SEMGROUP CORP, 10-Q filed on 5/9/2014
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2014
Apr. 30, 2014
Class A
Apr. 30, 2014
Class B
Document Type
10-Q 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Mar. 31, 2014 
 
 
Document Fiscal Period Focus
Q1 
 
 
Document Fiscal Year Focus
2014 
 
 
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
 
42,616,224 
28,235 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 74,958 
$ 79,351 
Restricted cash
7,672 
5,119 
Accounts receivable (net of allowance of $3,475 and $3,661, respectively)
381,149 
323,965 
Receivable from affiliates
52,281 
67,273 
Inventories
38,822 
44,295 
Other current assets
11,826 
14,011 
Total current assets
566,708 
534,014 
Property, plant and equipment (net of accumulated depreciation of $200,193 and $188,720, respectively)
1,137,540 
1,105,728 
Equity method investments
593,538 
565,124 
Goodwill
61,923 
62,021 
Other intangible assets (net of accumulated amortization of $14,815 and $12,655, respectively)
171,801 
174,838 
Other noncurrent assets, net
29,884 
28,889 
Total assets
2,561,394 
2,470,614 
Current liabilities:
 
 
Accounts payable
323,520 
254,467 
Payable to affiliates
38,203 
62,279 
Accrued liabilities
69,693 
83,429 
Payables to pre-petition creditors
3,179 
3,177 
Warrant liability
57,155 
58,134 
Deferred revenue
23,204 
25,538 
Other current liabilities
5,742 
12,153 
Current portion of long-term debt
38 
37 
Total current liabilities
520,734 
499,214 
Long-term debt
672,578 
615,088 
Deferred income taxes
108,761 
100,945 
Other noncurrent liabilities
41,062 
41,504 
Commitments and contingencies (Note 9)
   
   
SemGroup owners’ equity:
 
 
Common stock, $0.01 par value (authorized - 100,000 shares; issued - 42,673 and 42,533 shares, respectively)
427 
425 
Additional paid-in capital
1,149,024 
1,154,516 
Treasury stock, at cost (449 and 438 shares, respectively)
(1,332)
(613)
Accumulated deficit
(83,984)
(97,572)
Accumulated other comprehensive loss
(5,826)
(2,854)
Total SemGroup Corporation owners’ equity
1,058,309 
1,053,902 
Noncontrolling interests in consolidated subsidiaries
159,950 
159,961 
Total owners’ equity
1,218,259 
1,213,863 
Total liabilities and owners’ equity
$ 2,561,394 
$ 2,470,614 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Mar. 31, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 3,475 
$ 3,661 
Accumulated depreciation
200,193 
188,720 
Accumulated amortization
$ 14,815 
$ 12,655 
Common stock, $0.01 par value
$ 0.01 
$ 0.01 
Common stock shares authorized
100,000 
100,000 
Common stock shares issued
42,673 
42,533 
Treasury stock shares
449 
438 
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Revenues:
 
 
Product
$ 427,030 
$ 235,629 
Service
48,507 
27,657 
Other
23,346 
24,410 
Total revenues
498,883 
287,696 
Expenses:
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
385,113 
212,369 
Operating
50,778 
40,771 
General and administrative
18,736 
17,037 
Depreciation and amortization
23,637 
12,636 
Gain on disposal of long-lived assets, net
(58)
(162)
Total expenses
478,206 
282,651 
Earnings from equity method investments
14,962 
17,345 
Gain on issuance of common units by equity method investee
8,127 
Operating income
43,766 
22,390 
Other expenses (income):
 
 
Interest expense
9,227 
2,396 
Foreign currency transaction gain
(683)
(167)
Other expense (income), net
(1,047)
25,633 
Total other expenses, net
7,497 
27,862 
Income (loss) from continuing operations before income taxes
36,269 
(5,472)
Income tax expense (benefit)
16,526 
(54,006)
Income from continuing operations
19,743 
48,534 
Income (loss) from discontinued operations, net of income taxes
(5)
32 
Net income
19,738 
48,566 
Less: net income attributable to noncontrolling interests
6,150 
5,143 
Net income attributable to SemGroup
13,588 
43,423 
Other comprehensive loss, net of income taxes
(2,972)
(5,058)
Comprehensive income
16,766 
43,508 
Less: comprehensive income attributable to noncontrolling interests
6,150 
5,143 
Comprehensive income attributable to SemGroup
$ 10,616 
$ 38,365 
Net income per common share (Note 11):
 
