SEMGROUP CORP, 10-Q filed on 8/7/2015
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2015
Jul. 31, 2015
Common Class A [Member]
Jul. 31, 2015
Class B
Document Type
10-Q 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Jun. 30, 2015 
 
 
Document Fiscal Period Focus
Q2 
 
 
Document Fiscal Year Focus
2015 
 
 
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
 
44,641,669 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2015
Dec. 31, 2014
Current assets:
 
 
Cash and cash equivalents
$ 228,783 
$ 40,598 
Restricted cash
34 
6,980 
Accounts receivable (net of allowance of $2,785 and $3,260, respectively)
349,931 
351,334 
Receivable from affiliates
18,172 
16,819 
Inventories
77,677 
43,532 
Other current assets
20,560 
20,017 
Total current assets
695,157 
479,280 
Property, plant and equipment (net of accumulated depreciation of $285,271 and $245,629, respectively)
1,420,194 
1,256,825 
Equity method investments
548,831 
577,920 
Goodwill
58,023 
58,326 
Other intangible assets (net of accumulated amortization of $25,215 and $20,545, respectively)
167,689 
173,065 
Other noncurrent assets, net
59,495 
44,386 
Total assets
2,949,389 
2,589,802 
Current liabilities:
 
 
Accounts payable
278,903 
257,177 
Payable to affiliates
19,040 
13,460 
Accrued liabilities
99,393 
92,694 
Payables to pre-petition creditors
3,129 
Deferred revenue
21,071 
23,688 
Other current liabilities
1,694 
1,474 
Current portion of long-term debt
44 
40 
Total current liabilities
420,145 
391,662 
Long-term debt
1,044,339 
767,092 
Deferred income taxes
191,171 
161,956 
Other noncurrent liabilities
22,099 
49,655 
Commitments and contingencies (Note 9)
   
   
SemGroup owners’ equity:
 
 
Common stock, $0.01 par value (authorized - 100,000 shares; issued - 44,847 and 44,689 shares, respectively)
439 
436 
Additional paid-in capital
1,252,694 
1,245,877 
Treasury stock, at cost (930 and 862 shares, respectively)
(5,586)
(1,332)
Accumulated deficit
(43,569)
(68,332)
Accumulated other comprehensive loss
(30,681)
(27,141)
Total SemGroup Corporation owners’ equity
1,173,297 
1,149,508 
Noncontrolling interests in consolidated subsidiaries
98,338 
69,929 
Total owners’ equity
1,271,635 
1,219,437 
Total liabilities and owners’ equity
$ 2,949,389 
$ 2,589,802 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Jun. 30, 2015
Dec. 31, 2014
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 2,785 
$ 3,260 
Accumulated depreciation
285,271 
245,629 
Accumulated amortization
$ 25,215 
$ 20,545 
Common stock, $0.01 par value
$ 0.01 
$ 0.01 
Common stock shares authorized
100,000 
100,000 
Common stock shares issued
44,847 
44,689 
Treasury stock shares
930 
862 
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, 2015
Jun. 30, 2014
Jun. 30, 2015
Jun. 30, 2014
Revenues:
 
 
 
 
Product
$ 288,736 
$ 402,986 
$ 508,867 
$ 830,016 
Service
66,604 
53,450 
128,481 
101,957 
Other
21,886 
25,788 
38,188 
49,134 
Total revenues
377,226 
482,224 
675,536 
981,107 
Expenses:
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
244,158 
368,527 
436,230 
753,640 
Operating
60,800 
59,424 
113,890 
110,202 
General and administrative
22,917 
21,850 
55,227 
40,586 
Depreciation and amortization
24,674 
22,062 
48,408 
45,699 
Loss on disposal or impairment of long-lived assets, net
1,372 
19,315 
2,430 
19,257 
Total expenses
353,921 
491,178 
656,185 
969,384 
Earnings from equity method investments
23,903 
19,187 
44,462 
34,149 
Gain on issuance of common units by equity method investee
5,897 
5,897 
8,127 
Operating income
53,105 
10,233 
69,710 
53,999 
Other expenses (income), net:
 
 
 
 
Interest expense
16,822 
10,360 
31,413 
19,587 
Foreign currency transaction loss (gain)
(295)
167 
(814)
(516)
Other expense (income), net
(6,718)
18,962 
(14,703)
17,915 
Total other expenses, net
9,809 
29,489 
15,896 
36,986 
Income (loss) from continuing operations before income taxes
43,296 
(19,256)
53,814 
17,013 
Income tax expense (benefit)
14,861 
(6,672)
19,603 
9,854 
Income (loss) from continuing operations
28,435 
(12,584)
34,211 
7,159 
Loss from discontinued operations, net of income taxes
(2)
(2)
(5)
Net income (loss)
28,433 
(12,584)
34,209 
7,154 
Less: net income attributable to noncontrolling interests
5,136 
5,025 
9,446 
11,250 
Net income (loss) attributable to SemGroup
23,297 
(17,609)
24,763 
(4,096)
Other comprehensive income (loss), net of income taxes
5,520 
6,685 
(3,540)
3,713 
Comprehensive income (loss)
33,953 
(5,899)
30,669 
10,867 
Less: comprehensive income attributable to noncontrolling interests
5,136 
5,025 
9,446 
11,250 
Comprehensive income (loss) attributable to SemGroup
$ 28,817 
$ (10,924)
$ 21,223 
$ (383)
Net income (loss) attributable to SemGroup per common share (Note 11):
 
 
 
 
Basic
$ 0.53 
$ (0.41)
$ 0.57 
$ (0.10)
Diluted
$ 0.53 
$ (0.41)
$ 0.56 
$ (0.10)
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Cash flows from operating activities:
 
 
Net income
$ 34,209 
$ 7,154 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Net unrealized loss (gain) related to derivative instruments
1,230 
(245)
Depreciation and amortization
48,408 
45,699 
Loss on disposal or impairment of long-lived assets, net
2,430 
19,257 
Earnings from equity method investments
(44,462)
(34,149)
Gain on issuance of common units by equity method investee
(5,897)
(8,127)
Gain on sale of common units of equity method investee
(14,517)
Distributions from equity investments
48,031 
36,601 
Amortization of debt issuance costs
2,314 
1,571 
Deferred tax expense
12,791 
8,035 
Non-cash equity compensation
6,204 
3,796 
Excess tax benefit from equity-based awards
(1,650)
Loss on fair value of warrants
17,949 
Provision for uncollectible accounts receivable, net of recoveries
(309)
93 
Currency gain
(814)
(516)
Inventory valuation adjustment
1,235 
Changes in operating assets and liabilities (Note 12)
(17,896)
(39,919)
Net cash provided by operating activities
72,957 
55,549 
Cash flows from investing activities:
 
