SEMGROUP CORP, 10-Q filed on 8/9/2013
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2013
Jul. 31, 2013
Class A
Jul. 31, 2013
Class B
Document Type
10-Q 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Jun. 30, 2013 
 
 
Document Fiscal Period Focus
Q2 
 
 
Document Fiscal Year Focus
2013 
 
 
Entity Registrant Name
SemGroup Corp 
 
 
Entity Central Index Key
0001489136 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
42,021,494 
28,235 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 298,766 
$ 80,029 
Restricted cash
34,332 
34,678 
Accounts receivable, net
347,677 
346,169 
Receivable from affiliates
8,594 
6,178 
Inventories
34,369 
34,433 
Other current assets
16,285 
18,516 
Total current assets
740,023 
520,003 
Property, plant and equipment, net
833,591 
814,724 
Equity method investments
466,239 
387,802 
Goodwill
9,916 
9,884 
Other intangible assets, net
6,811 
7,585 
Other noncurrent assets, net
40,071 
8,181 
Total assets
2,096,651 
1,748,179 
Current liabilities:
 
 
Accounts payable
252,972 
253,623 
Accrued liabilities
67,579 
63,831 
Payables to pre-petition creditors
32,367 
32,933 
Deferred revenue
17,736 
18,973 
Other current liabilities
7,745 
4,960 
Current portion of long-term debt
4,349 
24 
Total current liabilities
382,748 
374,344 
Long-term debt
466,549 
206,062 
Deferred income taxes
55,947 
65,620 
Other noncurrent liabilities
89,302 
80,625 
Commitments and contingencies (Note 9)
   
   
SemGroup owners' equity:
 
 
Common stock (Note 10)
425 
420 
Additional paid-in capital
1,114,388 
1,039,189 
Treasury stock, at cost (Note 10)
(613)
(242)
Accumulated deficit
(98,661)
(145,674)
Accumulated other comprehensive loss
(11,711)
(1,299)
Total SemGroup owners' equity
1,003,828 
892,394 
Noncontrolling interests in consolidated subsidiaries
98,277 
129,134 
Total owners' equity
1,102,105 
1,021,528 
Total liabilities and owners' equity
$ 2,096,651 
$ 1,748,179 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2013
Dec. 31, 2012
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 4,390 
$ 3,687 
Accumulated depreciation
151,298 
130,886 
Accumulated amortization
$ 7,549 
$ 6,701 
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Jun. 30, 2013
Jun. 30, 2012
Revenues:
 
 
 
 
Product
$ 241,253 
$ 237,571 
$ 476,882 
$ 499,206 
Service
31,678 
29,615 
59,335 
56,928 
Other
51,313 
64,591 
75,723 
87,674 
Total revenues
324,244 
331,777 
611,940 
643,808 
Expenses:
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
212,709 
219,936 
425,078 
461,457 
Operating
69,682 
82,389 
110,453 
120,380 
General and administrative
16,898 
16,561 
33,935 
36,391 
Depreciation and amortization
12,814 
11,882 
25,450 
23,607 
(Gain) loss on disposal of long-lived assets, net
(376)
119 
(538)
119 
Total expenses
311,727 
330,887 
594,378 
641,954 
Earnings from equity method investments
14,861 
12,289 
32,206 
19,787 
Operating income
27,378 
13,179 
49,768 
21,641 
Other expenses (income):
 
 
 
 
Interest expense
4,495 
2,114 
6,891 
5,773 
Foreign currency transaction (gain) loss
(349)
(35)
(516)
Other expense, net
6,467 
3,508 
32,100 
7,428 
Total other expenses, net
10,613 
5,587 
38,475 
13,203 
Income from continuing operations before income taxes
16,765 
7,592 
11,293 
8,438 
Income tax expense (benefit)
9,288 
(92)
(44,718)
(1,104)
Income from continuing operations
7,477 
7,684 
56,011 
9,542 
Income (loss) from discontinued operations, net of income taxes
35 
(441)
67 
(189)
Net income
7,512 
7,243 
56,078 
9,353 
Less: net income attributable to noncontrolling interests
3,943 
2,096 
9,065 
5,579 
Net income (loss) attributable to SemGroup
3,569 
5,147 
47,013 
3,774 
Other comprehensive income (loss), net of income taxes
(5,354)
(9,897)
(10,412)
2,858 
Comprehensive income (loss)
2,158 
(2,654)
45,666 
12,211 
Less: comprehensive income attributable to noncontrolling interests
3,943 
2,096 
9,065 
5,579 
Comprehensive income (loss) attributable to SemGroup
$ (1,785)
$ (4,750)
$ 36,601 
$ 6,632 
Net income per common share (Note 11):
 
 
 
 
Basic
$ 0.08 
$ 0.12 
$ 1.12 
$ 0.09 
Diluted
$ 0.08 
$ 0.12 
$ 1.11 
$ 0.09 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2013
Jun. 30, 2012
Cash flows from operating activities:
 
 
Net income
$ 56,078 
$ 9,353 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Net unrealized (gain) loss related to derivative instruments
(1,295)
122 
Depreciation and amortization
25,450 
23,935 
Gain (Loss) on Sale of Property Plant Equipment
515 
(119)
Gain on disposal of long-lived assets, net
(538)
119 
Earnings from equity method investments
(32,206)
(19,787)
Distributions from equity investments
29,798 
17,771 
Amortization and write down of debt issuance costs
1,060 
1,755 
Deferred tax benefit
(48,865)
(2,283)
Non-cash equity compensation
3,259 
3,223 
Loss on fair value of warrants
32,194 
7,539 
Provision for uncollectible accounts receivable, net of recoveries
323 
632 
Foreign Currency Transaction Gain (Loss), Unrealized
516 
(3)
Changes in operating assets and liabilities (Note 12)
(9,329)
(18,230)
Net cash provided by operating activities
55,436 
24,152 
Cash flows from investing activities:
 
 
Capital expenditures
(59,877)
(43,517)
Proceeds from sale of long-lived assets
544 
201 
Investments in non-consolidated subsidiaries
(81,611)
(3,447)
Distributions in excess of equity in earnings of affiliates
5,582 
4,969 
Net cash used in investing activities
(135,362)
(41,794)
Cash flows from financing activities:
 