 
Basic
$ 0.32 
$ 1.03 
Diluted
$ 0.29 
$ 1.03 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Cash flows from operating activities:
 
 
Net income
$ 19,738 
$ 48,566 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Net unrealized (gain) loss related to derivative instruments
606 
(468)
Depreciation and amortization
23,637 
12,636 
Gain on disposal of long-lived assets, net
(58)
(162)
Earnings from equity method investments
(14,962)
(17,345)
Gain on issuance of common units by equity method investee
(8,127)
Distributions from equity investments
16,421 
16,951 
Amortization of debt issuance costs
785 
448 
Deferred tax expense (benefit)
10,518 
(54,796)
Non-cash equity compensation
2,330 
1,183 
Excess Tax Benefit from Share-based Compensation, Operating Activities
(1,650)
Loss (gain) on fair value of warrants
(980)
25,796 
Provision for uncollectible accounts receivable, net of recoveries
(129)
(28)
Currency (gain) loss
(683)
(167)
Changes in operating assets and liabilities (Note 12)
(18,548)
(5,311)
Net cash provided by operating activities
28,898 
27,303 
Cash flows from investing activities:
 
 
Capital expenditures
(56,753)
(21,906)
Proceeds from sale of long-lived assets
695 
167 
Investments in non-consolidated subsidiaries
(24,251)
(36,425)
Proceeds from the sale of non-consolidated affiliate
 
Distributions in excess of equity in earnings of affiliates
2,505 
1,114 
Net cash used in investing activities
(77,804)
(57,050)
Cash flows from financing activities:
 
 
Debt issuance costs
(155)
(1,612)
Borrowings on credit facilities
186,000 
229,474 
Principal payments on credit facilities and other obligations
(128,509)
(255,006)
Proceeds from issuance of Rose Rock Midstream, L.P. common units, net of offering costs
57,886 
Distributions to noncontrolling interests
(6,398)
(3,624)
Repurchase of common stock for payment of statutory taxes due on equity-based compensation
(719)
(371)
Dividends paid
(9,382)
Proceeds from Issuance of Shares under Incentive and Share-based Compensation Plans, Excluding Stock Options
88 
Excess Tax Benefit from Share-based Compensation, Financing Activities
1,650 
Net cash provided by financing activities
42,575 
26,747 
Effect of exchange rate changes on cash and cash equivalents
1,938 
323 
Change in cash and cash equivalents
(4,393)
(2,677)
Cash and cash equivalents at beginning of period
79,351 
80,029 
Cash and cash equivalents at end of period
$ 74,958 
$ 77,352 
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, 2013, 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 ended March 31, 2014, are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.
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, 2013, which are included in our Annual Report on Form 10-K for the year ended December 31, 2013, 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, 2013.
Recent accounting pronouncements
On March 4, 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 adopted this guidance in the first quarter of 2014. The impact was not material.
In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which requires an unrecognized tax benefit to be classified as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2013, and interim periods within those years. The Company adopted this guidance in the first quarter of 2014. The impact was not material.
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 will adopt this guidance in the first quarter of 2015. 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 March 31, 2014, we own the 2% general partner interest and a 51.6% limited partner interest made up of 4.4 million common units, 8.4 million subordinated units and 2.5 million Class A units.
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.  
The following table shows the cash distributions paid or declared during 2014 and 2013 (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, 2012
$
0.4025

 
$
167

$

$
1,163

$
3,377

$
3,624

$
8,331

March 31, 2013
$
0.4300

 
$
179

$
41

$
1,242

$
3,607

$
3,872

$
8,941

June 30, 2013
$
0.4400


$
183

$
72

$
1,271

$
3,692

$
3,962

$
9,180

September 30, 2013
$
0.4500

 
$
232

$
127

$
1,301

$
3,775

$
6,189

$
11,624

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


*Expected distributions related to the quarter ended March 31, 2014, which will be paid on May 15, 2014 to unitholders of record as of May 5, 2014.