 
Capital expenditures
(236,956)
(127,668)
Proceeds from sale of long-lived assets
230 
4,020 
Contributions to equity method investments
(23,461)
(67,977)
Payments to Acquire Businesses, Net of Cash Acquired
44,508 
Proceeds from sale of common units of equity method investee
56,318 
Distributions in excess of equity in earnings of affiliates
13,077 
5,400 
Net cash used in investing activities
(190,792)
(230,733)
Cash flows from financing activities:
 
 
Debt issuance costs
(6,289)
(155)
Borrowings on credit facilities and issuance of senior unsecured notes, net of discount
802,208 
533,830 
Principal payments on credit facilities and other obligations
(525,024)
(331,518)
Rose Rock Midstream, L.P. equity issuance
89,119 
Distributions to noncontrolling interests
(19,261)
(13,209)
Repurchase of common stock for payment of statutory taxes due on equity-based compensation
(4,254)
(719)
Dividends paid
(31,478)
(19,628)
Proceeds from issuance of common stock under employee stock purchase plan
609 
88 
Excess tax benefit from equity-based awards
1,650 
Net cash provided by financing activities
305,630 
170,339 
Effect of exchange rate changes on cash and cash equivalents
390 
832 
Change in cash and cash equivalents
188,185 
(4,013)
Cash and cash equivalents at beginning of period
40,598 
79,351 
Cash and cash equivalents at end of period
$ 228,783 
$ 75,338 
Overview
OVERVIEW
OVERVIEW
SemGroup Corporation is a Delaware corporation headquartered in Tulsa, Oklahoma. The terms "we," "our," "us," "SemGroup," "the Company" and similar language used in these notes to the unaudited condensed consolidated financial statements refer to SemGroup Corporation and its subsidiaries.
Basis of presentation
The accompanying condensed consolidated balance sheet at December 31, 2014, which is derived from audited financial statements, and the unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission ("SEC"). These financial statements include all normal and recurring adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of its operations and its cash flows.
Our condensed consolidated financial statements include the accounts of our controlled subsidiaries. All significant transactions between our consolidated subsidiaries have been eliminated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Although management believes these estimates are reasonable, actual results could differ materially from these estimates. The results of operations for the three months and six months ended June 30, 2015, are not necessarily indicative of the results to be expected for the full year ending December 31, 2015.
Pursuant to the rules and regulations of the SEC, the accompanying condensed consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States. Certain reclassifications have been made to conform previously reported balances to the current presentation. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2014, which are included in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC.
Our significant accounting policies are consistent with those described in our Annual Report on Form 10-K for the year ended December 31, 2014.
Recent accounting pronouncements
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value rather than the lower of cost or market. The standard will be effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new guidance shall be applied prospectively and early adoption is permitted. The Company will adopt this guidance in the first quarter of 2017. The impact is not expected to be material.
In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which is designed to simplify presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard will be effective for U.S. public companies for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The new guidance shall be applied on a retrospective basis for all periods presented. The Company will adopt this guidance in the first quarter of 2016. The impact is not expected to be material.
In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which adds requirements that limited partnerships must meet to qualify as voting interest entities and modifies the evaluation of whether limited partnerships are variable interest entities or voting interest entities. It also eliminates the presumption that a general partner should consolidate a limited partnership. This guidance is effective for public companies for fiscal years beginning after December 15, 2015. The Company will adopt this guidance in the first quarter of 2016. The impact is not expected to be material.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which supersedes nearly all existing revenue recognition guidance under accounting principles generally accepted in the United States ("U.S. GAAP"). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard permits using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). On July 9, 0215, the FASB approved a one-year deferral and the standard is now effective for annual periods beginning after December 15, 2017, and interim periods therein. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard. We will adopt this guidance in the first quarter of 2018.
In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The Company adopted this guidance in the first quarter of 2015. The impact was not 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. (NYSE: RRMS) ("Rose Rock"), through our ownership of the general partner interest. As of June 30, 2015, we own the 2% general partner interest and a 55.2% limited partner interest.
On January 1, 2015, certain operational targets were achieved by White Cliffs Pipeline, L.L.C. ("White Cliffs") and all 3,750,000 Class A units held by the Company were converted to common units on a one-for-one basis. The conversion did not impact the total number of Rose Rock's outstanding units representing limited partner interests.
On February 13, 2015, we contributed the Wattenberg Oil Trunkline ("WOT") and our 50% ownership interest in Glass Mountain Pipeline LLC ("Glass Mountain") to Rose Rock for (i) cash of approximately $251.2 million, (ii) the issuance of 1.75 million common units, and (iii) an increase of the capital account of the general partner and a related issuance of general partner interest, to allow the general partner to maintain its 2% general partner interest.
As the transaction was between entities under common control, Rose Rock recorded the acquired assets and liabilities based on SemGroup's historical cost. The purchase price in excess of historical cost was treated as an equity transaction with SemGroup, which reduced the partners' capital accounts of Rose Rock's general and limited partners on a pro-rata basis.
Additionally, the acquisition of WOT created a change in reporting entity which required Rose Rock's historical results to be recast as if WOT had been part of Rose Rock in prior periods. The historical summarized financial information of Rose Rock has been recast to reflect this change. The impact to prior periods was not significant. Prior period earnings of WOT have been allocated to the general partner. The acquisition of the equity method investment in Glass Mountain did not create a change in reporting entity. As such, prior periods have not been recast to include the historical results of Glass Mountain. There was no impact to SemGroup as these entities are all reported within the Crude segment.
On February 17, 2015, certain targets specified in Rose Rock’s partnership agreement were achieved and all 8,389,709 subordinated units held by the Company were converted to common units. The conversion did not impact the total number of Rose Rock’s outstanding units representing limited partner interests.
Cash distributions
We receive distributions from Rose Rock on our common units, our 2% general partner interest and incentive distribution rights. Rose Rock intends to pay a minimum quarterly distribution of $0.3625 per unit, to the extent it has sufficient available cash, as defined in Rose Rock’s partnership agreement.  
The following table shows the cash distributions paid or declared during 2015 and 2014 (in thousands, except for per unit amounts):
 
Distribution
Per Unit
 
Distributions Paid/To Be Paid
Quarter Ended
SemGroup
Noncontrolling
Interest
Common Units
Total
Distributions
General
Partner
Incentive
Distributions
Common
Units
Subordinated
Units
December 31, 2013
$
0.4650

 
$
257

$
244

$
2,041

$
3,901

$
6,398

$
12,841

March 31, 2014
$
0.4950


$
278

$
488

$
2,173

$
4,153

$
6,811

$
13,903

June 30, 2014
$
0.5350

 
$
334

$
888

$
3,646

$
4,488

$
7,362

$
16,718

September 30, 2014
$
0.5750

 
$
377

$
1,835

$
3,918

$
4,824

$
7,912

$
18,866

December 31, 2014
$
0.6200

 
$
485

$
3,487

$
6,551

$
5,202

$
8,544

$
24,269

March 31, 2015
$
0.6350

 
$
568

$
4,450

$
13,148

$

$
10,213

$
28,379

June 30, 2015
$
0.6500

*
$
590

$
4,979

$
13,458

$

$
10,456

$
29,483


*Expected distributions related to the quarter ended June 30, 2015, which will be paid on August 14, 2015 to unitholders of record as of August 4, 2015.

