SEMGROUP CORP, 10-Q filed on 11/9/2012
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Oct. 31, 2012
Class A
Oct. 31, 2012
Class B
Document Type
10-Q 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Sep. 30, 2012 
 
 
Document Fiscal Period Focus
Q3 
 
 
Document Fiscal Year Focus
2012 
 
 
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
 
41,883,447 
28,235 
Condensed Consolidated Balance Sheets (USD $)
Sep. 30, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 67,461,000 
$ 73,613,000 
Restricted cash
34,912,000 
39,543,000 
Accounts receivable (net of allowance of $4,416 and $3,623 at September 30, 2012 and December 31, 2011, respectively)
335,795,000 
209,781,000 
Receivable from affiliates
5,786,000 
6,408,000 
Inventories
34,479,000 
31,994,000 
Other current assets
17,998,000 
28,396,000 
Total current assets
496,431,000 
389,735,000 
Property, plant and equipment (net of accumulated depreciation of $119,547 and $83,481 at September 30, 2012 and December 31, 2011, respectively)
800,231,000 
733,925,000 
Equity method investments
378,522,000 
327,243,000 
Goodwill
9,956,000 
9,453,000 
Other intangible assets (net of accumulated amortization of $6,272 and $4,336 at September 30, 2012 and December 31, 2011, respectively)
8,181,000 
8,950,000 
Other assets, net
17,744,000 
21,875,000 
Total assets
1,711,065,000 
1,491,181,000 
Current liabilities:
 
 
Accounts payable
237,357,000 
145,203,000 
Payable to affiliates
1,577,000 
6,314,000 
Accrued liabilities
73,943,000 
53,675,000 
Payables to pre-petition creditors
32,944,000 
37,800,000 
Deferred revenue
15,127,000 
23,031,000 
Other current liabilities
3,495,000 
4,430,000 
Current portion of long-term debt
2,096,000 
26,058,000 
Total current liabilities
366,539,000 
296,511,000 
Long-term debt
189,569,000 
83,277,000 
Deferred income taxes
76,581,000 
73,784,000 
Other noncurrent liabilities
77,024,000 
58,944,000 
SemGroup owners' equity:
 
 
Common stock (Note 10)
419,497 
418,000 
Additional paid-in capital
1,036,978,000 
1,032,365,000 
Treasury stock, at cost (Note 10)
(242,000)
Accumulated deficit
(166,768,000)
(167,812,000)
Accumulated other comprehensive income (loss)
1,055,000 
(13,875,000)
Total SemGroup owners' equity
871,442,000 
851,096,000 
Noncontrolling interests in consolidated subsidiaries
129,910,000 
127,569,000 
Total owners' equity
1,001,352,000 
978,665,000 
Total liabilities and owners' equity
$ 1,711,065,000 
$ 1,491,181,000 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Statement of Financial Position [Abstract]
 
 
Accounts receivable , net of allowance
$ 4,416 
$ 3,623 
Property, plant and equipment ,net of accumulated depreciation
119,547 
83,481 
Other intangible assets , net of accumulated amortization
$ 6,272 
$ 4,336 
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Revenues:
 
 
 
 
Product
$ 209,202 
$ 335,331 
$ 708,408 
$ 962,879 
Service
29,800 
28,565 
86,727 
96,782 
Other
38,850 
27,626 
126,525 
75,426 
Total revenues
277,852 
391,522 
921,660 
1,135,087 
Expenses:
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
189,830 
313,490 
651,283 
896,871 
Operating
52,367 
41,772 
172,750 
116,384 
General and administrative
16,680 
16,883 
53,073 
56,443 
Depreciation and amortization
12,081 
12,894 
35,687 
38,355 
Gain on disposal or impairment of long-lived assets, net
(3,615)
(3,496)
(136)
Total expenses
267,343 
385,039 
909,297 
1,107,917 
Earnings from equity method investments
3,116 
4,016 
22,903 
10,166 
Operating income
13,625 
10,499 
35,266 
37,336 
Other expenses (income):
 
 
 