Certain summarized balance sheet information of Rose Rock is shown below (in thousands):
 
(Unaudited)
 
 
 
March 31,
2014
 
December 31,
2013
Cash
$
2,823

 
$
15,459

Other current assets
346,817

 
306,128

Property, plant and equipment, net
308,270

 
311,616

Equity method investment
234,742

 
224,095

Goodwill
28,224

 
28,322

Other noncurrent assets, net
10,513

 
11,627

Total assets
$
931,389

 
$
897,247

 
 
 
 
Current liabilities
$
326,835

 
$
293,031

Long-term debt
244,578

 
245,088

Partners’ capital attributable to SemGroup
120,500

 
120,610

Partners’ capital attributable to noncontrolling interests
159,950

 
159,961

Noncontrolling interests in consolidated subsidiary retained by SemGroup
79,526

 
78,557

Total liabilities and equity
$
931,389

 
$
897,247


Certain summarized income statement information of Rose Rock for the three months ended March 31, 2014 and 2013 is shown below (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Revenue
$
290,923

 
$
171,232

Cost of products sold
$
254,537

 
$
148,451

Operating, general and administrative expenses
$
18,501

 
$
8,979

Depreciation and amortization expense
$
10,534

 
$
3,507

Earnings from equity method investment
$
11,080

 
$
3,453

Net income
$
16,159

 
$
11,994

Noncontrolling interests in consolidated subsidiary retained by SemGroup
$
3,676

 
$

Net income attributable to Rose Rock Midstream, L.P.
$
12,483

 
$
11,994

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):
 
March 31, 2014
 
December 31, 2013
White Cliffs
$
234,742

 
$
224,095

NGL Energy
215,225

 
208,848

Glass Mountain
143,571

 
132,181

Total equity method investments
$
593,538

 
$
565,124


    
Under the equity method, we do not report the individual revenues and expenses of our investees in our condensed consolidated statements of operations and comprehensive income. Instead, our interest in the earnings of our investees is reflected in one line item on our condensed consolidated statements of operations and comprehensive income. Our earnings from equity method investments consist of the following (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
White Cliffs
$
11,080

 
$
10,439

NGL Energy*
3,591

 
6,916

Glass Mountain
291

 
(10
)
Total earnings from equity method investments
$
14,962

 
$
17,345


* Excluding gain on issuance of common units of $8.1 million.
Cash distributions received from equity method investments consist of the following (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
White Cliffs
$
13,585

 
$
13,792

NGL Energy
5,341

 
4,272

Glass Mountain

 

Total cash distributions received from equity method investments
$
18,926

 
$
18,064


White Cliffs
We account for our 51% ownership of White Cliffs Pipeline, L.L.C. ("White Cliffs") under the equity method, as the other owners have substantive rights to participate in its management.
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 $110.6 million for project funding up through March 31, 2014, including $12.8 million for the three months ended March 31, 2014, and estimate our expected remaining contributions to be $40.6 million, which will be made in 2014.
Certain summarized income statement information of White Cliffs for the three months ended March 31, 2014 and 2013 is shown below (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Revenue
$
33,274