Summarized financial information
Certain summarized balance sheet information of Rose Rock is shown below (in thousands):
 
(Unaudited)
 
 
 
June 30,
2015
 
December 31,
2014
Cash
$
68,102

 
$
3,625

Other current assets
340,418

 
271,144

Property, plant and equipment, net
419,458

 
396,066

Equity method investment
426,058

 
269,635

Goodwill
36,116

 
36,116

Other noncurrent assets, net
33,686

 
29,677

Total assets
$
1,323,838

 
$
1,006,263

 
 
 
 
Current liabilities
$
308,116

 
$
265,682

Long-term debt
744,339

 
432,092

Partners’ capital attributable to SemGroup
173,045

 
238,560

Partners’ capital attributable to noncontrolling interests
98,338

 
69,929

Total liabilities and partners' capital
$
1,323,838

 
$
1,006,263


Certain summarized income statement information of Rose Rock for the three months and six months ended June 30, 2015 and 2014 is shown below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
223,303

 
$
292,156

 
$
357,996

 
$
584,670

Cost of products sold
$
173,133

 
$
255,745

 
$
269,370

 
$
510,282

Operating, general and administrative expenses
$
29,985

 
$
23,629

 
$
56,556

 
$
42,591

Depreciation and amortization expense
$
10,608

 
$
7,276

 
$
20,751

 
$
18,758

Earnings from equity method investment
$
17,683

 
$
12,291

 
$
38,547

 
$
23,371

Net income
$
17,068

 
$
15,088

 
$
31,668

 
$
31,314

Noncontrolling interests in consolidated subsidiary retained by SemGroup
$

 
$
4,082

 
$

 
$
7,758

Net income attributable to Rose Rock Midstream, L.P.
$
17,068

 
$
11,006

 
$
31,668

 
$
23,556

Equity Method Investments
EQUITY METHOD INVESTMENTS
EQUITY METHOD INVESTMENTS

Our equity method investments consist of the following (in thousands):
 
June 30, 2015
 
December 31, 2014
White Cliffs
$
281,627

 
$
269,635

NGL Energy Partners LP
122,773

 
162,246

Glass Mountain
144,431

 
146,039

Total equity method investments
$
548,831

 
$
577,920


    
Our earnings from equity method investments consist of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
White Cliffs
$
15,545

 
$
12,291

 
$
34,635

 
$
23,371

NGL Energy Partners LP*
6,220

 
4,968

 
5,915

 
8,559

Glass Mountain
2,138

 
1,928

 
3,912

 
2,219

Total earnings from equity method investments
$
23,903

 
$
19,187

 
$
44,462

 
$
34,149


* Excluding gain on issuance of common units of $5.9 million for the three months and six months ended June 30, 2015 and $8.1 million for the six months ended June 30, 2014.
Cash distributions received from equity method investments consist of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
White Cliffs
$
20,551

 
$
14,467

 
$
44,705

 
$
28,052

NGL Energy Partners LP
4,468

 
5,671

 
9,483

 
11,012

Glass Mountain
5,009

 
2,937

 
6,920

 
2,937

Total cash distributions received from equity method investments
$
30,028

 
$
23,075

 
$
61,108

 
$
42,001


White Cliffs
Certain unaudited summarized income statement information of White Cliffs for the three months and six months ended June 30, 2015 and 2014 is shown below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
48,509

 
$
34,533

 
$
103,123

 
$
67,807

Operating, general and administrative expenses
$
9,045

 
$
5,539

 
$
17,398

 
$
12,307

Depreciation and amortization expense
$
8,587

 
$
4,537

 
$
17,125

 
$
8,930

Net income
$
30,870

 
$
24,457

 
$
68,593

 
$
46,570


The equity in earnings of White Cliffs for the three months and six months ended June 30, 2015 and 2014 is less than 51% of the net income of White Cliffs for the same periods. This is due to certain general and administrative expenses we incur in managing the operations of White Cliffs that the other owners are not obligated to share. Such expenses are recorded by White Cliffs and are allocated to our ownership interest. White Cliffs recorded $0.4 million and $0.4 million of such general and administrative expense for the three months ended June 30, 2015 and 2014, respectively. White Cliffs recorded $0.7 million and $0.8 million of such general and administrative expense for the six months ended June 30, 2015 and 2014, respectively.
The members of White Cliffs are required to contribute capital to White Cliffs to fund various projects. For the six months ended June 30, 2015, we contributed $21.4 million to these projects, including $13.1 million of contributions for an expansion project adding approximately 65,000 barrels per day of capacity. Remaining contributions related to the expansion project will be paid in 2015 and are expected to total $23.6 million. The project is expected to be completed in late 2015.
NGL Energy Partners LP
At June 30, 2015, we owned 4,652,568 common units representing limited partner interests in NGL Energy Partners LP (NYSE: NGL) ("NGL Energy"), which represents approximately 4.5% of the total 103,794,870 limited partner units of NGL Energy outstanding at March 31, 2015, and an 11.78% interest in the general partner of NGL Energy.
At June 30, 2015, the fair market value of our 4,652,568 common unit investment in NGL Energy was $141.1 million, based on a June 30, 2015 closing price of $30.33 per common unit. This does not reflect our 11.78% interest in the general partner of NGL Energy. The fair value of our limited partner investment in NGL Energy is categorized as a Level 1 measurement, as it is based on quoted market prices.
Our policy is to record our equity in earnings of NGL Energy on a one-quarter lag, as we do not expect information on the earnings of NGL Energy to always be available in time to consistently record the earnings in the quarter in which they are generated. Accordingly, the equity in earnings from NGL Energy, which is reflected in our condensed consolidated statements of operations and comprehensive income for the three months and six months ended June 30, 2015 and 2014, relates to the earnings of NGL Energy for the three months and six months ended March 31, 2015 and 2014, respectively.
In the first quarter of 2015, NGL announced several transactions in which they issued common units publicly and privately which diluted our limited partnership interest. As we record activity on a one-quarter lag, we recognized a non-cash gain of $5.9 million associated with these issuances in the second quarter of 2015.
During the six months ended June 30, 2015, we sold 1,999,533 of our NGL Energy common units for $56.3 million, net of related costs of $0.5 million. We recorded net gains related to these sales of $6.6 million and $14.5 million in "other expense (income)" in our condensed consolidated statement of operations and comprehensive income for the three months and six months ended June 30, 2015, respectively.
Certain unaudited summarized income statement information of NGL Energy for the three months and six months ended March 31, 2015 and 2014 is shown below (in thousands):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2015
 