 
Debt issuance costs
(10,263)
(132)
Borrowings on credit facilities
649,974 
165,500 
Principal payments on credit facilities and other obligations
(385,012)
(154,240)
Proceeds from issuance of Rose Rock Midstream, L.P. common units, net of offering costs
57,751 
Distributions to noncontrolling interests
(7,496)
(3,077)
Proceeds from Warrant Exercises
224 
Repurchase of stock-based awards for payment of statutory taxes due on stock-based compensation
(371)
(242)
Payments of Dividends
(7,939)
Net cash provided by financing activities
296,868 
7,809 
Effect of exchange rate changes on cash and cash equivalents
1,795 
1,206 
Change in cash and cash equivalents
218,737 
(8,627)
Change in cash and cash equivalents included in discontinued operations
214 
Change in cash and cash equivalents from continuing operations
218,737 
(8,413)
Cash and cash equivalents at beginning of period
80,029 
73,613 
Cash and cash equivalents at end of period
$ 298,766 
$ 65,200 
Overview
OVERVIEW
OVERVIEW
SemGroup Corporation is a Delaware corporation headquartered in Tulsa, Oklahoma. SemGroup Corporation is the successor entity of SemGroup, L.P., which was an Oklahoma limited partnership. The terms “we,” “our,” “us,” “SemGroup,” “the Company” and similar language used in these notes to the unaudited condensed consolidated financial statements refer to SemGroup Corporation, SemGroup, L.P., and their subsidiaries.
Basis of presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission. These financial statements include all normal and recurring adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of its operations and its cash flows.
The accompanying condensed consolidated financial statements are unaudited. The condensed consolidated balance sheet at December 31, 2012 is derived from audited financial statements.
Our condensed consolidated financial statements include the accounts of our controlled subsidiaries. All significant transactions between our consolidated subsidiaries have been eliminated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Although management believes these estimates are reasonable, actual results could differ materially from these estimates. The results of operations for the three months and six months ended June 30, 2013, are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
Pursuant to the rules and regulations of the 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, 2012, which are included in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission.
Certain reclassifications have been made to conform previously reported balances to the current presentation, including the reclassification of prior periods to reflect the SemStream segment's Arizona operations as discontinued operations.
Our significant accounting policies are consistent with those described in our Annual Report on Form 10-K for the year ended December 31, 2012.
Recent accounting pronouncements
On January 31, 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," which clarifies the scope of the offsetting disclosure requirements in ASU 2011-11, "Disclosures About Offsetting Assets and Liabilities." Under ASU 2013-01, the disclosure requirements apply to derivative instruments accounted for in accordance with Accounting Standards Codification ("ASC") 815, "Derivatives and Hedging," including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those years. Retrospective application is required for all comparative periods presented. We adopted this guidance in the first quarter of 2013. The impact of adoption was not material.
On February 5, 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." This ASU adds new disclosure requirements for items reclassified out of accumulated other comprehensive income ("AOCI"). The ASU is intended to help entities improve the transparency of changes in other comprehensive income ("OCI") and items reclassified out of AOCI in their financial statements. It does not amend any existing requirements for reporting net income or OCI in the financial statements. We adopted this guidance in the first quarter of 2013. The impact of adoption was not material.
On February 28, 2013, the FASB issued ASU 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the FASB Emerging Issues Task Force)." The ASU requires entities to “measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the following:
the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors; and
any additional amount the reporting entity expects to pay on behalf of its co-obligors.”
Required disclosures include a description of the joint and several arrangement and the total outstanding amount of the obligation for all joint parties. The ASU permits entities to aggregate disclosures (as opposed to providing separate disclosures for each joint and several obligation). These disclosure requirements are incremental to the existing related-party disclosure requirements in ASC 850, "Related Party Disclosures." The ASU is effective for public entities for all prior periods in fiscal years beginning on or after December 15, 2013, and interim reporting periods within those years. The Company will adopt this guidance in the first quarter of 2014. The impact is not expected to be material.
On March 4, 2013, the FASB issued ASU 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity - a consensus of the FASB Emerging Issues Task Force”, which indicates that the entire amount of a cumulative translation adjustment ("CTA") related to an entity's investment in a foreign entity should be released when there has been a:
sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity;
loss of a controlling financial interest in an investment in a foreign entity (i.e., the foreign entity is deconsolidated); or
step acquisition for a foreign entity (i.e., when an entity has changed from applying the equity method for an investment in a foreign entity to consolidating the foreign entity).
The ASU does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2013, and interim periods within those years. The Company will adopt this guidance in the first quarter of 2014. The impact is not expected to be material.
Rose Rock Midstream, L.P.
ROSE ROCK MIDSTREAM, L.P.
ROSE ROCK MIDSTREAM, L.P.
We control the operations of our consolidated subsidiary, Rose Rock Midstream, L.P. ("Rose Rock") through our ownership of the general partner interest. As of June 30, 2013, we own the 2% general partner interest and 58.2% of the limited partner interest made up of 2.9 million common units, 8.4 million subordinated units and 1.25 million Class A units.
On January 11, 2013, we contributed a 33% interest in SemCrude Pipeline, L.L.C. to Rose Rock in exchange for (i) cash of approximately $189.5 million, (ii) the issuance of 1.5 million common units, (iii) the issuance of 1.25 million Class A units and (iv) an increase of the capital account of the general partner of Rose Rock and a related issuance of general partner interest, to allow the general partner of Rose Rock to maintain its two percent general partner interest. SemCrude Pipeline, L.L.C. owns a 51% membership interest in White Cliffs Pipeline, L.L.C. ("White Cliffs"), which owns a 527-mile pipeline that transports crude oil from Platteville, Colorado to Cushing, Oklahoma (the "White Cliffs Pipeline"), giving Rose Rock an indirect 17% interest in White Cliffs.
The Class A units are not entitled to receive any distribution of available cash (other than upon liquidation) prior to the first day of the month immediately following the first month for which the average daily throughput volumes on the White Cliffs Pipeline for such month are 125,000 barrels per day or greater. Upon such date, the Class A units will automatically convert into common units.
As this transaction was between parties under common control, Rose Rock recorded its interest in SemCrude Pipeline, L.L.C. at SemGroup's historical value and as such no gain on the sale was recognized by SemGroup. Proceeds in excess of the historical value were accounted for as an equity transaction between Rose Rock and SemGroup and resulted in a $90.5 million reduction to noncontrolling interests in consolidated subsidiaries and an offsetting increase to additional paid-in capital of $56.8 million (net of tax impact of $33.7 million). This non-cash entry represents the portion of the proceeds in excess of historical cost which were attributed to Rose Rock's third-party unitholders.
In connection with this transaction, Rose Rock issued and sold 2.0 million common units to third-party purchasers in a private placement for aggregate consideration of $59.3 million. In addition, Rose Rock exercised the accordion feature of its revolving credit facility and increased the total borrowing capacity under the credit facility from $150 million to $385 million and made a borrowing of $133.5 million under the credit facility. The proceeds from the private placement and the borrowing were used by Rose Rock to fund the cash consideration in the transaction with us and to pay certain related transaction costs and expenses. Subsequent to the transaction, SemGroup owns 58.2% of the limited partner interest and the 2% general partner interest in Rose Rock.
SemGroup incurred $1.4 million of expense associated with the transaction including amounts expensed by Rose Rock. Rose Rock incurred $3.7 million of cost, of which $1.6 million of equity issuance costs were offset against proceeds, $1.6 million was related to the borrowing and was deferred, and $0.5 million was expensed.
Outside ownership interests in Rose Rock are reflected in “noncontrolling interests in consolidated subsidiaries” on our condensed consolidated balance sheets at June 30, 2013 and December 31, 2012. The portion of Rose Rock’s net income attributable to outside owners is reflected within “net income attributable to noncontrolling interests” in our condensed consolidated statements of operations and comprehensive income (loss) for the three months and six months ended June 30, 2013.
We receive distributions from Rose Rock on our common and subordinated units, our 2% general partner interest and incentive distribution rights. Rose Rock intends to pay a minimum quarterly distribution of $0.3625 per unit, to the extent it has sufficient available cash, as defined in Rose Rock’s partnership agreement. Rose Rock’s partnership agreement requires Rose Rock to distribute all of its available cash each quarter in the following manner:
 
Total Quarterly Distributions
Per Unit Target Amount
 
Marginal Percentage
Interest in Distributions
 
Unitholders
 
General
Partner
 
Incentive
Distribution
Rights
Minimum Quarterly Distributions
 
 
 
 
 
 
$
0.362500

 
98.0
%
 
2.0
%
 

First Target Distribution
above
 
$
0.362500

 
up to
 
$
0.416875

 
98.0
%
 
2.0
%
 

Second Target Distribution
above
 
$
0.416875

 
up to
 
$
0.453125

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

 
up to
 
$
0.543750

 
75.0
%
 
2.0
%
 
23.0
%
Thereafter
 
 
 
 
above
 
$
0.543750

 
50.0
%
 
2.0
%
 
48.0
%
 
The following table shows the distributions paid or declared for the six months ended June 30, 2013 and 2012 (in thousands, except for per unit amounts):
 
 
Record Date
Payment Date
Distribution
Per Unit
 
Distributions Paid/To Be Paid
Quarter Ended
 
SemGroup
Noncontrolling
Interest
Common Units
Total
Distributions
 
General
Partner
Incentive
Distributions
Common
Units
Subordinated
Units
December 31, 2011
*
February 3, 2012
February 13, 2012
$
0.0670

$
23

$

$
93

$
561

$
470

$
1,147

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

  
$
128

$

$
517

$
3,125

$
2,607

$
6,377

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

 
$
131

$

$
532

$
3,209

$
2,678

$
6,550

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

 
$
167

$

$
1,163

$
3,377

$
3,624

$
8,331

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

 
$
179

$
41

$
1,242

$
3,607

$
3,872

$
8,941

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

**
$
183

$
72

$
1,271

$
3,692

$
3,962

$
9,180

*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 June 30, 2013.