 
$
30,673

Operating, general and administrative expenses
$
6,768

 
$
5,179

Depreciation and amortization expense
$
4,393

 
$
4,715

Net income
$
22,113

 
$
20,779


The equity in earnings of White Cliffs for the three months ended March 31, 2014 and 2013 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 $0.3 million of such general and administrative expense for the three months ended March 31, 2014 and 2013, respectively.
NGL Energy Partners LP
We own 9,133,409 common units representing limited partner interests in NGL Energy Partners LP (NYSE: NGL) (“NGL Energy”), which represents approximately 11.5% of the total 79,327,078 limited partner units of NGL Energy outstanding at December 31, 2013, and an 11.78% interest in the general partner of NGL Energy.
At March 31, 2014, the fair market value of our 9,133,409 common unit investment in NGL Energy was $342.8 million, based on a March 31, 2014 closing price of $37.53 per common unit. This does not reflect our interest in the general partner of NGL Energy. The fair value of our limited partner investment in NGL Energy is categorized as a Level 1 measurement, as it is based on quoted market prices.
Our policy is to record our equity in earnings of NGL Energy on a one-quarter lag, as we do not expect information on the earnings of NGL Energy to always be available in time to consistently record the earnings in the quarter in which they are generated. Accordingly, the equity in earnings from NGL Energy, which is reflected in our condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2014 and 2013, relates to the earnings of NGL Energy for the three months ended December 31, 2013 and 2012, respectively.
Our limited partnership interest was diluted as a result of the issuance of NGL common units in a private placement in connection with the completion of an acquisition. Accordingly, we recorded a non-cash gain of $8.1 million in the first quarter 2014, which is included in "gain on issuance of common units by equity method investee" in our condensed consolidated statement of operations and comprehensive income.
Certain unaudited summarized income statement information of NGL Energy for the three months ended December 31, 2013 and 2012 is shown below (in thousands):
 
Three Months Ended December 31,
 
2013
 
2012
Revenue
$
2,743,445

 
$
1,338,208

Cost of sales
$
2,576,029

 
$
1,204,545

Operating, general and administrative expenses
$
90,753

 
$
64,693

Depreciation and amortization expense
$
35,494

 
$
18,747

Net income
$
24,052

 
$
40,477

 
Glass Mountain Pipeline, LLC
We hold a 50% interest in Glass Mountain Pipeline, LLC ("GMP" or "Glass Mountain") which began operations in the first quarter of 2014. The owner of the remaining 50%, a subsidiary of NGL Energy, is a related party (Note 13). We account for our investment in GMP using the equity method. As of March 31, 2014, we have invested $143.3 million in GMP including our capital contributions, amounts paid to increase our ownership percentage, and capitalized interest. We invested $11.1 million in GMP for the three months ended March 31, 2014. We expect to make additional contributions of approximately $6.1 million for the remainder of 2014.
The equity in earnings of GMP for the three months ended March 31, 2014 reported in our condensed consolidated statement of operations and comprehensive income is less than 50% of the net income of GMP for the same period due to amortization of capitalized interest for the period.
Certain unaudited summarized income statement information of GMP for the three months ended March 31, 2014 is shown below (in thousands):
 
Three Months Ended March 31, 2014
Revenue
$
3,853

Operating, general and administrative expenses
$
850

Depreciation and amortization expense
$
2,348

Net income
$
653

Segments
SEGMENTS
SEGMENTS
Our businesses are organized based on the nature and location of the services they provide. Certain summarized information related to our reportable segments is shown in the tables below. None of the operating segments have been aggregated, other than White Cliffs 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 March 31, 2014
 
Crude

SemStream

SemCAMS

SemGas

SemLogistics

SemMexico

Corporate
and Other

Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
292,514

 
$

 
$
39,283

 
$
90,686

 
$
4,790

 
$
71,610

 
$

 
$
498,883

Intersegment

 

 

 
9,892

 

 

 
(9,892
)
 

Total revenues
292,514

 

 
39,283

 
100,578

 
4,790

 
71,610

 
(9,892
)
 
498,883

Expenses:
 
 

 

 

 

 

 

 
 
Costs of products sold, exclusive of depreciation and amortization shown below
254,537

 

 
67

 
78,582

 
350

 
61,469

 
(9,892
)
 
385,113

Operating
15,139

 

 
23,666

 
7,444

 
2,080

 
2,449

 

 
50,778

General and administrative
3,942

 
113

 
3,980

 
1,972

 
1,422

 
2,751

 
4,556

 
18,736

Depreciation and amortization
11,482

 

 
2,829

 
4,969

 
2,495

 
1,427

 
435

 
23,637

Loss (gain) on disposal of long-lived assets, net
(34
)
 