2014
 
2015
 
2014
Revenue
$
3,220,771

 
$
3,975,935

 
$
7,772,917

 
$
6,719,380

Cost of sales
$
2,933,021

 
$
3,764,744

 
$
7,244,689

 
$
6,340,773

Operating, general and administrative expenses
$
151,793

 
$
110,923

 
$
323,857

 
$
201,676

Depreciation and amortization expense
$
54,140

 
$
37,475

 
$
104,475

 
$
72,969

Net income
$
90,942

 
$
43,146

 
$
85,673

 
$
67,198

 
Glass Mountain
Certain unaudited summarized income statement information of Glass Mountain for the three months and six months ended June 30, 2015 is shown below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
9,788

 
$
8,891

 
$
20,909

 
$
12,744

Cost of sales
$

 
$

 
$
1,982

 
$

Operating, general and administrative expenses
$
1,473

 
$
1,158

 
$
2,911

 
$
2,008

Depreciation and amortization expense
$
3,932

 
$
3,770

 
$
7,976

 
$
6,118

Net income
$
4,381

 
$
3,962

 
$
8,036

 
$
4,615


The equity in earnings of Glass Mountain for the three months and six months ended June 30, 2015 reported in our condensed consolidated statement of operations and comprehensive income is less than 50% of the net income of Glass Mountain for the same period due to amortization of capitalized interest for the period.
For the six months ended June 30, 2015, we contributed $1.4 million to Glass Mountain related to capital projects.
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. 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, 2015
 
Crude

SemStream

SemCAMS

SemGas

SemLogistics

SemMexico

Corporate
and Other

Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
223,303

 
$

 
$
35,915

 
$
60,270

 
$
6,279

 
$
51,459

 
$

 
$
377,226

Intersegment

 

 

 
6,451

 

 

 
(6,451
)
 

Total revenues
223,303

 

 
35,915

 
66,721

 
6,279

 
51,459

 
(6,451
)
 
377,226

Expenses:
 
 

 

 

 

 

 

 
 
Costs of products sold, exclusive of depreciation and amortization shown below
173,133

 

 
76

 
36,160

 

 
41,240

 
(6,451
)
 
244,158

Operating
23,955

 

 
23,665

 
8,799

 
2,041

 
2,340

 

 
60,800

General and administrative
6,332

 
12

 
4,193

 
2,641

 
2,246

 
2,823

 
4,670

 
22,917

Depreciation and amortization
10,608

 

 
3,187

 
7,359

 
2,154

 
1,037

 
329

 
24,674

Loss (gain) on disposal or impairment of long-lived assets, net
(79
)
 

 

 
1,450

 

 

 
1

 
1,372

Total expenses
213,949

 
12


31,121


56,409


6,441


47,440


(1,451
)

353,921

Earnings from equity method investments
17,683

 
6,220

 

 

 

 

 

 
23,903

Gain on issuance of common units by equity method investee

 
5,897

 

 

 

 

 

 
5,897

Operating income (loss)
27,037

 
12,105


4,794


10,312


(162
)

4,019


(5,000
)

53,105

Other expenses (income), net
13,083

 
(7,959
)
 
3,263

 
3,269

 
(432
)
 
56

 
(1,471
)
 
9,809

Income from continuing operations before income taxes
$
13,954

 
$
20,064

 
$
1,531

 
$
7,043

 
$
270

 
$
3,963

 
$
(3,529
)

$
43,296

Total assets at June 30, 2015 (excluding intersegment receivables)
$
1,407,189

 
$
122,773

 
$
282,551

 
$
709,818

 
$
154,432

 
$
97,011

 
$
175,615

 
$
2,949,389



 
Three Months Ended June 30, 2014
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
292,156

 
$

 
$
39,954

 
$
83,162

 
$
3,981

 
$
62,971

 
$

 
$
482,224

Intersegment

 

 

 
9,792

 

 

 
(9,792
)
 

Total revenues
292,156

 


39,954


92,954


3,981


62,971


(9,792
)
 
482,224

Expenses:
 
 
 
 

 

 

 

 

 

Costs of products sold, exclusive of depreciation and amortization shown below
255,745

 

 
71

 
68,231

 
265

 
54,007

 
(9,792
)
 
368,527

Operating
17,689

 

 
28,836

 
8,012

 
1,940

 
2,947

 

 
59,424

General and administrative
6,438

 
(52
)
 
3,574

 
2,240

 
1,529

 
3,112

 
5,009

 
21,850

Depreciation and amortization
7,276

 

 
3,079

 
7,279

 
2,555

 
1,456

 
417

 
22,062

Loss (gain) on disposal of long-lived assets, net
(27
)
 

 
(915
)
 
20,100

 
(3,634
)
 

 
3,791

 
19,315

Total expenses
287,121

 
(52
)

34,645


105,862


2,655


61,522


(575
)
 
491,178

Earnings from equity method investments
14,219

 
4,968

 

 

 

 

 

 
19,187

Operating income (loss)
19,254


5,020


5,309


(12,908
)

1,326


1,449


(9,217
)

10,233

Other expenses (income), net
5,178

 
(1,277
)
 
3,750

 
2,013

 
83

 
(56
)
 
19,798

 
29,489

Income (loss) from continuing operations before income taxes
$
14,076

 
$
6,297


$
1,559


$
(14,921
)

$
1,243


$
1,505


$
(29,015
)

$
(19,256
)
 
Six Months Ended June 30, 2015
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
364,971

 
$

 
$
65,639

 
$
120,546

 
$
11,431

 
$
112,949

 
$

 
$
675,536

Intersegment

 

 

 
12,432

 

 

 
(12,432
)
 

Total revenues
364,971

 

 
65,639

 
132,978

 
11,431

 
112,949

 
(12,432
)
 
675,536

Expenses:
 
 

 

 

 
 
 

 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
278,278

 

 
208

 
77,429

 

 
92,747

 
(12,432
)
 
436,230

Operating
45,117

 

 
41,996

 
16,845

 
4,655

 
5,277

 

 
113,890

General and administrative
11,954

 
15

 
7,569

 
4,704

 
3,923

 
4,765

 
22,297

 
55,227

Depreciation and amortization
20,751

 

 
6,253

 
14,497

 
4,194

 
2,090

 
623

 
48,408

Loss (gain) on disposal of long-lived assets, net
73

 

 

 
1,449

 

 
(19
)
 
927

 
2,430

Total expenses
356,173

 
15

 
56,026

 
114,924

 
12,772

 
104,860

 
11,415

 
656,185

Earnings from equity method investments
38,547

 
5,915

 

 

 

 

 

 
44,462

Gain on issuance of common units by equity method investee

 
5,897

 

 

 

 

 

 
5,897

Operating income (loss)
47,345

 
11,797


9,613


18,054


(1,341
)

8,089


(23,847
)
 
69,710

Other expenses (income), net
23,729

 
(17,175
)
 
6,332

 
6,120

 
684

 
125

 
(3,919
)
 