 
Interest expense
1,992 
6,013 
7,763 
49,321 
Currency (gain) loss
355 
(2,874)
358 
(3,430)
Other (income) expense, net
9,354 
(8,973)
16,783 
(14,564)
Total other expenses, net
11,701 
(5,834)
24,904 
31,327 
Income (loss) from continuing operations before income taxes
1,924 
16,333 
10,362 
6,009 
Income tax (benefit) expense
2,091 
1,308 
985 
3,202 
Income (loss) from continuing operations
(167)
15,025 
9,377 
2,807 
Income ( loss) from discontinued operations, net of income taxes
(265)
(686)
(456)
(735)
Net income
(432)
14,339 
8,921 
2,072 
Less: net income attributable to noncontrolling interests
2,336 
7,915 
Net Income (Loss) Attributable to Parent
(2,768)
14,339 
1,006 
2,072 
Other comprehensive income (loss), net of income taxes
12,072 
(18,103)
14,930 
(11,465)
Comprehensive income
11,640 
(3,764)
23,851 
(9,393)
Less: comprehensive income attributable to noncontrolling interests
2,336 
7,915 
Comprehensive income (loss) attributable to SemGroup
$ 9,304 
$ (3,764)
$ 15,936 
$ (9,393)
Net income per common share (Note 11):
 
 
 
 
Basic
$ (0.07)
$ 0.34 
$ 0.02 
$ 0.05 
Diluted
$ (0.07)
$ 0.34 
$ 0.02 
$ (0.15)
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Cash flows from operating activities:
 
 
Net income
$ 8,921 
$ 2,072 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Net unrealized (gain) loss related to derivative instruments
(432)
(9,394)
Depreciation and amortization
36,123 
39,556 
Gain on disposal or impairment of long-lived assets, net
(3,496)
(137)
Equity earnings from investments
(22,903)
(10,166)
Distributions from equity investments
25,053 
10,166 
Amortization and write down of debt issuance costs
2,078 
23,235 
Deferred tax benefit
(3,738)
(4,019)
Non-cash equity compensation
4,832 
3,949 
Provision for uncollectible accounts receivable, net of recoveries
(828)
(5,340)
Currency (gain) loss
358 
(3,430)
Changes in operating assets and liabilities (Note 12)
5,790 
(54,726)
Net cash provided by (used in) operating activities
51,758 
(8,234)
Cash flows from investing activities:
 
 
Capital expenditures
(82,123)
(50,879)
Proceeds from sale of long-lived assets
347 
1,093 
Investments in non-consolidated subsidiaries
(63,999)
(2,863)
Proceeds from the sale of non-consolidated affiliate
3,500 
Distributions in excess of equity in earnings of affiliates
10,569 
9,745 
Net cash used in investing activities
(131,706)
(42,904)
Cash flows from financing activities:
 
 
Debt issuance costs
(694)
(10,639)
Borrowings on debt and other obligations
260,500 
153,434 
Principal payments on debt and other obligations
(179,001)
(115,425)
Distributions
(5,754)
Repurchase of stock-based awards for payment of statutory taxes due on stock-based compensation
(242)
Net cash provided by (used in) financing activities
74,809 
27,370 
Effect of exchange rate changes on cash and cash equivalents
(977)
1,005 
Net decrease in cash and cash equivalents
(6,116)
(22,763)
Net Cash Provided by (Used in) Discontinued Operations
(36)
(1,206)
Net Cash Provided by (Used in) Continuing Operations
(6,152)
(23,969)
Cash and cash equivalents at beginning of period
73,613 
87,821 
Cash and cash equivalents at end of period
$ 67,461 
$ 63,852 
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.
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 applications for creditor protection in Canada under the Companies’ Creditors Arrangement Act. Later during 2008, certain other U.S. subsidiaries filed petitions for reorganization.
During the reorganization process, SemGroup, L.P. filed a Plan of Reorganization with the court, which was confirmed on October 28, 2009. 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 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.
The accompanying condensed consolidated financial statements are unaudited. The condensed consolidated balance sheet at December 31, 2011 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 nine months ended September 30, 2012, are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.
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 condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2011, which are included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission.
Certain reclassifications have been made to conform previously reported balances to the current presentation, including the reclass of prior periods to reflect the SemStream segment's Arizona operations as discontinued operations and classify assets and liabilites as held for sale. On September 12, 2012, we entered into an agreement to sell the Arizona operations, subject to regulatory approval.
Our significant accounting policies are consistent with those described in our Annual Report on Form 10-K for the year ended December 31, 2011.
Recent accounting pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”), which creates common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. We adopted this guidance on January 1, 2012. The impact of adoption was not material.
During June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. This ASU is designed to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which deferred certain presentation requirements in ASU No. 2011-05 for items reclassified out of accumulated other comprehensive income. We adopted this guidance on January 1, 2012. The impact of adoption was not material.
During September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment”. This ASU is designed to simplify how entities test goodwill for impairment. Under the new standard, an entity may first assess qualitative factors to determine whether it is more likely than not that the fair value of an asset group is less than the carrying amount, for the purpose of determining whether it is necessary to estimate the fair value of the asset group to which the goodwill relates. We adopted this guidance on January 1, 2012, and will test goodwill for impairment on October 1st in accordance with SemGroup Corporation’s policy.
Rose Rock Midstream, L.P.
ROSE ROCK MIDSTREAM, L.P.
ROSE ROCK MIDSTREAM, L.P.
On December 14, 2011, our subsidiary Rose Rock Midstream, L.P. (“Rose Rock”) completed an initial public offering (“IPO”) of 7 million common units representing limited partner interests (NYSE: RRMS). We control the operations of Rose Rock through our ownership of the general partner interest, and we continue to consolidate Rose Rock. Our ownership interest in Rose Rock as of September 30, 2012 (unaudited) and December 31, 2011 is shown in the table below:

