 million of condensate that had been stolen from PEMEX. The lawsuit does not allege that SemCrude knew the condensate had been stolen, and states that PEMEX "does not allege that SemCrude acted with intent or knowledge that it was a part of any conspiracy." The lawsuit seeks damages from SemCrude in the amount of the purchased condensate, plus attorney's fees and statutory penalties. We cannot reliably predict the final outcome of this matter, as this lawsuit has only recently been filed.

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 contingent liabilities may change materially as circumstances develop.

 

Environmental

We may from time to time experience leaks of petroleum products from our facilities, 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 SemCrude and one owned by SemGas) that KDHE believes, based on their historical use, may have soil or groundwater contamination in excess of state standards. At the present time, no contamination has been confirmed. 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. At the present time, no violation of law has been alleged and the amount of this potential cleanup cannot be determined because it is not yet known whether these sites are contaminated.

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 is under investigation by Environment Canada and Alberta Environment, and we have accrued a liability of $0.4 million at June 30, 2011 for estimated fines and environmental contributions.

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 $35.7 million at June 30, 2011, which is included within other noncurrent liabilities on our consolidated balance sheets. This amount was calculated using the $110.0 million cost we estimate we would incur to retire these facilities, discounted based on our risk-adjusted cost of borrowing at the Emergence Date, taking into consideration 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. The $110.0 million estimated cost represents only our proportionate share of the obligations associated with these facilities. An additional $46.1 million of estimated costs are attributable to third-party owners' proportionate share of the obligations. If an owner fails to perform on its obligations, the other owners (including SemGroup) could be obligated to bear that party's share of the remediation costs.

Our other segments may also be subject to removal and restoration costs upon retirement of their facilities. However, we do not believe the present value of such obligations under current laws and regulations, after taking into account the estimated lives of our facilities, is material to our consolidated financial position or results of operations.

 

Purchase and sale commitments

We routinely enter into agreements to purchase and sell petroleum products at specified future dates. We establish a margin for these purchases by entering into various types of physical and financial sale and exchange transactions through which we seek to maintain a position that is substantially balanced between purchases on the one hand and sales and future delivery obligations on the other. We account for these commitments as normal purchases and sales, and therefore we do not record assets or liabilities related to these agreements until the product is purchased or sold. At June 30, 2011, such commitments included the following (in thousands):

 

 

     Volume
(barrels)
     Value  

Fixed price sales

     150       $ 14,734   

Floating price purchases

     22,800         2,224,755   

Floating price sales

     21,742         2,221,430   

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).

We have also entered into an agreement under which we are obligated to purchase all of the propane produced by a third-party refinery at a price that floats based on market rates. Under this agreement, which expires on March 31, 2012, we purchased 8.8 million gallons of propane during the six months ended June 30, 2011 for a total price of $13.2 million.

We also entered into a long term marketing agreement to market all natural gas liquids produced by a third party's natural gas processing plants. The agreement expires March 31, 2022. We marketed 26.9 million gallons of natural gas liquids at a purchase cost of $41.8 million during the six months ended June 30, 2011 pursuant to this agreement.

In addition, our SemGas segment 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. During the six months ended June 30, 2011, the majority of SemGas' revenues were generated from such contracts.

Owners' Equity
Owners' Equity
9. OWNERS' 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, 2010 to June 30, 2011 (in thousands):

 

                        Accumulated         
            Additional           Other      Total  
     Common      Paid-in     Accumulated     Comprehensive      Owners'  
     Stock      Capital     Deficit     Income      Equity  

Balance at December 31, 2010

   $ 415       $ 1,023,727      $ (170,189   $ 1,115       $ 855,068   

Net loss

     —           —          (12,267     —           (12,267

Other comprehensive income, net of income taxes

     —           —          —          6,638         6,638   

Share-based compensation expense

     —           2,561        —          —           2,561   

Issuance of common stock under compensation plans

     1         (1     —          —           —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2011

   $ 416       $ 1,026,287      $ (182,456   $ 7,753       $ 852,000   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

For the six months ended June 30, 2011, other comprehensive income consists primarily of currency translation adjustments.

 

Common stock

Upon emergence from bankruptcy, we issued 40,882,496 shares of common stock. The Plan of Reorganization specified that we were to issue an additional 517,500 shares of common stock in settlement of pre-petition claims. As of June 30, 2011, we have issued 181,610 shares of this stock, and we will issue the remainder as the process of resolving the claims progresses. The owners' equity balances on the consolidated balance sheets include the shares that are required to be issued in settlement of pre-petition claims. The shares of common stock reflected on the consolidated balance sheet at June 30, 2011 are summarized below:

 

Shares issued on Emergence Date

     40,882,496   

Shares subsequently issued in settlement of pre-petition claims

     181,610   

Remaining shares required to be issued in settlement of pre-petition claims

     335,890   

Issuance of shares under employee and director compensation programs

     238,495   

Shares issued upon exercise of warrants

     6   
  

 

 

 

Total shares

     41,638,497   

Par value per share

   $ 0.01   
  

 

 

 

Common stock on June 30, 2011 consolidated balance sheet

   $ 416,385   
  

 

 

 

The common stock includes Class A and Class B stock. Class A stock is eligible to be listed on an exchange, whereas Class B stock is not. Any share of Class B stock may be converted to Class A at the election of the holder. Both classes of stock have full voting rights. The total number of shares authorized for issuance is 90,000,000 shares of Class A stock and 10,000,000 shares of Class B stock.