Certain summarized balance sheet information of Rose Rock is shown below (in thousands):
 
(unaudited)
 
 
 
June 30,
2013
 
December 31,
2012
Cash
$
3,650

 
$
108

Other current assets
247,195

 
250,509

Property, plant and equipment, net
296,084

 
291,530

Equity method investment
66,037

 

Other noncurrent assets, net
3,792

 
2,579

Total assets
$
616,758

 
$
544,726

Current liabilities
$
223,158

 
$
231,843

Long-term debt
166,549

 
4,562

Partners’ capital attributable to SemGroup
128,774

 
179,187

Partners’ capital attributable to noncontrolling interests
98,277

 
129,134

Total liabilities and partners’ capital
$
616,758

 
$
544,726


Certain summarized income statement information of Rose Rock for the three months and six months ended June 30, 2013 and 2012 is shown below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
161,422

 
$
157,418

 
$
332,654

 
$
337,133

Cost of products sold
$
140,506

 
$
140,549

 
$
288,957

 
$
301,057

Operating, general and administrative expenses
$
9,061

 
$
8,267

 
$
18,040

 
$
16,197

Depreciation and amortization expense
$
3,690

 
$
2,999

 
$
7,197

 
$
5,966

Earnings from equity method investment
$
3,451

 
$

 
$
6,904

 
$

Net income
$
9,134

 
$
5,126

 
$
21,128

 
$
12,884

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

Our investments in affiliates over which we have significant influence, but for which we do not control the operating decisions of the investee, are accounted for under the equity method. Under the equity method, we do not report the individual assets and liabilities of our investees on our condensed consolidated balance sheets. Instead, our ownership interest is reflected in one line as a noncurrent asset on our condensed consolidated balance sheets. Our equity method investments consist of the following (in thousands):
 
June 30, 2013
 
December 31, 2012
White Cliffs
$
193,709

 
$
138,970

NGL Energy
176,816

 
174,398

Glass Mountain
95,714

 
74,434

Total equity method investments
$
466,239

 
$
387,802


    
Under the equity method, we do not report the individual revenues and expenses of our investees in our condensed consolidated statements of income. Instead, our interest in the earnings of our investees is reflected in one line item on our condensed consolidated statement of operations and comprehensive income (loss). Our earnings from equity method investments consist of the following (in thousands):
    
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
White Cliffs
$
10,661

 
$
8,461

 
$
21,100

 
$
15,032

NGL Energy
4,200

 
3,828

 
11,116

 
4,755

Glass Mountain

 

 
(10
)
 

Total earnings from equity method investments
$
14,861

 
$
12,289

 
$
32,206

 
$
19,787



Cash distributions received from equity methods investments consist of the following (in thousands):
    
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
White Cliffs
$
12,889

 
$
10,827

 
$
26,681

 
$
19,767

NGL Energy
4,426

 
1,812

 
8,698

 
2,972

Glass Mountain

 

 

 

Total cash distributions received from equity method investments
$
17,315

 
$
12,639

 
$
35,379

 
$
22,739



White Cliffs
We account for our 51% ownership of White Cliffs under the equity method, as the other owners have substantive rights to participate in its management.
In August 2012, the owners of White Cliffs approved an expansion project to construct a 12" pipeline from Platteville, Colorado to Cushing, Oklahoma. The project is expected to cost approximately $300 million, which will be funded by capital calls to owners. Our funding requirement will be 51% of the total cost. We have contributed approximately $61.9 million for project funding up through June 30, 2013, including $36.9 million and $59.6 million for the three months and six months ended June 30, 2013, respectively, and estimate our expected remaining contributions to be $59.7 million and $29.5 million for 2013 and 2014, respectively.
Certain summarized income statement information of White Cliffs for the three months and six months ended June 30, 2013 and 2012 is shown below (in thousands):
    
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Revenue
$
30,112

 
$
25,732

 
$
60,785

 
$
48,388

Operating, general and administrative expenses
$
4,113

 
$
3,640

 
$
9,292

 
$
7,525

Depreciation and amortization expense
$
4,715

 
$
4,986

 
$
9,430

 
$
9,969

Net income
$
21,284

 
$
17,106

 
$
42,063

 
$
30,894


The equity in earnings of White Cliffs for the three months and six months ended June 30, 2013 and 2012 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 $0.4 million and $0.5 million of such general and administrative expense for the three months ended June 30, 2013 and 2012, respectively, and $0.7 million and $1.5 million for the six months ended June 30, 2013 and 2012, respectively.
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 17.0% of the total 53,622,659 limited partner units of NGL Energy outstanding at March 31, 2013, and a 6.42% interest in the general partner of NGL Energy.
At June 30, 2013, the fair market value of our 9,133,409 common unit investment in NGL Energy was $275.7 million, based on a June 28, 2013 closing price of $30.19 per common unit. This does not reflect our interest in the general partner of NGL Energy. The fair value of our limited partner investment in NGL Energy is categorized as a Level 1 measurement, as it is based on quoted market prices.
Our policy is to record our equity in earnings of NGL Energy on a one-quarter lag, as we do not expect information on the earnings of NGL Energy to always be available in time to consistently record the earnings in the quarter in which they are generated. Accordingly, the equity in earnings from NGL Energy which is reflected in our condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2013 and 2012 relates to the earnings of NGL Energy for the three and six months ended March 31, 2013 and 2012, prorated for the period of time we held our ownership interest in NGL Energy.
Certain unaudited summarized income statement information of NGL Energy for the three months and six months ended March 31, 2013 and 2012 is shown below (in thousands):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2013

2012
 
2013
 
2012
Revenue
$
1,617,613

 
$
438,938

 
$
2,955,821

 
$
909,587

Cost of products sold
$
1,481,890

 
$
389,806

 
$
2,686,435

 
$
829,596

Operating, general and administrative expenses
$
74,632

 
$
25,901

 
$
139,325

 
$
42,717

Depreciation and amortization expense
$
27,518

 
$
6,631

 
$
46,265

 
$
12,033

Net income
$
22,341

 
$
13,942

 
$
62,818

 
$
20,032

 
Glass Mountain Pipeline LLC
In May 2012, we formed a joint venture, Glass Mountain Pipeline, LLC (“Glass Mountain” or "GMP"), to construct, maintain and operate a 210-mile crude oil pipeline system 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. Our original ownership interest in GMP was 25%. In September 2012, we acquired an additional 25% ownership interest in GMP bringing our total ownership interest to 50% . We account for our investment in GMP using the equity method. As of June 30, 2013, we have invested $95.7 million in GMP including our capital contributions, amounts paid to acquire the additional ownership percentage, and capitalized interest. We invested $7.9 million and $21.3 million in GMP for the three months and six months ended June 30, 2013, respectively. We expect to make additional contributions of approximately $27.6 million for the remainder of 2013 and $3.5 million in 2014.
Segments
SEGMENTS
4.
SEGMENTS
Our businesses are organized based on the nature and location of the services they provide. Certain summarized information related to our reportable segments is shown in the tables below. None of the operating segments have been aggregated, other than White Cliffs and Glass Mountain, which have been included within the Crude segment. Our investment in NGL Energy is included within the SemStream segment. Although “Corporate and Other” does not represent an operating segment, it is included in the tables below to reconcile segment information to that of the consolidated Company. Eliminations of transactions between segments are also included within “Corporate and Other” in the tables below.
The accounting policies of each segment are the same as the accounting policies of the consolidated Company. Transactions between segments are generally recorded based on prices negotiated between the segments. Certain general and administrative and interest expenses incurred at the corporate level are allocated to the segments, based on our allocation policies in effect at the time.