General partner interest
2
%
Limited partner interest (a)
57
%
Total ownership interest
59
%
(a)
Represents 1.4 million common units and 8.4 million subordinated units
Outside ownership interests in Rose Rock are reflected in “noncontrolling interests in consolidated subsidiaries” on our condensed consolidated balance sheets at September 30, 2012 and December 31, 2011. 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 (loss) for the three months and nine months ended September 30, 2012.
We receive distributions from Rose Rock on our common and subordinated units and our two percent general partner interest, which includes our 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 distributions paid or expected to be paid (in thousands, except for per unit amounts):

 
 
Record Date
 
Payment Date
 
Distri-bution
Per Unit
 
Distributions Paid/To Be Paid
Quarter Ended
 
SemGroup
 
Noncontrolling
Interest
Common Units
 
Total
Distributions
 
General
Partner
 
Incentive
Distri-butions
 
Common
Units
 
Subord-inated
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

 
$
6,549

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

**
$
134

 
$

 
$
545

 
$
3,293

 
$
2,748

 
$
6,720

*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, 2012.Certain summarized balance sheet information of Rose Rock is shown below (in thousands):
 
(unaudited)
 
 
 
September 30,
2012
 
December 31,
2011
Cash
$
13,498

 
$
9,709

Other current assets
236,144

 
156,873

Property, plant and equipment, net
285,244

 
276,246

Other noncurrent assets, net
2,665

 
2,666

Total assets
$
537,551

 
$
445,494

Current liabilities
$
227,131

 
$
140,553

Long-term debt
69

 
87

Partners’ capital attributable to SemGroup
180,441

 
177,323

Partners’ capital attributable to noncontrolling interests
129,910

 
127,531

Total liabilities and partners’ capital
$
537,551

 
$
445,494

Certain summarized income statement information of Rose Rock for the three months and nine months ended September 30, 2012 and September 30, 2011 is shown below (in thousands):
 
Three Months Ended September 30, 2012
 
Three Months Ended September 30, 2011
 
Nine Months Ended September 30, 2012
 
Nine Months Ended September 30, 2011
 
 
 
 
Revenue
$
131,554

 
$
104,616

 
$
468,687

 
$
299,121

Cost of products sold
$
111,790

 
$
90,660

 
$
412,847

 
$
252,804

Operating, general and administrative expenses
$
9,779

 
$
6,570

 
$
25,976

 
$
20,202

Depreciation and amortization expense
$
3,066

 
$
3,122

 
$
9,032

 
$
8,505

Net income
$
6,469

 
$
3,830

 
$
19,353

 
$
16,407

Investments in Non-Consolidated Subsidiaries
INVESTMENTS IN NON-CONSOLIDATED SUBSIDIARIES
INVESTMENTS IN NON-CONSOLIDATED SUBSIDIARIES
White Cliffs
We account for our 51% ownership of White Cliffs Pipeline, L.L.C. (“White Cliffs”) under the equity method, as the other owners have substantive rights to participate in its management. Under the equity method, we do not report the individual assets and liabilities of White Cliffs 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. Certain summarized income statement information of White Cliffs for the three months and nine months ended September 30, 2012 and September 30, 2011 is shown below (in thousands):
 