 

 
4

 

 
(28
)
 

 
(58
)
Total expenses
285,066

 
113


30,542


92,971


6,347


68,068


(4,901
)

478,206

Earnings from equity method investments
11,371

 
3,591

 

 

 

 

 

 
14,962

Gain on issuance of common units by equity method investee

 
8,127

 

 

 

 

 

 
8,127

Operating income (loss)
18,819

 
11,605


8,741


7,607


(1,557
)

3,542


(4,991
)

43,766

Other expenses (income), net
4,663

 
(1,264
)
 
4,155

 
1,689

 
251

 
(45
)
 
(1,952
)
 
7,497

Income (loss) from continuing operations before income taxes
$
14,156

 
$
12,869

 
$
4,586

 
$
5,918

 
$
(1,808
)
 
$
3,587

 
$
(3,039
)

$
36,269

Total assets at March 31, 2014 (excluding intersegment receivables)
$
1,116,662

 
$
215,225

 
$
294,405

 
$
594,878

 
$
168,751

 
$
109,518

 
$
61,955

 
$
2,561,394



 
Three Months Ended March 31, 2013
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
171,232

 
$

 
$
35,781

 
$
34,654

 
$
3,035

 
$
42,994

 
$

 
$
287,696

Intersegment

 

 

 
4,085

 

 

 
(4,085
)
 

Total revenues
171,232

 


35,781


38,739


3,035


42,994


(4,085
)
 
287,696

Expenses:
 
 
 
 

 

 

 

 

 

Costs of products sold, exclusive of depreciation and amortization shown below
148,451

 

 
183

 
29,171

 

 
38,649

 
(4,085
)
 
212,369

Operating
5,738

 
1

 
26,884

 
4,144

 
1,839

 
2,165

 

 
40,771

General and administrative
3,850

 
156

 
4,145

 
1,591

 
1,120

 
2,222

 
3,953

 
17,037

Depreciation and amortization
3,507

 

 
2,656

 
2,128

 
2,340

 
1,480

 
525

 
12,636

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

 
6

 

 
(2
)
 

 
(166
)
 

 
(162
)
Total expenses
161,546

 
163


33,868


37,032


5,299


44,350


393

 
282,651

Earnings from equity method investments
10,429

 
6,916

 

 

 

 

 

 
17,345

Operating income (loss)
20,115

 
6,753


1,913


1,707


(2,264
)

(1,356
)

(4,478
)
 
22,390

Other expenses (income), net
3,171

 
(968
)
 
4,711

 
593

 
756

 
(471
)
 
20,070

 
27,862

Income (loss) from continuing operations before income taxes
$
16,944

 
$
7,721


$
(2,798
)

$
1,114


$
(3,020
)

$
(885
)

$
(24,548
)
 
$
(5,472
)
 
 
Inventories
Inventories
INVENTORIES
Inventories consist of the following (in thousands):
 
March 31,
2014
 
December 31,
2013
Crude oil
$
25,765

 
$
30,779

Asphalt and other
13,057

 
13,516

Total inventories
$
38,822

 
$
44,295

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 March 31, 2014 and December 31, 2013 (in thousands):

 
March 31, 2014
 
December 31, 2013
 
Level 1
 
Netting*
 
Total
 
Level 1
 
Netting*
 
Total
Assets:
 
 
 
 

 
 
 
 
 

Commodity derivatives
$

 
$

 
$

 
$
36

 
$
(36
)
 
$

Total assets

 

 

 
36

 
(36
)
 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
666

 
$

 
$
666

 
$
96

 
$
(36
)
 
$
60

Warrants
57,155

 

 
57,155

 
58,134

 

 
58,134

Total liabilities
57,821

 

 
57,821

 
58,230

 
(36
)
 
58,194

Net assets (liabilities) at fair value
$
(57,821
)
 
$

 
$
(57,821
)
 
$
(58,194
)
 
$

 
$
(58,194
)
*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. These also include common stock warrants (Note 10) which are traded on the New York Stock 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 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 March 31, 2014, 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 ended March 31, 2014 and 2013, 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 notional quantities for commodity derivative instruments entered into (in thousands of barrels):
 