15,896

Income (loss) from continuing operations before income taxes
$
23,616

 
$
28,972

 
$
3,281

 
$
11,934

 
$
(2,025
)
 
$
7,964

 
$
(19,928
)
 
$
53,814

 
Six Months Ended June 30, 2014
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
584,670

 
$

 
$
79,237

 
$
173,848

 
$
8,771

 
$
134,581

 
$

 
$
981,107

Intersegment

 

 

 
19,684

 

 

 
(19,684
)
 

Total revenues
584,670

 

 
79,237

 
193,532

 
8,771

 
134,581

 
(19,684
)
 
981,107

Expenses:
 
 

 

 

 
 
 

 

 
 
Costs of products sold, exclusive of depreciation and amortization shown below
510,282

 

 
138

 
146,813

 
615

 
115,476

 
(19,684
)
 
753,640

Operating
32,828

 

 
52,502

 
15,456

 
4,020

 
5,396

 

 
110,202

General and administrative
10,380

 
61

 
7,554

 
4,212

 
2,951

 
5,863

 
9,565

 
40,586

Depreciation and amortization
18,758

 

 
5,908

 
12,248

 
5,050

 
2,883

 
852

 
45,699

Loss (gain) on disposal of long-lived assets, net
(61
)
 

 
(915
)
 
20,104

 
(3,634
)
 
(28
)
 
3,791

 
19,257

Total expenses
572,187

 
61

 
65,187

 
198,833

 
9,002

 
129,590

 
(5,476
)
 
969,384

Earnings from equity method investments
25,590

 
8,559

 

 

 

 

 

 
34,149

Gain on issuance of common units by equity method investee

 
8,127

 

 

 

 

 

 
8,127

Operating income (loss)
38,073


16,625


14,050


(5,301
)

(231
)

4,991


(14,208
)

53,999

Other expenses (income), net
9,841

 
(2,541
)
 
7,905

 
3,702

 
334

 
(101
)
 
17,846

 
36,986

Income (loss) from continuing operations before income taxes
$
28,232

 
$
19,166

 
$
6,145

 
$
(9,003
)
 
$
(565
)
 
$
5,092

 
$
(32,054
)
 
$
17,013

Inventories
Inventories
INVENTORIES
Inventories consist of the following (in thousands):
 
June 30,
2015
 
December 31,
2014
Crude oil
$
67,331

 
$
26,722

Asphalt and other
10,346

 
16,810

Total inventories
$
77,677

 
$
43,532



During the six months ended ended June 30, 2015, our Crude segment recorded non-cash charges of $1.2 million to write-down crude oil inventory to the lower of cost or market.
Financial Instruments
FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS
Fair value of financial instruments
We record certain financial assets and liabilities at fair value at each balance sheet date. The tables below summarize the balances of commodity derivative assets and liabilities at June 30, 2015 and December 31, 2014 (in thousands):

 
June 30, 2015
 
December 31, 2014
Derivatives subject to netting arrangements:
Level 1
 
Netting*
 
Total
 
Level 1
 
Netting*
 
Total
Commodity derivatives:
 
 
 
 

 
 
 
 
 

Assets
$
762

 
$
(317
)
 
$
445

 
$
3,311

 
$
(1,637
)
 
$
1,674

Liabilities
$
317

 
$
(317
)
 
$

 
$
1,637

 
$
(1,637
)
 
$

*Relates primarily to exchange traded futures. Gain and loss positions on multiple contracts are settled net on a daily basis with the exchange.
"Level 1" measurements are based on inputs consisting of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. These include commodity futures contracts that are traded on an exchange.
"Level 2" measurements are based on inputs consisting of market observable and corroborated prices for similar derivative contracts. Assets and liabilities classified as Level 2 include over the counter ("OTC") traded physical fixed priced purchases and sales forward contracts.
"Level 3" measurements are based on inputs from a pricing service and/or internal valuation models incorporating observable and unobservable market data. These include commodity derivatives, such as forwards and swaps for which there is not a highly liquid market and therefore are not included in Level 2 above.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value levels. At June 30, 2015, 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 recorded at fair value which were classified as Level 2 or Level 3 during the three months and six months ended June 30, 2015 and 2014. As such, no rollforward of Level 3 activity has been presented.
Commodity derivative contracts
Our consolidated results of operations and cash flows are impacted by changes in market prices for petroleum products. This exposure to commodity price risk is managed, in part, by entering into various commodity derivatives.
We seek to manage the price risk associated with our marketing operations by limiting our net open positions through (i) the concurrent purchase and sale of like quantities of petroleum products to create back-to-back transactions that are intended to lock in positive margins based on the timing, location or quality of the petroleum products purchased and delivered or (ii) derivative contracts. Our storage and transportation assets can also be used to mitigate location and time basis risk. All marketing activities are subject to our Comprehensive Risk Management Policy, which establishes limits in order to manage risk and mitigate financial exposure.
Our commodity derivatives can be comprised of swaps, futures contracts and forward contracts of crude oil, natural gas and natural gas liquids. These are defined as follows:
Swaps – OTC transactions where a floating price, basis or index is exchanged for a fixed (or a different floating) price, basis or index at a preset schedule in the future, according to an agreed-upon formula.
Futures contracts – Exchange traded contracts to buy or sell a commodity. These contracts are standardized by the exchange in terms of quality, quantity, delivery period and location for each commodity.
Forward contracts – OTC contracts to buy or sell a commodity at an agreed upon future date. The buyer and seller agree on specific terms (price, quantity, delivery period and location) and conditions at the inception of the contract.
The following table sets forth the notional quantities for commodity derivative instruments entered into (in thousands of barrels):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Sales
7,721

 
1,135

 
13,452

 
1,950

Purchases
7,508

 
1,005

 
13,413

 
1,815


We have not designated any of our commodity derivative instruments as accounting hedges. We have recorded the fair value of our commodity derivative instruments on our condensed consolidated balance sheets in other current assets and other current liabilities in the following amounts (in thousands):
 
June 30, 2015
 
December 31, 2014
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
$
445

 
$

 
$
1,674

 
$


We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. Our margin deposit balances were $1.1 million and $0.8 million at June 30, 2015 and December 31, 2014, respectively. These margin account balances have not been offset against our net commodity derivative instrument (contract) positions. Had these margin deposits been netted against our net commodity derivative instrument (contract) positions as of June 30, 2015 and December 31, 2014, we would have had net asset positions of $1.5 million and $2.5 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,
 
2015
 
2014
 
2015
 
2014
Commodity contracts
$
(2,202
)
 
$
(1,942
)
 
$
(2,268
)
 
$
(2,749
)

Concentrations of risk
During the three months ended June 30, 2015, two customers of our Crude segment accounted for more than 10% of our consolidated revenues at approximately 35%. No suppliers accounted for more than 10% of our costs of products sold.
During the six months ended June 30, 2015, two customers of our Crude segment accounted for more than 10% of our consolidated revenues at approximately 35%. We purchased approximately $98.5 million of product from two third-party suppliers of our Crude segment, which represented approximately 23% of our costs of products sold.
At June 30, 2015, one third-party customer of our Crude segment accounted for approximately 39% of our consolidated accounts receivable.
Income Taxes
INCOME TAXES
INCOME TAXES

The effective tax rate was 34% and 35% for the three months ended June 30, 2015 and 2014, respectively and 36% and 58% for the six months ended June 30, 2015 and 2014, respectively. The rate for the six months ended June 30, 2014 is impacted by $3.1 million Canadian withholding tax paid on remittances to the U.S. 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 a non-controlling interest in Rose Rock for which taxes are not provided. 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.