 
Three Months Ended June 30, 2013
 
Crude

SemStream

SemCAMS

SemGas

SemLogistics

SemMexico

Corporate
and Other

Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
161,422

 
$

 
$
66,459

 
$
41,908

 
$
2,623

 
$
51,832

 
$

 
$
324,244

Intersegment

 

 

 
5,018

 

 

 
(5,018
)
 

Total revenues
161,422

 

 
66,459

 
46,926

 
2,623

 
51,832

 
(5,018
)
 
324,244

Expenses:
 
 
 
 

 

 
 
 

 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
140,506

 

 
1

 
33,567

 

 
43,653

 
(5,018
)
 
212,709

Operating
5,691

 

 
55,508

 
4,289

 
1,848

 
2,346

 

 
69,682

General and administrative
3,568

 
160

 
3,342

 
1,598

 
1,486

 
2,443

 
4,301

 
16,898

Depreciation and amortization
3,690

 

 
2,638

 
2,233

 
2,313

 
1,458

 
482

 
12,814

Gain on disposal of long-lived assets, net
(25
)
 

 

 
(4
)
 

 
(347
)
 

 
(376
)
Total expenses
153,430

 
160


61,489


41,683


5,647


49,553


(235
)

311,727

Earnings from equity method investments
10,661

 
4,200

 

 

 

 

 

 
14,861

Operating income (loss)
18,653

 
4,040

 
4,970

 
5,243

 
(3,024
)
 
2,279

 
(4,783
)

27,378

Other expenses (income), net
4,120

 
(1,193
)
 
4,748

 
676

 
357

 
153

 
1,752

 
10,613

Income (loss) from continuing operations before income taxes
$
14,533

 
$
5,233

 
$
222

 
$
4,567

 
$
(3,381
)
 
$
2,126

 
$
(6,535
)

$
16,765

Total assets at June 30, 2013 (excluding intersegment receivables)
$
867,993

 
$
176,816

 
$
298,793

 
$
156,724

 
$
160,490

 
$
100,910

 
$
334,925

 
$
2,096,651


For the three months ended June 30, 2013, two customers from our Crude segment accounted for 14% and 11% of our total consolidated revenue, respectively.

 
Three Months Ended June 30, 2012
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
157,418

 
$

 
$
79,683

 
$
23,580

 
$
2,613

 
$
68,483

 
$

 
$
331,777

Intersegment

 

 

 
2,554

 

 

 
(2,554
)
 

Total revenues
157,418

 


79,683


26,134


2,613


68,483


(2,554
)
 
331,777

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Costs of products sold, exclusive of depreciation and amortization shown below
140,549

 
3

 
71

 
19,990

 
99

 
61,778

 
(2,554
)
 
219,936

Operating
6,462

 
(21
)
 
68,848

 
3,306

 
1,631

 
2,163

 

 
82,389

General and administrative
2,063

 
(1
)
 
2,632

 
1,394

 
1,448

 
2,541

 
6,484

 
16,561

Depreciation and amortization
2,999

 

 
2,673

 
1,726

 
2,334

 
1,517

 
633

 
11,882

Loss on disposal of long-lived assets, net
56

 

 

 

 

 
63

 

 
119

Total expenses
152,129

 
(19
)

74,224


26,416


5,512


68,062


4,563

 
330,887

Earnings from equity method investments
8,461

 
3,828

 

 

 

 

 

 
12,289

Operating income (loss)
13,750

 
3,847


5,459


(282
)

(2,899
)

421


(7,117
)
 
13,179

Other expenses (income), net
(383
)
 
7

 
5,352

 
770

 
189

 
425

 
(773
)
 
5,587

Income (loss) from continuing operations before income taxes
$
14,133

 
$
3,840


$
107


$
(1,052
)

$
(3,088
)

$
(4
)

$
(6,344
)
 
$
7,592


 
Six Months Ended June 30, 2013
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
332,654

 
$

 
$
102,240

 
$
76,562

 
$
5,658

 
$
94,826

 
$

 
$
611,940

Intersegment

 

 

 
9,103

 

 

 
(9,103
)
 

Total revenues
332,654

 

 
102,240

 
85,665

 
5,658

 
94,826

 
(9,103
)
 
611,940

Expenses:
 
 
 
 

 

 
 
 

 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
288,957

 

 
184

 
62,738

 

 
82,302

 
(9,103
)
 
425,078

Operating
11,429

 
1

 
82,392

 
8,433

 
3,687

 
4,511

 

 
110,453

General and administrative
7,418

 
316

 
7,487

 
3,189

 
2,606

 
4,665

 
8,254

 
33,935

Depreciation and amortization
7,197

 

 
5,294

 
4,361

 
4,653

 
2,938

 
1,007

 
25,450

(Gain) loss on disposal of long-lived assets, net
(25
)
 
6

 

 
(6
)
 

 
(513
)
 

 
(538
)
Total expenses
314,976

 
323

 
95,357

 
78,715

 
10,946

 
93,903

 
158

 
594,378

Earnings from equity method investments
21,090

 
11,116

 

 

 

 

 

 
32,206

Operating income (loss)
38,768

 
10,793

 
6,883

 
6,950

 
(5,288
)
 
923

 
(9,261
)
 
49,768

Other expenses (income), net
7,291

 
(2,161
)
 
9,459

 
1,269

 
1,113

 
(318
)
 
21,822

 
38,475

Income (loss) from continuing operations before income taxes
$
31,477

 
$
12,954

 
$
(2,576
)
 
$
5,681

 
$
(6,401
)
 
$
1,241

 
$
(31,083
)
 
$
11,293


For the six months ended June 30, 2013, one customer from our Crude segment accounted for 13% of our total consolidated revenue.
 
Six Months Ended June 30, 2012
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
337,133

 
$
6

 
$
114,848

 
$
54,290

 
$
6,397

 
$
131,134

 
$

 
$
643,808

Intersegment

 

 

 
5,284

 

 

 
(5,284
)
 

Total revenues
337,133

 
6

 
114,848

 
59,574

 
6,397

 
131,134

 
(5,284
)
 
643,808

Expenses:
 
 
 
 

 

 
 
 

 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
301,057

 
37

 
190

 
46,539

 
99

 
118,819

 
(5,284
)
 
461,457

Operating
11,916

 
(27
)
 
95,084

 
6,159

 
3,085

 
4,163

 

 
120,380

General and administrative
4,781

 
50

 
7,050

 
3,237

 
3,259

 
5,229

 
12,785

 
36,391

Depreciation and amortization
5,966

 

 
5,246

 
3,356

 
4,652

 
3,078

 
1,309

 
23,607

Loss on disposal of long-lived assets, net
56

 

 

 

 

 
63

 

 
119

Total expenses
323,776

 
60

 
107,570

 
59,291

 
11,095

 
131,352

 
8,810

 
641,954

Earnings from equity method investments
15,032

 
4,755

 

 

 

 

 

 
19,787

Operating income (loss)
28,389

 
4,701

 
7,278

 
283

 
(4,698
)
 