Three Months Ended September 30, 2012
 
Three Months Ended September 30, 2011
 
Nine Months Ended September 30, 2012
 
Nine Months Ended September 30, 2011
Revenue
$
28,522

 
$
17,515

 
$
76,910

 
$
47,878

Operating, general and administrative expenses
$
3,857

 
$
3,824

 
$
11,382

 
$
10,029

Depreciation and amortization expense
$
4,995

 
$
5,214

 
$
14,964

 
$
15,622

Net income
$
19,670

 
$
8,477

 
$
50,564

 
$
22,227

Distributions paid to SemGroup
$
(10,794
)
 
$
(7,239
)
 
$
(30,561
)
 
$
(19,912
)

The equity in earnings of White Cliffs for the three months and nine months ended September 30, 2012 and September 30, 2011 reported in our condensed consolidated statement of operations and comprehensive income (loss) 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 $24.0 thousand and $0.6 million of such general and administrative expense for the three months ended September 30, 2012 and September 30, 2011, respectively. White Cliffs recorded $1.5 million and $2.4 million of such general and administrative expense for the nine months ended September 30, 2012 and September 30, 2011, respectively. The decrease in allocated costs from prior year is primarily due to revisions to our cost allocations based on a transfer pricing study completed in the third quarter for which year to date adjustments were booked in September 2012.
In September 2012, we received $3.5 million from the other owners of White Cliffs related to the September 2010 exercise of their rights to purchase additional ownership interests in White Cliffs. This gain is reported in gain on disposal or impairment of long-lived assets, net in the condensed consolidated statements of operations and comprehensive income (loss).
NGL Energy
We own 9,133,409 common units representing limited partner interests in NGL Energy Partners LP (NYSE: NGL) (“NGL Energy”), which represents approximately 18.0% of the total 50,669,109 limited partner units of NGL Energy outstanding at June 30, 2012, and a 6.42% interest in the general partner of NGL Energy. Our limited and general partner ownership interests reflect the dilution caused by an NGL Energy acquisition completed June 19, 2012. In conjunction with the June 2012 transaction, we received 201,378 additional common units.
At September 30, 2012, the fair market value of our 9,133,409 common unit investment in NGL Energy was $219.6 million, based on a September 28, 2012 closing price of $24.04 per common unit. This does not reflect our interest in the general partner of NGL Energy. The excess of the recorded amount of our investment over the book value of our share of the underlying net assets primarily represents equity method goodwill. 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, we have recorded losses representing our equity in earnings of NGL Energy of $6.9 million and $2.2 million in our condensed consolidated statements of operations and comprehensive income (loss) for the three months and nine months ended September 30, 2012, respectively, which relate to the earnings of NGL Energy for the three months and nine months ended June 30, 2012, prorated for the period of time we held our ownership interest in NGL Energy. We received cash distributions of $2.1 million and $5.1 million for the three months and nine months ended September 30, 2012, respectively, related to these earnings from NGL Energy. The agreement to waive our distribution rights on approximately 3.9 million common units expired in the third quarter 2012 and any third quarter distributions declared related to these units will be received in the fourth quarter 2012.
Certain unaudited summarized income statement information of NGL Energy for the three months and nine months ended June 30, 2012 is shown below (in thousands):

 
Three Months Ended June 30, 2012
 
Nine Months Ended June 30, 2012
 
 
Revenue
$
326,436

 
$
1,236,023

Cost of products sold
$
298,985

 
$
1,128,581

Operating, general and administrative expenses
$
33,298

 
$
76,015

Depreciation and amortization expense
$
9,227

 
$
21,260

Net income
$
(24,710
)
 
$
(4,678
)
 
Glass Mountain Pipeline LLC
In May 2012, we formed a joint venture, Glass Mountain Pipeline, LLC (“GMP”), to construct, maintain and operate a 210-mile crude oil pipeline system originating in Alva and Arnett, Oklahoma and terminating at Cushing, Oklahoma. Construction of the pipeline is expected to be completed by the end of 2013. Once the pipeline is in service, it will be operated by a subsidiary of Rose Rock. In September 2012, we acquired an additional 25% ownership interest in GMP. As of September 30, 2012, we have invested $62.5 million in GMP, including our capital contributions and amounts paid to acquire the additional ownership percentage. We also assumed the responsibility for future capital contributions related to the additional 25% ownership. Subsequent to this transaction, we have a 50% ownership interest in GMP and account for our investment in GMP using the equity method.
As of September 30, 2012, we expect to make additional contributions of approximately $11.2 million and $51.6 million in 2012 and 2013, respectively.
Segments
SEGMENTS
SEGMENTS
Our businesses are organized based on the nature and location of the services they provide. Certain summarized information related to our reportable segments is shown in the tables below. None of the operating segments have been aggregated, other than White Cliffs, which has 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, 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 or impairment 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