Equity-based compensation

Our board of directors has authorized the issuance of a maximum of 2,781,635 shares of common stock under director and employee compensation programs. At June 30, 2011, there are approximately 470,000 unvested shares that have been granted pursuant to these programs. The par value of these shares has not yet been reflected in common stock on the consolidated balance sheet, as these shares have not yet vested. There are also shares of restricted stock that were returned to treasury upon forfeiture. The par value of these shares is not reflected in the consolidated balance sheet, as no accounting recognition is given to forfeited shares. For certain of the awards, the number of shares that will vest is contingent upon our achievement of certain specified targets. If we meet the specified maximum targets, approximately 30,000 additional shares could vest.

Warrants

Upon emergence from bankruptcy, we issued 1,634,210 warrants. The Plan of Reorganization specified that we were to issue an additional 544,737 warrants in settlement of pre-petition claims. As of June 30, 2011, we have issued 191,165 of these warrants, and we will issue the remainder as the process of resolving the claims progresses. The warrants reflected on the consolidated balance sheet at June 30, 2011 are summarized below:

 

Warrants issued on Emergence Date

     1,634,210   

Warrants issued in settlement of pre-petition claims

     191,165   

Remaining warrants to be issued in settlement of pre-petition claims

     353,572   

Warrants exercised

     (6
  

 

 

 

Total warrants

     2,178,941   

Fair value per warrant at June 30, 2011

   $ 6.25   
  

 

 

 

Warrant value included within other noncurrent liabilities on June 30, 2011 consolidated balance sheet

     $13,618,381   
  

 

 

 

Each warrant entitles the holder to purchase one share of common stock for $25 at any time before the November 30, 2014 expiration date. The closing price of our common stock was $25.67 per share on June 30, 2011. In the event of a change in control of the Company, the holders of the warrants would have the right to sell the warrants to us, and we would have the right to purchase the warrants from the holders. In either case, the price to be paid for the warrants would be calculated using a standard pricing model with inputs specified in the warrants agreement.

Earnings Per Share
Earnings Per Share

10. EARNINGS PER SHARE

The following table summarizes the calculation of basic and diluted earnings (loss) per share for the three months ended June 30, 2011 and 2010 (amounts in thousands, except per share amounts):

 

00000000 00000000 00000000 00000000 00000000 00000000
     Three Months Ended June 30, 2011     Three Months Ended June 30, 2010  
     Continuing     Discontinued            Continuing     Discontinued         
     Operations     Operations      Net     Operations     Operations      Net  

Income (loss)

   $ (12,319   $ 20       $ (12,299   $ (121,872   $ 894       $ (120,978

less: Income attributable to noncontrolling interests

     —          —           —          56        —           56   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Numerator

   $ (12,319   $ 20       $ (12,299   $ (121,928   $ 894       $ (121,034

Common stock issued and to be issued pursuant to Plan of Reorganization

     41,400        41,400         41,400        41,400        41,400         41,400   

Weighted average common stock outstanding issued under compensation plans

     222        222         222        —          —           —     

Denominator

     41,622        41,622         41,622        41,400        41,400         41,400   

Basic and diluted earnings (loss) per share

   $ (0.30   $ 0.00       $ (0.30   $ (2.95   $ 0.02       $ (2.92

 

The following table summarizes the calculation of basic and diluted earnings (loss) per share for the six months ended June 30, 2011 and 2010 (amounts in thousands, except per share amounts):

 

00000000 00000000 00000000 00000000 00000000 00000000
     Six Months Ended June 30, 2011     Six Months Ended June 30, 2010  
     Continuing     Discontinued            Continuing     Discontinued         
     Operations     Operations      Net     Operations     Operations      Net  

Income (loss)

   $ (12,296   $ 29       $ (12,267   $ (113,197   $ 1,376       $ (111,821

less: Income attributable to noncontrolling interests

     —          —           —          117        —           117   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Numerator

   $ (12,296   $ 29       $ (12,267   $ (113,314   $ 1,376       $ (111,938

Common stock issued and to be issued pursuant to Plan of Reorganization

     41,400        41,400         41,400        41,400        41,400         41,400   

Weighted average common stock outstanding issued under compensation plans

     210        210         210        —          —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Denominator

     41,610        41,610         41,610        41,400        41,400         41,400   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Basic and dluted earnings (loss) per share

   $ (0.30   $ 0.00       $ (0.29   $ (2.74   $ 0.03       $ (2.70
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Since we experienced losses from continuing operations, neither the warrants nor the restricted stock (described in Note 9) caused any dilution.

Subsequent Events
Subsequent Events

11. SUBSEQUENT EVENTS

During August 2011, we formed a new subsidiary, Rose Rock Midstream, L.P. (the "Partnership"), and filed a registration statement with the Securities and Exchange Commission to register limited partner interests in the Partnership for sale to the public. We intend to contribute certain assets of our SemCrude segment to the Partnership and to sell a portion of the limited partner interests in the Partnership in an initial public offering, which we expect to complete no earlier than fourth quarter 2011.