(218
)
 
(14,094
)
 
21,641

Other expenses (income), net
(620
)
 
45

 
10,555

 
1,302

 
1,468

 
315

 
138

 
13,203

Income (loss) from continuing operations before income taxes
$
29,009

 
$
4,656

 
$
(3,277
)
 
$
(1,019
)
 
$
(6,166
)
 
$
(533
)
 
$
(14,232
)
 
$
8,438


Segment information for the three months and the six months ended June 30, 2012 has been recast to reflect SemStream's Arizona residential business as a discontinued operation. As result, the total revenues and total expenses decreased from amounts previously reported by $2.4 million and $2.8 million for the three months ended June 30, 2012 and by $8.0 million and $8.2 million for the six months ended June 30, 2012, respectively. Operating income and income from continuing operations before income taxes reported above has increased from amounts previously reported by $0.4 million and $0.4 million for the three months ended June 30, 2012 and by $0.2 million and $0.2 million for the six months ended June 30, 2012, respectively.
Inventories
Inventories
INVENTORIES
Inventories consist of the following (in thousands):
 
June 30,
2013
 
December 31,
2012
Crude oil
$
21,740

 
$
24,840

Asphalt and other
12,629

 
9,593

Total inventories
$
34,369

 
$
34,433

Financial Instruments
FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS
Fair value of financial instruments
We record certain financial assets and liabilities at fair value at each balance sheet date. The tables below summarize the balances of these assets and liabilities at June 30, 2013 and December 31, 2012 (in thousands):

 
June 30, 2013
 
December 31, 2012
 
Level 1
 
Netting*
 
Total
 
Level 1
 
Netting*
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
315

 
$
(54
)
 
$
261

 
$
22

 
$
(22
)
 
$

Total assets
315

 
(54
)
 
261

 
22

 
(22
)
 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
54

 
$
(54
)
 
$

 
$
1,056

 
$
(22
)
 
$
1,034

Warrants
41,810

 

 
41,810

 
32,858

 

 
32,858

Total liabilities
41,864

 
(54
)
 
41,810

 
33,914

 
(22
)
 
33,892

Net assets (liabilities) at fair value
$
(41,549
)
 
$

 
$
(41,549
)
 
$
(33,892
)
 
$

 
$
(33,892
)
*Relates primarily to exchange traded futures. Gain and loss positions on multiple contracts are settled net on a daily basis with the exchange.
“Level 1” measurements use as inputs unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. These include commodity futures contracts that are traded on an exchange. These also include common stock warrants (Note 10) which are traded on the New York Stock Exchange.
“Level 2” measurements use as inputs market observable and corroborated prices for similar commodity derivative contracts. Assets and liabilities classified as Level 2 include over-the-counter (“OTC”) traded forward contracts and swaps.
“Level 3” measurements use as inputs information from a pricing service and internal valuation models incorporating observable and unobservable market data. These may include commodity derivatives, such as forwards and swaps for which there is not a highly liquid market, and therefore are not included in Level 2.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value levels. At June 30, 2013, all of our physical fixed price forward purchases and sales contracts were being accounted for as normal purchases and normal sales.
There were no financial assets or liabilities classified as Level 2 or Level 3 during the three months and six months ended June 30, 2013 and 2012, as such no rollforward of activity has been presented.
Commodity derivative contracts
Our consolidated results of operations and cash flows are impacted by changes in market prices for petroleum products. This exposure to commodity price risk is managed, in part, by entering into various commodity derivatives.
We seek to manage the price risk associated with our marketing operations by limiting our net open positions through (i) the concurrent purchase and sale of like quantities of petroleum products to create back-to-back transactions that are intended to lock in positive margins based on the timing, location or quality of the petroleum products purchased and delivered or (ii) derivative contracts. Our storage and transportation assets can also be used to mitigate location and time basis risk. All marketing activities are subject to our Comprehensive Risk Management Policy, which establishes limits in order to manage risk and mitigate financial exposure.
Our commodity derivatives can be comprised of swaps, future contracts and forward contracts of crude oil and natural gas liquids. These are defined as follows:
Swaps – OTC transactions where a floating price, basis or index is exchanged for a fixed (or a different floating) price, basis or index at a preset schedule in the future, according to an agreed-upon formula.
Futures contracts – Exchange traded contracts to buy or sell a commodity. These contracts are standardized by the exchange in terms of quality, quantity, delivery period and location for each commodity.
Forward contracts – OTC contracts to buy or sell a commodity at an agreed upon future date. The buyer and seller agree on specific terms (price, quantity, delivery period and location) and conditions at the inception of the contract.
The following table sets forth the unaudited notional quantities for commodity derivative instruments entered into (in thousands of barrels):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Sales
720

 
300

 
1,330

 
683

Purchases
615

 
235

 
1,290

 
686


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):
 
June 30, 2013
 
December 31, 2012
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
$
261

 
$

 
$

 
$
1,034


We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. Margin deposits outstanding for the periods ended June 30, 2013 and December 31, 2012 were $0.9 million and $1.9 million, respectively. These margin deposits have not been offset against our net commodity derivative instrument (contract) positions. Had these margin deposits been netted against (or combined with) our net commodity derivative instrument (contract) positions for the periods ended June 30, 2013 and December 31, 2012, we would have had net asset positions of $1.1 million and $0.8 million, respectively.
Realized and unrealized gains (losses) from our commodity derivatives were recorded to product revenue in the following amounts (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Commodity contracts
$
(233
)
 
$
1,415

 
$
(777
)
 
$
289


Warrants
As described in Note 10, upon emergence from bankruptcy, we issued certain common stock warrants. These warrants are recorded at fair value in other noncurrent liabilities on the condensed consolidated balance sheets, with changes in the fair value recorded to other expense (income).
Income Taxes
INCOME TAXES
INCOME TAXES
Due to our emergence from bankruptcy and overall restructuring, we recorded a full valuation allowance on all U.S. federal and state deferred tax assets in all periods prior to March 31, 2013. Deferred tax assets are reduced by a valuation allowance when a determination is made that it is more likely than not that some, or all, of the deferred tax assets will not be realized based on the weight of all available evidence. Evidence which is objectively verifiable carries a higher weight in the analysis. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income of the appropriate character within the carryback and carryforward period available under the tax law. Sources of taxable income include future reversals of existing taxable temporary differences, future earnings and available tax planning strategies.

The six months ended June 30, 2013 includes a discrete tax benefit of $50.9 million for the partial release of our valuation allowance. The tax benefit was recorded for the three months ended March 31, 2013. Gain recognition, for tax purposes, on the contribution of a 33% interest in SemCrude Pipeline, L.L.C. to Rose Rock, as disclosed in Note 2, had a material impact to the available positive and objectively verifiable evidence for that quarter and, combined with other factors, resulted in the change in our assessment of recoverability of the deferred tax assets. Under ASC 740, "Income Taxes", such evidence was not considered in the valuation allowance at December 31, 2012, due to fundamentals of the transaction which remained subject to market influence until closed. We did not release the valuation allowance attributable to a small portion of our state net operating loss carryovers which have shorter carryover periods. We have not released the valuation allowance on the foreign tax credits due to the foreign tax credit limitation and the relative subjectivity of forecasts of the relational magnitude of U.S. and foreign taxable income in future periods, as well as the shorter carryover period available for the credits.

We have determined that no accruals related to uncertainty in tax positions are required. All income tax years of the Company ending after the emergence from bankruptcy remain open for examination in all jurisdictions. In foreign jurisdictions, all tax years within the relevant statute of limitations for periods prior to the emergence from bankruptcy remain open for examination. Currently, there are no examinations in progress for our federal or state jurisdictions. Canada Revenue Agency has initiated an income tax audit of SemCAMS ULC for the tax year 2009, which remains in progress. We do not anticipate the SemCAMS ULC audit will have a significant impact on the results of operations or financial position. No other foreign jurisdictions are currently under audit.