Total assets at September 30, 2012 (excluding intersegment receivables)
$
747,200

 
$
190,736

 
$
298,867

 
$
124,130

 
$
175,269

 
$
90,906

 
$
83,957

 
$
1,711,065


 
Three Months Ended September 30, 2011
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
105,938

 
$
168,051

 
$
41,368

 
$
15,192

 
$
4,230

 
$
56,743

 
$

 
$
391,522

Intersegment
(1,322
)
 
14,725

 

 
13,158

 

 

 
(26,561
)
 

Total revenues
104,616

 
182,776

 
41,368

 
28,350

 
4,230

 
56,743

 
(26,561
)
 
391,522

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Costs of products sold, exclusive of depreciation and amortization shown below
90,660

 
178,904

 

 
20,512

 
152

 
49,823

 
(26,561
)
 
313,490

Operating
4,530

 
2,018

 
29,845

 
2,432

 
1,564

 
1,383

 

 
41,772

General and administrative
2,040

 
2,164

 
3,378

 
1,591

 
1,604

 
2,825

 
3,281

 
16,883

Depreciation and amortization
3,122

 
878

 
2,577

 
1,528

 
2,339

 
1,653

 
797

 
12,894

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

 
(24
)
 

 
4

 

 
20

 

 

Total expenses
100,352

 
183,940

 
35,800

 
26,067

 
5,659

 
55,704

 
(22,483
)
 
385,039

Earnings from equity method investments
4,016

 

 

 

 

 

 

 
4,016

Operating income (loss)
8,280

 
(1,164
)
 
5,568

 
2,283

 
(1,429
)
 
1,039

 
(4,078
)
 
10,499

Other expenses (income), net
(349
)
 
(638
)
 
1,990

 
82

 
312

 
479

 
(7,710
)
 
(5,834
)
Income (loss) from continuing operations before income taxes
$
8,629

 
$
(526
)
 
$
3,578

 
$
2,201

 
$
(1,741
)
 
$
560

 
$
3,632

 
$
16,333


 
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 or impairment 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


 
Nine Months Ended September 30, 2011
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
(dollars in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
301,626

 
$
492,938

 
$
122,004

 
$
42,923

 
$
18,815

 
$
156,024

 
$
757

 
$
1,135,087

Intersegment
(2,505
)
 
44,249

 

 
31,753

 

 

 
(73,497
)
 

Total revenues
299,121

 
537,187

 
122,004

 
74,676

 
18,815

 
156,024

 
(72,740
)
 
1,135,087

Expenses:
 
 
 
 
 
 

 
 
 
 
 
 
 

Costs of products sold, exclusive of depreciation and amortization shown below
252,804

 
528,356

 
10

 
52,150

 
152

 
136,378

 
(72,979
)
 
896,871

Operating
13,683

 
6,390

 
80,611

 
6,282

 
5,129

 
4,231

 
58

 
116,384

General and administrative
6,508

 
6,727

 
12,737

 
4,829

 
5,276

 
8,983

 
11,383

 
56,443

Depreciation and amortization
8,505

 
3,501

 
7,746

 
4,410

 
6,943

 
4,912

 
2,338

 
38,355

Loss (gain) on disposal or impairment of long-lived assets, net
12

 
40

 

 
4

 

 
(186
)
 
(6
)
 
(136
)
Total expenses
281,512

 
545,014

 
101,104

 
67,675

 
17,500

 
154,318

 
(59,206
)
 
1,107,917

Earnings from equity method investments
10,166

 

 

 

 

 

 

 
10,166

Operating income (loss)
27,775

 
(7,827
)
 
20,900

 
7,001

 
1,315

 
1,706

 
(13,534
)
 
37,336

Other expenses (income), net
1,919

 
14,323

 
16,661

 
1,829

 
740

 
(145
)
 
(4,000
)
 
31,327

Income (loss) from continuing operations before income taxes
$
25,856

 
$
(22,150
)
 
$
4,239

 
$
5,172

 
$
575

 
$
1,851

 
$
(9,534
)
 
$
6,009

Inventories
INVENTORIES
INVENTORIES
Inventories consist of the following (in thousands):
 