Three Months Ended March 31,
 
2014
 
2013
Sales
815

 
610

Purchases
810

 
675


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):
 
March 31, 2014
 
December 31, 2013
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
$

 
$
666

 
$

 
$
60


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 $1.4 million and $0.8 million at March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013, we would have had net asset positions of $0.7 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 March 31,
 
2014
 
2013
Commodity contracts
$
(807
)
 
$
(544
)

Warrants
As described in Note 10, upon emergence from bankruptcy, we issued certain common stock warrants. These warrants are recorded at fair value in current liabilities on the condensed consolidated balance sheets, with changes in the fair value recorded to other expense (income).
Concentrations of risk
During the three months ended March 31, 2014, one customer of our Crude segment accounted for more than 10% of our consolidated revenue at approximately 31%. We purchased approximately $130 million of product from two third-party suppliers of our Crude segment, which represented approximately 34% of our costs of products sold. At March 31, 2014, two third-party customers and one related party of our Crude segment accounted for approximately 42% of our consolidated accounts receivable.
Income Taxes
INCOME TAXES
INCOME TAXES

The effective tax rate was 46% and 987% for the three months ended March 31, 2014 and 2013, respectively. The rate for the three months ended March 31, 2014 is impacted by $3.1 million Canadian withholding tax paid on remittances to the U.S. The rate for the three months ended March 31, 2013 is impacted by a discrete tax benefit of $50.9 million for the partial release of our valuation allowance. 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.

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 three months ended March 31, 2013 includes a discrete tax benefit of $50.9 million for the partial release of our valuation allowance. Gain recognition, for tax purposes, on the contribution of a 33% interest in SemCrude Pipeline, L.L.C. to Rose Rock 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.
Long-Term Debt
Long-Term Debt
LONG-TERM DEBT
Our long-term debt consisted of the following (in thousands):
 