The effective tax rate was 55% and (1)% for the three months ended June 30, 2013 and 2012, respectively, and (396)% and (13)% for the six months ended June 30, 2013 and 2012, respectively. Significant items that impacted the effective tax rate for each period, as compared to the U.S. federal statutory rate of 35%, include earnings in foreign jurisdictions taxed at lower rates, a noncontrolling interest in Rose Rock for which taxes are not provided, warrant expense which is not deductible for tax purposes, and the impact of the valuation allowance or release recorded against our deferred tax assets. Further, the foreign earnings are taxed in foreign jurisdictions as well as in the U.S., since they are disregarded entities for U.S. federal income tax purposes. Deferred tax liabilities, with the exception of those related to certain long-lived assets, have been considered as a source of future taxable income in establishing the amount of the valuation allowance. These combined factors, and the magnitude of permanent items impacting the tax rate relative to income from continuing operations before income taxes, result in rates that are not comparable between the periods.
Long-Term Debt
Long-Term Debt
LONG-TERM DEBT
Our long-term debt consisted of the following (in thousands):
 
June 30,
2013
 
December 31,
2012
SemGroup 7.50% senior unsecured notes
$
300,000

 
$

SemGroup corporate revolving credit facility

 
201,500

Rose Rock credit facility
166,500

 
4,500

SemMexico credit facility
4,323

 

Capital leases
75

 
86

Total long-term debt
$
470,898

 
$
206,086

less: current portion of long-term debt
4,349

 
24

Noncurrent portion of long-term debt
$
466,549

 
$
206,062


SemGroup senior unsecured notes
On June 14, 2013, we completed an offering of $300 million of 7.50% senior unsecured notes due 2021 (the “Notes”) to certain initial purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons outside the United States pursuant to Regulation S of the Securities Act. The Notes are guaranteed by certain of our subsidiaries: SemGas, L.P., SemCanada, L.P., SemCanada II, L.P., SemMaterials, L.P., SemStream, L.P., SemGroup Europe Holding, L.L.C., SemOperating G.P., L.L.C., SemMexico, L.L.C., SemDevelopment, L.L.C., Rose Rock Midstream Holdings, LLC, Wattenberg Holding, LLC and Glass Mountain Holding, LLC (collectively, the "Guarantors").
The net proceeds from the offering were $294.0 million, after deducting the initial purchasers' discount. We used the net proceeds from the offering to (i) fund a portion of our acquisition on August 1, 2013 of all the outstanding equity interests in Mid-America Midstream Gas Services, L.L.C., a subsidiary of Chesapeake Energy Corporation, and (ii) during the second quarter of 2013, repay amounts borrowed under our revolving credit facility.
The Notes are governed by an indenture between the Company and its subsidiary Guarantors and Wilmington Trust, N.A., as trustee (the “Indenture”). The Indenture includes customary covenants, including limitations on our ability to incur additional indebtedness or issue certain preferred shares; pay dividends and make certain distributions, investments and other restricted payments; create certain liens; sell assets; enter into transactions with affiliates; enter into sale and lease-back transactions; merge, consolidate, sell or otherwise dispose of all or substantially all of our assets; and designate our subsidiaries as unrestricted under the Indenture.
The Indenture includes customary events of default, including events of default relating to non-payment of principal and other amounts owing from time to time, failure to provide required reports, failure to comply with agreements in the indenture, cross payment-defaults to any material indebtedness, bankruptcy and insolvency events, certain unsatisfied judgments, and invalidation or cessation of the subsidiary guarantee of a significant subsidiary. A default would permit holders to declare the Notes and accrued interest due and payable.
The Notes are effectively subordinated in right of payment to any of our and the Guarantors' existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness and are structurally subordinated to the obligations of any subsidiary that is not a guarantor of the Notes.
The Company may issue additional Notes under the Indenture from time to time, subject to the terms of the Indenture.
Except as described below, the Notes are not redeemable at the Company's option prior to June 15, 2016. From and after June 15, 2016, the Company may redeem the Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if redeemed during the twelve-month period beginning on June 15 of each of the years indicated below:
Year
 