September 30,
2012
 
December 31,
2011
Crude oil
$
29,181

 
$
21,803

Asphalt and other
5,298

 
10,191

 
$
34,479

 
$
31,994

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, 2012 and December 31, 2011 (in thousands):

 
September 30, 2012
 
December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Netting*
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Netting*
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
609

 
$

 
$

 
$
(15
)
 
$
594

 
$
393

 
$

 
$

 
$
(231
)
 
$
162

Total assets
609

 

 

 
(15
)
 
594

 
393

 

 

 
(231
)
 
162

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
15

 
$

 
$

 
$
(15
)
 
$

 
$
231

 
$

 
$

 
$
(231
)
 
$

Warrants
29,263

 

 

 

 
29,263

 
12,180

 

 

 

 
12,180

Interest rate swaps

 

 

 

 

 

 
358

 

 

 
358

Total liabilities
29,278

 

 

 
(15
)
 
29,263

 
12,411

 
358

 

 
(231
)
 
12,538

Net liabilities at fair value
$
(28,669
)
 
$

 
$

 
$

 
$
(28,669
)
 
$
(12,018
)
 
$
(358
)
 
$

 
$

 
$
(12,376
)
*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), beginning in September 2011, when the warrants began to be 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 include commodity derivatives, such as forwards and swaps for which there is not a highly liquid market, and therefore are not included in Level 2 above. Level 3 measurements also included common stock warrants until September 2011, when the warrants began to be traded on the New York Stock Exchange. Prior to that point, we used 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.
There were no financial assets or liabilities classified as Level 3 during the three months and nine months ended September 30, 2012. The following table summarizes changes in the fair value of our net financial assets (liabilities) classified as Level 3 in the fair value hierarchy (in thousands):

 
Three Months Ended September 30, 2012
 
Three Months Ended September 30, 2011
 
 
 
Warrants
 
Commodity
Derivatives
 
Total
 
Warrants
 
Commodity
Derivatives
 
Total
Net liabilities—beginning balance
$

 
$

 
$

 
$
(13,618
)
 
$
(1,736
)
 
$
(15,354
)
Transfers out of Level 3(*)

 

 

 
8,934

 
6

 
8,940

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

 

 

 
4,684

 
3,156

 
7,840

Settlements

 

 

 

 
(1,884
)
 
(1,884
)
Net liabilities—ending balance
$

 
$

 
$

 
$

 
$
(458
)
 
$
(458
)
Amount of total gain 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
$

 
$

 
$

 
$

 
$
3,156

 
$
3,156


 
Nine Months Ended September 30, 2012
 
Nine Months Ended September 30, 2011
 
 
 
Warrants
 
Commodity
Derivatives
 
Total
 
Warrants
 
Commodity
Derivatives
 
Total
Net liabilities—beginning balance
$

 
$

 
$

 
$
(17,192
)
 
$
(547
)
 
$
(17,739
)
Transfers out of Level 3(*)

 

 

 
8,934

 
(419
)
 
8,515

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

 

 

 
8,258

 
2,783

 
11,041

Settlements

 

 

 

 
(2,275
)
 
(2,275
)
Net liabilities—ending balance
$

 
$

 
$

 
$

 
$
(458
)
 
$
(458
)
Amount of total gain 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
$

 
$

 
$

 
$

 
$
2,783

 
$
2,783

(*) In these tables, transfers in and transfers out are recognized as of the beginning of the reporting period for commodity derivatives and as of the transfer date for warrants.
(**) Gains and losses related to commodity derivatives are reported in product revenue and gains and losses related to warrants are recorded in other expense (income) in the condensed consolidated statements of operations and comprehensive income (loss).
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 crude oil to create back-to-back transactions that are intended to lock in positive margins based on the timing, location or quality of the crude oil 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.
We contributed the primary operating assets of SemStream, L.P. (“SemStream) to NGL Energy on November 1, 2011, including all of SemStream’s commodity derivatives. Prior to November 1, 2011, SemStream managed 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 did 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, at times, hedged 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 were intended to lock in positive margins for SemStream, e.g., the sales price was sufficient to cover purchase costs, any other fixed and variable costs and SemStream’s profit. All marketing activities were subject to our Comprehensive Risk Management Policy, which establishes limits 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 unaudited notional quantities for commodity derivative instruments entered into (in thousands of barrels):
 
Three Months Ended September 30, 2012
 
Three Months Ended September 30, 2011
 
Nine Months Ended September 30, 2012
 
Nine Months Ended September 30, 2011
 
 
 