March 31,
2014
 
December 31,
2013
SemGroup 7.50% senior unsecured notes
$
300,000

 
$
300,000

SemGroup corporate revolving credit facility
128,000

 
70,000

Rose Rock credit facility
244,500

 
245,000

Capital leases
116

 
125

Total long-term debt
$
672,616

 
$
615,125

less: current portion of long-term debt
38

 
37

Noncurrent portion of long-term debt
$
672,578

 
$
615,088


SemGroup senior unsecured notes
For the three months ended March 31, 2014, we incurred $5.8 million of interest expense related to the 7.5% senior unsecured notes (the "Notes") including the amortization of debt issuance costs. At March 31, 2014, we had $6.0 million of unamortized debt issuance costs related to the Notes included in other noncurrent assets on our condensed consolidated balance sheet.
At March 31, 2014, we were in compliance with the terms of the Notes.
SemGroup corporate credit agreement
Our revolving credit facility has a capacity of $500 million. This capacity may be used either for cash borrowings or letters of credit, although the maximum letter of credit capacity is $250 million. At March 31, 2014, we had $128.0 million outstanding cash borrowings on this facility and outstanding letters of credit of $4.0 million.
The interest rate in effect at March 31, 2014 on $38.0 million of alternate base rate ("ABR") borrowings was 4.5%. The interest rate in effect at March 31, 2014 on $90.0 million of Eurodollar rate borrowings was 2.48%. At March 31, 2014, the rate in effect on letters of credit was 2.25%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit.
At March 31, 2014, $5.9 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 $1.8 million and $1.2 million for the three months ended March 31, 2014 and 2013, respectively, including amortization of debt issuance costs.
At March 31, 2014, we were in compliance with the terms of the credit agreement.
The credit agreement is guaranteed by all of our material domestic subsidiaries (except for Rose Rock Midstream, L.P. and its general partner and subsidiaries) and secured by a lien on substantially all of our property and assets, subject to customary exceptions.
Rose Rock credit facility
Our Rose Rock credit facility has a capacity of $585 million including a $150 million sub-limit for letters of credit. At March 31, 2014, there was $244.5 million outstanding cash borrowings under the Rose Rock revolving credit facility, of which $19.5 million incurred interest at the ABR plus an applicable margin, and $225 million incurred interest at the Eurodollar rate plus an applicable margin. The interest rate in effect at March 31, 2014 on $19.5 million of ABR borrowings was 4.0%. The interest rate in effect at March 31, 2014 on $225 million of Eurodollar rate borrowings was 1.99%.
Rose Rock had $42.4 million in outstanding letters of credit, and the rate in effect was 1.75%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit.
Rose Rock had $73.6 million of Secured Bilateral Letters of Credit outstanding at March 31, 2014. The interest rate in effect was 1.75%. Secured Bilateral Letters of Credit are external to the facility and do not reduce revolver availability.
We recorded $1.8 million and $2.0 million of interest expense related to this facility during the three months ended March 31, 2014 and 2013, respectively, including amortization of debt issuance costs.
At March 31, 2014, $4.6 million in capitalized loan fees, net of accumulated amortization, was recorded in other noncurrent assets, which is being amortized over the life of the facility.
At March 31, 2014, we were in compliance with the terms of the credit agreement.
SemMexico facilities
At March 31, 2014, SemMexico had no outstanding borrowings on its 56 million Mexican pesos (U.S. $4.3 million at the March 31, 2014 exchange rate) revolving credit facility, which matures in July 2014. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.70%.
At March 31, 2014, SemMexico had no outstanding borrowings on its 44 million Mexican pesos (U.S. $3.4 million at the March 31, 2014 exchange rate) revolving credit facility, which matures in June 2015. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 2.0%.
SemMexico had outstanding letters of credit of 352.0 million Mexican pesos at March 31, 2014 (U.S. $26.9 million at the March 31, 2014 exchange rate). Fees on outstanding letters of credit range from a rate of 0.45% to 1.0%.
At March 31, 2014, we were in compliance with the terms of these facilities.
Capitalized interest
During the nine months ended March 31, 2014 and 2013, we capitalized interest from our credit facilities of $0.7 million and $0.9 million, respectively.
Fair value
We estimate the fair value of our senior unsecured notes to be $326 million at March 31, 2014, 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 March 31, 2014. 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 March 31, 2014. This estimate is categorized as a Level 3 measurement.
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
Bankruptcy matters
On July 22, 2008 (the “Petition Date”), SemGroup, L.P. and certain subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Also on July 22, 2008, SemGroup, L.P.'s Canadian subsidiaries filed for creditor protection in Canada. Later during 2008, certain other U.S. subsidiaries filed petitions for reorganization. While in bankruptcy, SemGroup, L.P. filed a plan of reorganization with the court, which was confirmed on October 28, 2009 (the “Plan of Reorganization”). The Plan of Reorganization determined, among other things, how pre-Petition Date obligations would be settled, the equity structure of the reorganized company upon emergence, and the financing arrangements upon emergence. SemGroup Corporation emerged from bankruptcy protection on November 30, 2009 (the “Emergence Date”).
(a)
Confirmation order appeal