Percentage
2016
 
105.625%
2017
 
103.750%
2018
 
101.875%
2019 and thereafter
 
100.000%

Prior to June 15, 2016, the Company may, at its option, on one or more occasions, redeem up to 35% of the sum of the original aggregate principal amount of the Notes at a redemption price equal to 107.500% of the aggregate principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings of the Company, subject to certain conditions.
Prior to June 15, 2016, the Company may also redeem all or part of the Notes at a price equal to the principal plus a premium equal to the greater of 1% of the principal or the excess of the present value of the June 15, 2016 redemption price from the table above plus all required interest payments due through June 15, 2016, computed using a discount rate based on a published United States Treasury Rate plus 50 basis points, over the principal value of such Note.
In the event of a change of control, the Company is required to offer to repurchase the Notes at an amount equal to 101% of the principal plus accrued and unpaid interest.
The Notes are also subject to a Registration Rights Agreement which requires the Company to file a registration statement with the Securities and Exchange Commission ("SEC") and to use commercially reasonable efforts to cause the registration statement to be declared effective by the SEC so that holders of the Notes can exchange the Notes and related guarantees for registered notes (the "Exchange Notes") and guarantees that have substantially identical terms as the Notes and related guarantees. The guarantees of the Exchange Notes will be full and unconditional and will constitute the joint and several obligations of the Guarantors. Failure to meet the terms of the Registration Rights Agreement will require the Company to pay incremental interest of 0.25% per annum, increased by an additional 0.25% per annum for each 90-day period for which registration default continues (up to a maximum of 1.0% per annum).
Interest on the Notes is payable in arrears on June 15th and December 15th to holders of record on June 1st and December 1st each year until maturity. For the three and six months ended June 30, 2013, we incurred $1.1 million of interest expense related to the Notes, including the amortization of debt issuance costs. At June 30, 2013, we have $6.2 million of unamortized debt issuance costs related to the Notes included in other noncurrent assets on our condensed consolidated balance sheet.
At June 30, 2013, we were in compliance with the terms of the Notes.
SemGroup corporate credit agreement
Our revolving credit facility had a capacity of $500 million at June 30, 2013. This capacity may be used either for cash borrowings or letters of credit, although the maximum letter of credit capacity is $250 million. At June 30, 2013, we had no outstanding cash borrowings on this facility and outstanding letters of credit of $4.5 million.
At June 30, 2013, 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 June 30, 2013, $5.2 million in capitalized loan fees, net of accumulated amortization, was recorded in other noncurrent assets, which is being amortized over the life of the facility.
We recorded interest expense related to the SemGroup revolving credit facility of $1.5 million and $1.6 million for the three months ended June 30, 2013 and 2012, respectively, including amortization of debt issuance costs. We recorded interest expense related to the SemGroup revolving credit facility of $2.8 million and $3.2 million for the six months ended June 30, 2013 and 2012, respectively, including amortization of debt issuance costs.
At June 30, 2013, we were in compliance with the terms of the credit agreement.
On April 22, 2013, the credit agreement was amended to (i) permit the increase of the facility by up to an additional $300 million subject to satisfaction of certain conditions, (ii) remove the restriction limiting unsecured senior or subordinated indebtedness to $200 million, while establishing certain requirements for obtaining unsecured senior or subordinated indebtedness of $200 million or more and (iii) establish less restrictive leverage covenants.
On May 3, 2013, we elected to increase the credit facility capacity by $200 million, for a total capacity of $500 million. The facility can be increased by an additional $100 million. In connection with the increase, we recorded $2.2 million of capitalized loan fees which are being amortized over the remaining life of the facility.
The credit agreement is guaranteed by all of our material domestic subsidiaries (except for SemCrude Pipeline, L.L.C. and Rose Rock Midstream, L.P. and its subsidiaries) and secured by a lien on substantially all of our property and assets, subject to customary exceptions.
Rose Rock credit facility
At June 30, 2013, there were $166.5 million revolving cash borrowings outstanding on this facility, of which $66.5 million incurred interest at the ABR plus an applicable margin, and $100 million incurred interest at the Eurodollar rate plus an applicable margin. The interest rate in effect at June 30, 2013 on $66.5 million of ABR borrowings was 5.25%. The interest rate in effect at June 30, 2013 on $100 million of Eurodollar rate borrowings was 3.20%.
We had $37.4 million in outstanding letters of credit, and the rate in effect was 3.00%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit. A commitment fee that ranges from 0.375% to 0.50%, depending on a leverage ratio specified in the credit agreement, is charged on any unused capacity of the revolving credit facility.
On January, 11, 2013, the credit facility capacity was increased to $385 million and Rose Rock borrowed $133.5 million in connection with the purchase of a 33% interest in SemCrude Pipeline, L.L.C. from SemGroup and to pay transaction related expenses. The facility can be increased by an additional $165 million. Approximately $1.6 million of related costs have been capitalized and will be amortized over the remaining life of the facility.
We had $8.6 million of Secured Bilateral Letters of Credit outstanding at June 30, 2013. The interest rate in effect was 1.75% on $0.6 million and 2.0% on $8.0 million. Secured Bilateral Letters of Credit are external to the facility and do not reduce revolver availability.
We recorded $2.5 million and $0.5 million of interest expense related to this facility during the three months ended June 30, 2013 and 2012, respectively, including amortization of debt issuance costs. We recorded $4.2 million and $1.0 million of interest expense related to this facility during the six months ended June 30, 2013 and 2012, respectively, including amortization of debt issuance costs.
At June 30, 2013, $2.7 million in capitalized loan fees, net of accumulated amortization, was recorded in other noncurrent assets, which is being amortized over the life of the facility.
At June 30, 2013, we were in compliance with the terms of the credit agreement.
SemMexico facilities
On July 13, 2012, SemMexico entered into a credit agreement that allows SemMexico to borrow up to 56 million Mexican pesos (U.S. $4.3 million at the June 30, 2013 exchange rate) at any time during the term of the facility, which matured in July 2013 and was repaid on July 12, 2013. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.7%. At June 30, 2013, there were borrowings of 56 million Mexican pesos (U.S. $4.3 million at the June 30, 2013 exchange rate) outstanding on this facility and the interest rate in effect was 6.01%.
On June 13, 2012, SemMexico entered into a credit agreement that allows SemMexico to borrow up to 44 million Mexican pesos (U.S. $3.4 million at the June 30, 2013 exchange rate) at any time during the term of the facility, which matures in June 2015. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 2.0%. At June 30, 2013, there were no outstanding borrowings on this facility.
SemMexico also has outstanding letters of credit of 292.8 million Mexican pesos at June 30, 2013 (U.S. $22.6 million at the June 30, 2013 exchange rate). Fees are generally charged on outstanding letters of credit at a rate of 0.5%.
SemMexico recorded interest expense of $0.1 million and $0.1 million during the three months ended June 30, 2013 and 2012, respectively. SemMexico recorded interest expense of $0.1 million and $0.1 million during the six months ended June 30, 2013 and 2012, respectively.
At June 30, 2013, we were in compliance with the terms of these facilities.
Capitalized interest
During the six months ended June 30, 2013 and 2012, we capitalized interest from our credit facilities of $1.8 million and $0.1 million, respectively.
Fair value
We estimate the fair value of our senior unsecured notes to be $303 million at June 30, 2013, based on unadjusted, transacted market prices, which is categorized as a Level 1 measurement. We estimate that the fair value of our other long-term debt was not materially different than the recorded values at June 30, 2013. It is our belief that neither the market interest rates nor our credit profile have changed significantly enough to have had a material impact on the fair value of our other debt outstanding at June 30, 2013. Both estimates are categorized as Level 3 measurements.
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
Bankruptcy matters
On July 22, 2008 (the “Petition Date”), SemGroup, L.P., SemCrude, and Eaglwing filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. While in bankruptcy, SemGroup, L.P. filed a plan of reorganization with the court, which was confirmed on October 28, 2009 (the “Plan of Reorganization”). The Plan of Reorganization determined, among other things, how pre-Petition Date obligations would be settled, the equity structure of the reorganized company upon emergence, and the financing arrangements upon emergence. SemGroup Corporation, SemCrude, and Eaglwing emerged from bankruptcy protection on November 30, 2009 (the “Emergence Date”).
(a)
Confirmation order appeal
Luke Oil appeal. On October 21, 2009, Luke Oil Company, C&S Oil/Cross Properties, Inc., Wayne Thomas Oil and Gas and William R. Earnhardt Company (collectively, “Luke Oil”) filed an objection to the Plan of Reorganization “to the extent that the Plan of Reorganization may alter, impair, or otherwise adversely affect Luke Oil’s legal rights or other interests.” On October 28, 2009, the bankruptcy court overruled the Luke Oil objection and entered the confirmation order. On November 6, 2009, Luke Oil filed a Notice of Appeal. On December 23, 2009, Luke Oil’s appeal was docketed in the United States District Court for the District of Delaware. We filed a motion to dismiss the appeal as equitably moot. On May 21, 2012, the District Court entered an order granting our motion to dismiss Luke Oil's appeal of the confirmation order. On June 18, 2012, Luke Oil filed its Notice of Appeal, notifying the District Court and the parties to the lawsuit that it was appealing the decision of the District Court to the United States Court of Appeals for the Third Circuit. The appeal has been fully briefed. The Court of Appeals heard oral argument on January 22, 2013, and has not yet ruled. While we believe that this action is without merit and are vigorously defending this matter on appeal, an adverse ruling on this action could have a material adverse impact on us.
(b)
Investigations
Around the time of our predecessor's bankruptcy filings, several governmental agencies launched investigations regarding the circumstances of the filings. The mandate and scope of these investigations were very broad and the investigations are ongoing.
Bankruptcy examiner. On October 14, 2008, the bankruptcy court appointed an examiner to (i) investigate the circumstances surrounding our predecessor's trading strategy prior to bankruptcy filings; (ii) investigate the circumstances surrounding certain insider transactions and the formation of SemGroup Energy Partners L.P. (a former subsidiary); (iii) investigate the circumstances surrounding the potential improper use of borrowed funds and funds generated from operations and the liquidation of assets to satisfy margin calls related to our predecessor's trading strategy and that of certain entities owned or controlled by former officers and directors of the general partner of SemGroup, L.P.; (iv) determine whether any directors, officers or employees of the general partner of SemGroup, L.P. participated in fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of our affairs; and (v) determine whether the SemGroup debtor estates have causes of action against current or former officers, directors, or employees of the general partner of SemGroup, L.P. arising from such participation. The examiner’s report was filed with the bankruptcy court on April 15, 2009.
Certain current and prior employees of the general partner of SemGroup, L.P. are referenced in the examiner’s report and the report’s conclusions may suggest possible civil or criminal liability on their part. To the extent such claims exist, they are property of a litigation trust that was established for the benefit of pre-petition creditors pursuant to the Plan of Reorganization, and are not property of the reorganized SemGroup Corporation. This litigation trust is pursuing claims against certain former officers, at its own expense. We may incur expenses, which are not expected to be material, related to information and document requests of the litigation trust related to such claims. Any indemnification obligations to such officers by SemGroup, L.P. were discharged under the Plan of Reorganization.
CFTC. On June 19, 2008, we received a request for voluntary production from the Commodity Futures Trading Commission (“CFTC”). Subsequent to the bankruptcy filings, the CFTC sent other requests for voluntary production. The CFTC has also served subpoenas upon us requiring us to produce various documents and for the depositions of our representatives. We continue to comply with the CFTC’s requests. We are unaware of any currently pending formal charges against us by the CFTC.
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 predecessor's bankruptcy filing. On September 15, 2010, the bankruptcy court entered an order estimating the contingent, unliquidated and disputed claims and authorizing distributions to holders of allowed claims. Pursuant to that order we have begun making distributions to the claimants. We continue to attempt to settle unresolved claims.
Pursuant to the Plan of Reorganization, we committed to settle authorized and allowed bankruptcy claims by paying a specified amount of cash, issuing a specified number of warrants, and issuing a specified number of shares of SemGroup Corporation common stock. We do not believe the resolution of the remaining outstanding claims will exceed the total amount of consideration established under the Plan of Reorganization for all claimants; instead, the resolution of the remaining claims in some cases will impact the relative share of the established pool of common stock and warrants that certain claimants receive.
However, under certain circumstances we could be required to pay additional funds to settle the specified group of claims to be settled with cash. Pursuant to the Plan of Reorganization, a specified amount of restricted cash was set aside at the Emergence Date, which we expect to be sufficient to settle this group of claims. Since the Emergence Date, we have made significant progress in resolving these claims, and we continue to believe that the cash set aside at the Emergence Date will be sufficient to settle these claims. However, we have not yet reached a resolution of all of these claims, and if the total settlement amount of all of these claims exceeds the specified amount, we will be required to pay additional funds to satisfy the total settlement amount for this specified group of claims. If this were to become probable of occurring, we would be required to record a liability and a corresponding expense.
Blueknight claim
Blueknight Energy Partners, L.P. (“Blueknight”), which was formerly a subsidiary of SemGroup, together with other entities related to Blueknight, entered into a Shared Services Agreement on April 7, 2009, with SemCrude, L.P. 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. On June 11, 2013, the Special Master's Report was finalized and filed with the District Court, confirming a shortage in Blueknight's Cushing terminal and Oklahoma pipeline system.  Discovery will proceed in the District Court where we will seek documentation and testimony on the treatment of the missing oil.  We will continue to defend our position; however, we cannot predict the outcome. 
Environmental
We may from time to time experience leaks of petroleum products from our facilities and, as a result of which, we may incur remediation obligations or property damage claims. In addition, we are subject to numerous environmental regulations. Failure to comply with these regulations could result in the assessment of fines or penalties by regulatory authorities.
The Kansas Department of Health and Environment (“the KDHE”) initiated discussions during our bankruptcy proceeding regarding six of our sites in Kansas (five owned by Crude and one owned by SemGas) that KDHE believes, based on their historical use, may have soil or groundwater contamination in excess of state standards. KDHE sought our agreement to undertake assessments of these sites to determine whether they are contaminated. We reached an agreement with KDHE on this matter and entered into a Consent Agreement and Final Order with KDHE to conduct environmental assessments on the sites and to pay KDHE’s costs associated with their oversight of this matter. We have conducted Phase II investigations at all sites and results indicate that four of the sites have limited amounts of soil contamination that will require remediation and ground water contamination that may require further delineation and/or ongoing monitoring. Work plans have been submitted to, and approved by, the KDHE. We do not anticipate any penalties or fines for these historical sites.
A water pipeline break occurred at a SemCAMS facility during August 2010. This resulted in a spill of material that was predominantly salt water containing a small amount of hydrocarbons. The incident was investigated by Environment Canada and Alberta Environment. On February 14, 2012, charges were filed against SemCAMS by the Federal Government of Canada (Department of Fisheries) and the Province of Alberta (Alberta Environment) in connection with this incident. We have reviewed disclosure received from the agencies and engaged our expert to assist us in formulating our response. Our expert's report has been completed and was delivered to the crown in April 2013. 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 still carry on our books at June 30, 2013.
Other matters
We are party to various other claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of our management, the ultimate resolution of these claims, legal actions and complaints, after consideration of amounts accrued, insurance coverage and other arrangements, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, the outcome of such matters is inherently uncertain, and estimates of our consolidated liabilities may change materially as circumstances develop.
Asset retirement obligations
We will be required to incur significant removal and restoration costs when we retire our natural gas gathering and processing facilities in Canada. We have recorded an asset retirement obligation liability of $40.5 million at June 30, 2013, which is included within other noncurrent liabilities on our condensed consolidated balance sheets. This amount was calculated using the $102.0 million cost we estimate we would incur to retire these facilities, discounted based on our risk-adjusted cost of borrowing and the estimated timing of remediation.
The calculation of the liability for an asset retirement obligation requires the use of significant estimates, including those related to the length of time before the assets will be retired, cost inflation over the assumed life of the assets, actual remediation activities to be required, and the rate at which such obligations should be discounted. Future changes in these estimates could result in material changes in the value of the recorded liability. In addition, future changes in laws or regulations could require us to record additional asset retirement obligations.
Our other segments may also be subject to removal and restoration costs upon retirement of their facilities. However, we are unable to predict when, or if, our pipelines, storage tanks and other facilities would become completely obsolete and require decommissioning. Accordingly, we have not recorded a liability or corresponding asset, as both the amount and timing of such potential future costs are indeterminable.
Purchase and sale commitments
We routinely enter into agreements to purchase and sell petroleum products at specified future dates. We account for derivatives at fair value with the exception of commitments which have been designated as normal purchases and sales for which we do not record assets or liabilities related to these agreements until the product is purchased or sold. At June 30, 2013, such commitments included the following (in thousands):
 