 
Sales
470

 
5,189

 
1,153

 
18,000

Purchases
380

 
4,344

 
1,066

 
17,716

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, 2012
 
December 31, 2011
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
$
594

 
$

 
$
162

 
$


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, 2012
 
Three Months Ended September 30, 2011
 
Nine Months Ended September 30, 2012
 
Nine Months Ended September 30, 2011
 
 
 
 
 
$
(631
)
 
$
2,960

 
$
(342
)
 
$
62


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). Beginning in September 2011, the warrants began to be traded on the New York Stock Exchange.
Income Taxes
INCOME TAXES
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 109% for the three months ended September 30, 2012, and 8% for the three months ended September 30, 2011. The effective tax rate was 10% for the nine months ended September 30, 2012, and 53% for the nine months ended September 30, 2011. 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. For the three months and nine months ended September 30, 2012, the rate is impacted by a noncontrolling interest in Rose Rock for which taxes are not provided. 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,
2012
 
December 31,
2011
SemGroup corporate revolving credit facility
$
189,500

 
$
82,000

Rose Rock credit facility

 

SemLogistics credit facility

 
23,180

SemMexico credit facility
2,072

 
4,046

Capital leases
93

 
109

Total long-term debt
$
191,665

 
$
109,335

less: current portion of long-term debt
2,096

 
26,058

Noncurrent portion of long-term debt
$
189,569

 
$
83,277


SemGroup corporate credit agreement
Our revolving credit facility had a capacity of $300 million at September 30, 2012. The capacity was reduced from $320 million to $300 million during the first quarter of 2012 following the close of Rose Rock’s IPO. 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, 2012, we had outstanding cash borrowings of $189.5 million on this facility and outstanding letters of credit of $2.1 million.
At September 30, 2012, $90 million of our outstanding cash borrowings incurred interest at the Eurodollar rate and $99.5 million incurred interest at the alternate base rate (“ABR”). The interest rate in effect at September 30, 2012, on $50 million of Eurodollar rate borrowings was 3.23%, calculated as LIBOR of 0.7334% plus a margin of 2.5%. The interest rate in effect at September 30, 2012, on $40 million of Eurodollar rate borrowings was 2.96%, calculated as LIBOR of 0.46060% plus a margin of 2.5%. The interest rate in effect at September 30, 2012, on the $99.5 million of ABR borrowings was 4.75%, calculated as the prime rate of 3.25% plus a margin of 1.5%.
At September 30, 2012, the commitment rate in effect on letters of credit was 2.5%. 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, 2012, $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 loan.
We recorded interest expense related to the SemGroup revolving credit facility of $1.7 million and $4.9 million for the three months and nine months ended September 30, 2012, respectively, including amortization of debt issuance costs.
At September 30, 2012, we were in compliance with the terms of the credit agreement.
Rose Rock credit facility
At September 30, 2012, there were no revolving cash borrowings on Rose Rock’s $150 million revolving credit facility. We had $38.2 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. We had $8.4 million of Secured Bilateral Letters of Credit outstanding and the interest rate in effect on $2.7 million of Secured Bilateral Letters of Credit was 1.75%. The interest rate in effect on $5.7 million of Secured Bilateral Letters of Credit was 2.00%. Secured Bilateral Letters of Credit are external to the facility and do not reduce revolver availability. At September 30, 2012, we were in compliance with the terms of the credit agreement.
In September 2012, we amended the credit agreement such that the revolving credit facility may under certain conditions be increased by up to an additional $400 million. The previous agreement provided for an increase of up to $200 million.
We recorded $0.5 million and $1.4 million of interest expense during the three months and nine months ended September 30, 2012, respectively, including amortization of debt issuance costs.
At September 30, 2012, $1.6 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.
SemLogistics credit facilities
SemLogistics entered into a credit agreement in December 2010, which included a £15 million term loan and a £15 million revolving credit facility. This facility was terminated in March 2012.
At December 31, 2011, unamortized debt issuance costs of $0.8 million were included in other noncurrent assets. This balance was amortized to interest expense during first quarter 2012.
During February 2011, we entered into three interest swap agreements. The intent of the swaps was to offset a portion of the variability in interest payments due under the term loan. These swaps were terminated in March 2012 with a loss on closure of $0.4 million, including a reclass of $0.3 million from accumulated other comprehensive income to earnings.
SemMexico facilities
During 2010, SemMexico entered into a credit agreement that allowed SemMexico to borrow up to 80 million Mexican pesos at any time through June 2011. Borrowings on this facility are required to be repaid with monthly payments through May 2013. At September 30, 2012, borrowings of 26.7 million Mexican pesos (U.S. $2.1 million at the September 30, 2012 exchange rate) were outstanding on this facility. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.5%. At September 30, 2012, the interest rate in effect was 6.30%, calculated as 1.5% plus the bank prime rate of 4.80%.