We have a valuation allowance on a small portion of our state net operating loss carryovers with shorter carryover periods and our foreign tax credit carryover. 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. 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.

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. No foreign jurisdictions are currently under audit.
Long-Term Debt
Long-Term Debt
LONG-TERM DEBT
Our long-term debt consisted of the following (in thousands):
 
June 30,
2015
 
December 31,
2014
SemGroup 7.50% senior unsecured notes
$
300,000

 
$
300,000

SemGroup corporate revolving credit facility

 
35,000

Rose Rock 5.625% senior unsecured notes due 2022
400,000

 
400,000

Rose Rock 5.625% senior unsecured notes due 2023
344,276

 

Rose Rock revolving credit facility

 
32,000

SemMexico revolving credit facility

 

Capital leases
107

 
132

Total long-term debt
$
1,044,383

 
$
767,132

Less: current portion of long-term debt
44

 
40

Noncurrent portion of long-term debt
$
1,044,339

 
$
767,092


SemGroup senior unsecured notes
For the three months ended June 30, 2015 and 2014, we incurred $5.8 million and $5.8 million, respectively, of interest expense related to $300 million of 7.50% senior unsecured notes due 2021 (the "Notes") including the amortization of debt issuance costs. For the six months ended June 30, 2015 and 2014, we incurred $11.7 million and $11.7 million, respectively of interest expense related to the Notes including amortization of debt issuance costs.
SemGroup corporate revolving credit facility
At June 30, 2015, we had no outstanding cash borrowings on our $500 million revolving credit facility.
At June 30, 2015, we had outstanding letters of credit under the facility of $4.5 million, for which the rate in effect was 2.0%.
We incurred interest expense related to the SemGroup revolving credit facility of $1.0 million and $2.0 million for the three months ended June 30, 2015 and 2014, respectively, including amortization of debt issuance costs. We incurred interest expense related to the SemGroup revolving credit facility of $2.0 million and $3.7 million for the six months ended June 30, 2015 and 2014, respectively, including amortization of debt issuance costs.
Rose Rock senior unsecured notes due 2022
At June 30, 2015, Rose Rock had outstanding $400 million of 5.625% senior unsecured notes due 2022 (the "Rose Rock 2022 Notes"). For the three months and six months ended June 30, 2015, we incurred $5.9 million and $11.7 million, respectively, of interest expense related to the Rose Rock 2022 Notes including amortization of debt issuance costs.
Rose Rock senior unsecured notes due 2023
On May 14, 2015, Rose Rock and its wholly-owned subsidiary, Rose Rock Finance Corporation ("Finance Corp."), as co-issuer, sold $350 million of 5.625% senior unsecured notes due 2023 (the “Rose Rock 2023 Notes”) to certain initial purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons outside the United States pursuant to Regulation S of the Securities Act. The Rose Rock 2023 Notes are guaranteed by all of Rose Rock's existing subsidiaries other than Finance Corp. Such guarantees of the Rose Rock 2023 Notes are full and unconditional and constitute the joint and several obligations of the subsidiary guarantors.
The Rose Rock 2023 notes were sold at 98.345% of par, a discount of $5.8 million. The discount is reported as a reduction to the face value of the Rose Rock 2023 Notes on our condensed consolidated balance sheets and is being amortized over the life of the Rose Rock 2023 Notes using the interest method. At June 30, 2015, the unamortized discount was $5.7 million.
The net proceeds from the offering of $337.7 million, after the discount and $6.5 million of underwriters' fees and offering expenses, were used to repay amounts borrowed under Rose Rock's revolving credit facility and for general partnership purposes.
The Rose Rock 2023 Notes are governed by an indenture among Rose Rock, its subsidiary guarantors, Finance Corp. and Wilmington Trust, National Association, as trustee (the “Indenture”). The Indenture includes customary covenants, including limitations on Rose Rock's ability to incur additional indebtedness or issue certain preferred shares; pay dividends and make certain distributions, investments and other restricted payments; create certain liens; sell assets; enter into transactions with affiliates; merge, consolidate, sell or otherwise dispose of all or substantially all of its assets; and designate its subsidiaries as unrestricted subsidiaries under the Indenture.
The Indenture includes customary events of default. A default would permit the trustee or holders of at least 25% in aggregate principal amount of the Rose Rock 2023 Notes then outstanding to declare all amounts owing under the Rose Rock 2023 Notes to be due and payable.
The Rose Rock 2023 Notes are effectively subordinated in right of payment to any of Rose Rock's, and the subsidiary guarantors', existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness.
Rose Rock may issue additional notes under the Indenture from time to time, subject to the terms of the Indenture.
Except as described below, the Rose Rock 2023 Notes are not redeemable at Rose Rock's option prior to May 15, 2019. From and after May 15, 2019, Rose Rock may redeem the Rose Rock 2023 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 May 15 of each of the years indicated below:
Year
 