Volume
(Barrels)
 
Value
Fixed price purchases
150

 
$
13,434

Fixed price sales
150

 
$
14,318

Floating price purchases
18,933

 
$
1,772,366

Floating price sales
18,948

 
$
1,799,559


Certain of the commitments shown in the table above relate to agreements to purchase product from a counterparty and to sell a similar amount of product (in a different location) to the same counterparty. Many of the commitments shown in the table above are cancellable by either party, as long as notice is given within the time frame specified in the agreement (generally 30 to 120 days).
Our SemGas segment has a take or pay contractual obligation related to the fractionation of natural gas liquids. This obligation began in July 2011 and continues through June 2023, subsequent to the extension of the agreement in the second quarter of 2013. At June 30, 2013, approximately $26 thousand was due under the contract and the amount of future obligation is approximately $89.0 million. SemGas also enters into contracts under which we are responsible for marketing the majority of the gas and natural gas liquids produced by the counterparties to the agreements. The majority of SemGas’ revenues were generated from such contracts.
During the first quarter 2012, SemGas committed to purchasing equipment related to a 125 mmcf per day processing facility. At June 30, 2013, the future obligation associated with this purchase is $1.7 million.
See Note 3 for commitments related to Glass Mountain Pipeline LLC and the White Cliffs expansion project.
Equity
EQUITY
EQUITY
Unaudited condensed consolidated statement of changes in owners’ equity
The following table shows the changes in our consolidated owners’ equity accounts from December 31, 2012 to June 30, 2013 (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, 2012
$
420

 
$
1,039,189

 
$
(242
)
 
$
(145,674
)
 
$
(1,299
)
 
$
129,134

 
$
1,021,528

Net income

 

 

 
47,013

 

 
9,065

 
56,078

Other comprehensive income (loss), net of income taxes

 

 

 

 
(10,412
)
 

 
(10,412
)
Distributions to noncontrolling interests

 

 

 

 

 
(7,496
)
 
(7,496
)