SemMexico also has outstanding letters of credit of 292.8 million Mexican pesos at September 30, 2012 (U.S. $22.8 million at the September 30, 2012 exchange rate). Fees are generally charged on outstanding letters of credit at a rate of 0.46%.
On June 13, 2012, SemMexico entered into an additional revolving credit agreement that allows SemMexico to borrow up to 44 million Mexican pesos (U.S. $3.4 million at the September 30, 2012 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, 2012, there were no outstanding borrowings on this facility.
On July 13, 2012, SemMexico entered into an additional credit agreement that allows SemMexico to borrow up to 56 million Mexican pesos (U.S. $4.4 million at the September 30, 2012 exchange rate) at any time during the term of the facility, which matures in July 2013. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.7%. At September 30, 2012, there were no outstanding borrowings on this facility.
SemMexico recorded interest expense of $0.1 million and $0.2 million during the three months and nine months ended September 30, 2012, respectively, related to these facilities. At September 30, 2012, we were in compliance with the terms of these facilities.
Fair value
We estimate that the fair value of our long-term debt was not materially different than the recorded values at September 30, 2012, and is categorized as a Level 3 measurement. 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 debt outstanding at September 30, 2012.
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
Bankruptcy matters
(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. 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 some of 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 relating to findings in the examiner’s report, 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 former 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.
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.
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. and SemManagement, L.L.C. (which are currently subsidiaries of SemGroup). The services provided by SemCrude to Blueknight under this agreement included the coordination of movement of crude oil belonging to Blueknight’s customers and 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 manage the movement of its crude oil and the operation of its Cushing terminal.
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 we requested Blueknight to substantiate its claim, Blueknight filed suit against us in the District Court of Oklahoma County, Oklahoma. On May 1, 2012, the court approved our motion to transfer this case to Tulsa County, Oklahoma. On July 2, 2012, the Tulsa County District Court appointed a Special Master to conduct a review of whether Blueknight is missing 141,000 barrels of crude oil from operations occurring during the months of April through June, 2010. The Special Master will prepare an advisory report to the Court of her findings and conclusions. We believe this matter is without merit and will vigorously 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. We are currently reviewing disclosure received from the agencies and have engaged our expert to assist us in formulating our response. Although it is not possible to predict the outcome of these proceedings, we accrued a liability for estimated fines and environmental contributions of $0.4 million in December 2010, which we continue to carry on our books at September 30, 2012.
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 $39.7 million at September 30, 2012, which is included within other noncurrent liabilities on our condensed consolidated balance sheets. This amount was calculated using the $109.1 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 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 financial position or results of operations.
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.
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, 2012, such commitments included the following (in thousands):
 
Volume
(Barrels)
 
Value
Fixed price purchases
77

 
$
6,922

Fixed price sales
88

 
$
8,440

Floating price purchases
25,422

 
$
2,397,146

Floating price sales
25,483

 
$
2,411,393

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 2015. At September 30, 2012, approximately $0.1 million was due under the contract and the amount of future obligation is approximately $3.3 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. In 2012, the majority of SemGas’ revenues were generated from such contracts.
During the first quarter 2012, SemGas committed to purchasing equipment related to a 125 MMcf per day processing facility. At September 30, 2012, the future obligation associated with this purchase is $6.6 million.
See Note 3 for commitments related to Glass Mountain Pipeline LLC.
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, 2011 to September 30, 2012 (in thousands):
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Total
Owners’
Equity
Balance at December 31, 2011
$
418

 
$
1,032,365

 
$

 
$
(167,812
)
 
$
(13,875
)
 
$
127,569

 
$
978,665

Net income

 

 

 
1,006

 

 
7,915

 
8,921

Other comprehensive income, net of income taxes

 

 

 

 
14,930

 

 
14,930

Distributions to noncontrolling interests

 

 

 

 

 
(5,754
)
 
(5,754
)
Non-cash equity compensation

 
4,614