Percentage
2019
 
102.813%
2020
 
101.406%
2021 and thereafter
 
100.000%

Prior to May 15, 2018, Rose Rock may, at its option, on one or more occasions, redeem up to 35% of the sum of the original aggregate principal amount of the Rose Rock 2023 Notes at a redemption price equal to 105.625% of the aggregate principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings of Rose Rock, or the parent of Rose Rock to the extent such net proceeds are contributed to Rose Rock, subject to certain conditions.
Prior to May 15, 2019, Rose Rock may also redeem all or part of the Rose Rock 2023 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 May 15, 2019 redemption price from the table above plus all required interest payments due through May 15, 2019, computed using a discount rate based on a published United States Treasury Rate plus 50 basis points, over the principal value of such Rose Rock 2023 Note.
In the event of a change of control, Rose Rock is required to offer to repurchase the Rose Rock 2023 Notes at an amount equal to 101% of the principal plus accrued and unpaid interest.
The Rose Rock 2023 Notes are also subject to a Registration Rights Agreement which requires Rose Rock to file a registration statement with the SEC and to use commercially reasonable efforts to consummate such exchange offer within one year of the settlement date of the Rose Rock 2023 Notes so that holders of the Rose Rock 2023 Notes can exchange the Rose Rock 2023 Notes and related guarantees for registered notes (the "Exchange Notes") and guarantees that have substantially identical terms as the Rose Rock 2023 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 subsidiary guarantors. Failure to meet the terms of the Registration Rights Agreement will require Rose Rock 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 May 15th and November 15th to holders of record on May 1st and November 1st each year until maturity.
For the three months and six months ended June 30, 2015, we incurred $2.7 million of interest expense related to the Rose Rock 2023 Notes including amortization of debt issuance costs.
Rose Rock revolving credit facility
At June 30, 2015, Rose Rock had no outstanding cash borrowings under the $585 million Rose Rock revolving credit facility.
At June 30, 2015, Rose Rock had $24.6 million in outstanding letters of credit, and the rate in effect was 2.75%.
Rose Rock had $36.0 million of Secured Bilateral Letters of Credit outstanding at June 30, 2015. The interest rate in effect was 1.75%. Secured Bilateral Letters of Credit are external to the facility and do not reduce availability for borrowing on the revolving credit facility.
We incurred $2.0 million and $2.6 million of interest expense related to this facility during the three months ended June 30, 2015 and 2014, respectively, including letters of credit and amortization of debt issuance costs. We incurred $4.2 million and $4.9 million of interest expense related to this facility during the six months ended June 30, 2015 and 2014, respectively, including letters of credit and amortization of debt issuance costs.
SemMexico revolving credit facility
SemMexico had a 44 million Mexican pesos (U.S. $2.8 million at the June 30, 2015 exchange rate) revolving credit facility, which matured in May 2015. At the time of the maturity, there were no outstanding borrowings.
At June 30, 2015, SemMexico had no outstanding borrowings on its 56 million Mexican pesos (U.S. $3.6 million at the June 30, 2015 exchange rate) revolving credit facility, which matured in July 2015. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.50%.
On May 22, 2015, SemMexico entered into a 100 million Mexican pesos (U.S. $6.4 million at the June 30, 2015 exchange rate) revolving credit facility, which matures in May 2018. There were no outstanding borrowings on the facility at June 30, 2015. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.50%.
At June 30, 2015, SemMexico had an outstanding letter of credit of 292.8 million Mexican pesos (U.S. $18.7 million at the June 30, 2015 exchange rate). The interest rate in effect was 0.40%.
Capitalized interest
During the six months ended June 30, 2015 and 2014, we capitalized interest from our credit facilities of $0.9 million and $0.8 million, respectively.
Fair value
We estimate the fair value of the Notes, the Rose Rock 2022 Notes and the Rose Rock 2023 Notes to be $319 million, $392 million and $340 million, respectively, at June 30, 2015, based on unadjusted, transacted market prices, which are categorized as Level 1 measurements.
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
Bankruptcy matters
On July 22, 2008 (the "Petition Date"), SemGroup, L.P. and certain subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Also on July 22, 2008, SemGroup, L.P.'s Canadian subsidiaries filed for creditor protection in Canada. Later during 2008, certain other U.S. subsidiaries filed petitions for reorganization. While in bankruptcy, SemGroup, L.P. filed a plan of reorganization with the court, which was confirmed on October 28, 2009 (the "Plan of Reorganization"). The Plan of Reorganization determined, among other things, how pre-Petition Date obligations would be settled, the equity structure of the reorganized company upon emergence and the financing arrangements upon emergence. SemGroup Corporation emerged from bankruptcy protection on November 30, 2009 (the "Emergence Date").
Claims reconciliation process
A large number of parties made claims against us for obligations alleged to have been incurred prior to our predecessor's bankruptcy filing. We have resolved or settled all of these outstanding claims and have made all required distributions. The Plan of Reorganization has therefore been fully administered. On November 7, 2014, SemGroup Corporation and the other reorganized debtors moved for a final decree from the bankruptcy court closing the debtors’ bankruptcy cases. The United States Bankruptcy Court for the District of Delaware granted the request and entered its Order Granting Motion of Remaining Debtors for Entry of Final Decree on December 18, 2014. Accordingly, the bankruptcy cases for SemCrude, L.P., Eaglwing, L.P., SemCanada II, L.P., SemCanada L.P., SemGas, L.P., SemGroup, L.P., SemMaterials, L.P., and SemStream, L.P. have been closed. As part of its decree, the Court retained jurisdiction over certain on-going adversary proceedings, but the debtors have estimated and paid the claims associated with these remaining adversaries, leaving the non-debtor parties to the adversaries to resolve their remaining claims amongst themselves. On January 2, 2015, Bettina M. Whyte, the duly appointed Trustee of the SemGroup Litigation Trust (the “Litigation Trustee”), filed a notice of appeal of the Bankruptcy Court’s December 18, 2014 order closing the aforementioned bankruptcy cases. However, the Bankruptcy Court’s order of final decree was effective upon entry, and the appeal does not stay the effect of the order. The Litigation Trustee’s appeal to the United States District Court for the District of Delaware is currently pending and will be opposed by SemGroup Corporation and the other remaining reorganized debtors.
Dimmit County, TX claims
An employee of Rose Rock Midstream Field Services, LLC was involved in a tractor trailer accident on January 15, 2015 in Dimmit County, Texas.  A second accident followed resulting in six fatalities and multiple injuries. At this time, the following lawsuits have been filed in either the District Court of Zavala County, Texas or the District Court of Dimmit County, Texas: Olga D. Rubio and Carlos Rubio, Individually and on Behalf of All Statutory Wrongful Death Beneficiaries of Carlos Rubio, Jr., Deceased vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; David Rodriguez and Maribel Rodriguez vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; David Rodriguez and Maribel Rodrigues, Plaintiffs and Alejandra Abigail Ortega, Individually and as next friend of K.A.P., a minor, and as Representative of the Estate of Eduardo Pena, and Julian Pena and Nelva G. Suifuentes Pena Intervenors vs. Rose Rock Midstream Field Services, LLC, Jesus Riojas, and Roberto Rivera; Derek Muhlenbruch vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; and Agustin Lara, Sr., Individually, and Elsa Zamarripa, Individually and as Representative of the Estate of Justin Lara, Deceased vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; Jorge A Porras vs. Rose Rock Midstream Field Services, LLC; Nancy Garcia vs. Rose Rock Midstream Field Services, LLC; Veronica Veyro vs. Rose Rock Midstream Field Services, LLC; Veronica Veyro a/n/f of Sergio Veyro, Jr. vs. Rose Rock Midstream Field Services, LLC; Veronica Veyro as Rep of Estate of Sergio Veyro Sr., Deceased vs. Rose Rock Midstream Field Services, LLC; Veronica Kimberly Veyro vs. Rose Rock Midstream Field Services, LLC; Roberto Rivera-Castilla vs. Rose Rock Midstream Field Services, LLC; Mary Alice Medellin vs. Rose Rock Midstream Field Services, LLC; Mary Medellin as Rep of Estate of Juan Medellin, Jr. vs. Rose Rock Midstream Field Services, LLC; Mary Medellin on behalf of those entitled to recover for the Wrongful Death of Juan Medellin, Jr. vs. Rose Rock Midstream Field Services, LLC; Elizabeth Rolon vs. Rose Rock Midstream Field Services, LLC; Juan Francisco Medellin, III vs. Rose Rock Midstream Field Services, LLC and David Rodriguez and Maribel Rodriguez vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas. We are currently working with counsel for the interested parties to investigate the accident, and no determination of liability has been made.  We will continue to defend our position and believe that any liability that may arise from this incident will be covered by our insurance; however, we cannot predict the outcome.
Blueknight claim
Blueknight Energy Partners, L.P. ("Blueknight"), which was formerly a subsidiary of SemGroup, LP, together with other entities related to Blueknight, entered into a Shared Services Agreement on April 7, 2009, with SemCrude, L.P., now known as Rose Rock Midstream Crude, L.P. ("SemCrude") and SemManagement, L.L.C. (which are currently subsidiaries of SemGroup). The services provided by SemCrude to Blueknight under this agreement included from time to time certain operational tasks as requested by Blueknight in order that Blueknight could operate its Oklahoma pipeline system and its Cushing, Oklahoma terminal. Under the subsequent amendments to the agreement certain of these services were phased out, and Blueknight began to perform all services necessary for operation of its Cushing terminal without SemCrude’s assistance.
In a letter dated August 18, 2011, Blueknight claimed that SemCrude owes Blueknight approximately 141,000 barrels of crude oil, and that SemCrude came to possess this oil as a result of a breach of the agreement and other tortious conduct. We responded to Blueknight’s letter denying their charges and requesting documentation from Blueknight of its claim for missing barrels. On February 14, 2012, after months of interaction between the parties through which Blueknight was requested to substantiate its claim, Blueknight filed suit against SemCrude and other related companies in the District Court of Oklahoma County, Oklahoma. On May 1, 2012, the case was transferred to Tulsa County, Oklahoma. On July 2, 2012, the Tulsa County District Court appointed a Special Master to review terminal operations accounting records and determine whether 141,000 barrels of crude oil owned by Blueknight is missing after three months of operations in April through June, 2010. On June 11, 2013, the Special Master’s Report was filed with the District Court finding a shortage in Blueknight’s Cushing terminal and Oklahoma pipeline system of 148,000 barrels. However, after a review of all records created during that three month time period, the Special Master was unable to determine how the shortage might have occurred and was unable to determine the ownership of the potential shortage.
The parties completed discovery in the District Court, where substantial documentation was exchanged and deposition testimony was taken. All parties are seeking complete or partial summary adjudication on the various pending claims and counterclaims. These requests for summary adjudication are currently being briefed by the parties and have yet to be ruled upon by the Court. SemGroup will continue to defend its position; however, we cannot predict the outcome. 
Environmental
We may, from time to time, experience leaks of petroleum products from our facilities and, as a result of which, we may incur remediation obligations or property damage claims. In addition, we are subject to numerous environmental regulations. Failure to comply with these regulations could result in the assessment of fines or penalties by regulatory authorities.
The Kansas Department of Health and Environment ("the KDHE") initiated discussions during our bankruptcy proceeding regarding six of our sites in Kansas (five owned by Crude and one owned by SemGas) that KDHE believes, based on their historical use, may have soil or groundwater contamination in excess of state standards. KDHE sought our agreement to undertake assessments of these sites to determine whether they are contaminated. We reached an agreement with KDHE on this matter and entered into a Consent Agreement and Final Order with KDHE to conduct environmental assessments on the sites and to pay KDHE’s costs associated with their oversight of this matter. We have conducted Phase II investigations at all sites. Four of the sites have limited amounts of soil contamination that will be excavated and/or remediated on site. Four of the sites appeared to have ground water contamination requiring further delineation and/or ongoing monitoring. Work plans have been submitted to, and approved by, the KDHE. One site was closed and we anticipate closure in 2015 for one of the remaining five sites. Groundwater beneath two sites is being monitored until contaminants achieve regulatory threshold for closure and will not require active remediation.  Two sites are in the process of completing assessment and characterization and will be remediated if necessary. We do not anticipate any penalties or fines for these historical sites.
Other matters
We are party to various other claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of our management, the ultimate resolution of these claims, legal actions and complaints, after consideration of amounts accrued, insurance coverage and other arrangements, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, the outcome of such matters is inherently uncertain, and estimates of our consolidated liabilities may change materially as circumstances develop.
Asset retirement obligations
We will be required to incur significant removal and restoration costs when we retire our natural gas gathering and processing facilities in Canada. During the second quarter of 2015, we completed a reevaluation of our asset retirement obligations and recorded reductions to the liability and offsetting asset of $26.0 million. The reduction was largely due to a change in the estimated timing of the retirement of the facilities. At June 30, 2015, we have an asset retirement obligation liability of $15.3 million, which is included within other noncurrent liabilities on our condensed consolidated balance sheets. This amount was calculated using the $116.2 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, 2015, such commitments included the following (in thousands):
 
Volume
(Barrels)
 
Value
Fixed price purchases
1,935

 
$
114,568

Fixed price sales
2,660

 
$
159,148

Floating price purchases
15,960

 
$
930,753

Floating price sales
22,129

 
$
1,129,425


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 through June 2023. At June 30, 2015, no amounts were due under the contract. The approximate amount of future obligation is as follows (in thousands):
For year ending:
 
December 31, 2015
$
5,410

December 31, 2016
11,804

December 31, 2017
11,938

December 31, 2018
10,060

December 31, 2019
9,121

Thereafter
24,392

Total expected future payments
$
72,725


SemGas further has a take or pay contractual obligation related to pipeline transportation through October 2015. The amount of future obligation is approximately $1.5 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.
Rose Rock has a take-or-pay obligation with our equity method investee, White Cliffs, for approximately 5,000 barrels per day of space on White Cliffs' pipeline subject to completion of an expansion project related to Rose Rock's Platteville facilities. The agreement is expected to become effective in November 2015 and has a term of 5 years. Annual payments to White Cliffs under the agreement are expected to be $9.4 million.
See Note 3 for capital contribution requirements related to the White Cliffs expansion.
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, 2014 to June 30, 2015 (in thousands):
 
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interests
Total
Owners’
Equity
Balance at December 31, 2014
$
436

$
1,245,877

$
(1,332
)
$
(68,332
)
$
(27,141
)
$
69,929

$
1,219,437

Net income



24,763


9,446

34,209

Other comprehensive loss, net of income taxes




(3,540
)

(3,540
)
Distributions to noncontrolling interests





(19,261
)
(19,261
)
Dividends paid

(31,478
)




(31,478
)
Unvested dividend equivalent rights

(146
)



(98
)
(244
)
Non-cash equity compensation

5,444




655

6,099

Issuance of common stock under compensation plans
3

833





836

Repurchase of common stock


(4,254
)



(4,254
)
Rose Rock Midstream, L.P. equity issuance