Luke Oil appeal. On October 21, 2009, Luke Oil Company, C&S Oil/Cross Properties, Inc., Wayne Thomas Oil and Gas and William R. Earnhardt Company (collectively, “Luke Oil”) filed an objection to the Plan of Reorganization “to the extent that the Plan of Reorganization may alter, impair, or otherwise adversely affect Luke Oil’s legal rights or other interests.” On October 28, 2009, the bankruptcy court overruled the Luke Oil objection and entered the confirmation order. On November 6, 2009, Luke Oil filed a Notice of Appeal. On December 23, 2009, Luke Oil’s appeal was docketed in the United States District Court for the District of Delaware. We filed a motion to dismiss the appeal as equitably moot. On May 21, 2012, the District Court entered an order granting our motion to dismiss Luke Oil's appeal of the confirmation order. On June 18, 2012, Luke Oil filed its Notice of Appeal, notifying the District Court and the parties to the lawsuit that it was appealing the decision of the District Court to the United States Court of Appeals for the Third Circuit. On August 27, 2013, the United States Court of Appeals for the Third Circuit issued an opinion, and on September 18, 2013 issued a judgment, reversing the District Court’s dismissal of the confirmation order and remanding the case to the District Court for consideration on the merits of Luke Oil’s appeal of the confirmation order. On January 28, 2014, the parties reached agreement to settle all outstanding disputes. A settlement agreement was executed by the parties pursuant to which each party granted the other a release of claims and causes of action and on March 5, 2014 the Appeal was dismissed.
(b)
Investigations
Around the time of our predecessor's bankruptcy filings, several governmental agencies launched investigations regarding the circumstances of the filings. The mandate and scope of these investigations were very broad and the investigations are ongoing.
Bankruptcy examiner. On October 14, 2008, the bankruptcy court appointed an examiner to (i) investigate the circumstances surrounding our predecessor's trading strategy prior to bankruptcy filings; (ii) investigate the circumstances surrounding certain insider transactions and the formation of SemGroup Energy Partners L.P. (a former subsidiary); (iii) investigate the circumstances surrounding the potential improper use of borrowed funds and funds generated from operations and the liquidation of assets to satisfy margin calls related to our predecessor's trading strategy and that of certain entities owned or controlled by former officers and directors of the general partner of SemGroup, L.P.; (iv) determine whether any directors, officers or employees of the general partner of SemGroup, L.P. participated in fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of our affairs; and (v) determine whether the SemGroup debtor estates have causes of action against current or former officers, directors, or employees of the general partner of SemGroup, L.P. arising from such participation. The examiner’s report was filed with the bankruptcy court on April 15, 2009.
Certain current and prior employees of the general partner of SemGroup, L.P. are referenced in the examiner’s report and the report’s conclusions may suggest possible civil or criminal liability on their part. To the extent such claims exist, they are property of a litigation trust that was established for the benefit of pre-petition creditors pursuant to the Plan of Reorganization, and are not property of the reorganized SemGroup Corporation. This litigation trust is pursuing claims against certain former officers, at its own expense. We may incur expenses, which are not expected to be material, related to information and document requests of the litigation trust related to such claims. Any indemnification obligations to such officers by SemGroup, L.P. were discharged under the Plan of Reorganization.
CFTC. On June 19, 2008, we received a request for voluntary production from the Commodity Futures Trading Commission (“CFTC”). Subsequent to the bankruptcy filings, the CFTC sent other requests for voluntary production. The CFTC has also served subpoenas upon us requiring us to produce various documents and for the depositions of our representatives. We continue to comply with the CFTC’s requests. We are unaware of any currently pending formal charges against us by the CFTC.
(c)
Claims reconciliation process
A large number of parties have made claims against us for obligations alleged to have been incurred prior to our predecessor's bankruptcy filing. On September 15, 2010, the bankruptcy court entered an order estimating the contingent, unliquidated and disputed claims and authorizing distributions to holders of allowed claims. Pursuant to that order we have begun making distributions to the claimants. We continue to attempt to settle unresolved claims.
Pursuant to the Plan of Reorganization, we committed to settle authorized and allowed bankruptcy claims by paying a specified amount of cash, issuing a specified number of warrants, and issuing a specified number of shares of SemGroup Corporation common stock. We do not believe the resolution of the remaining outstanding claims will exceed the total amount of consideration established under the Plan of Reorganization for all claimants; instead, the resolution of the remaining claims in some cases will impact the relative share of the established pool of common stock and warrants that certain claimants receive.
However, under certain circumstances we could be required to pay additional funds to settle the specified group of claims to be settled with cash. Pursuant to the Plan of Reorganization, a specified amount of restricted cash was set aside at the Emergence Date, which we expect to be sufficient to settle this group of claims. Since the Emergence Date, we have made significant progress in resolving these claims, and we continue to believe that the cash set aside at the Emergence Date will be sufficient to settle these claims. However, we have not yet reached a resolution of all of these claims, and if the total settlement amount of all of these claims exceeds the specified amount, we will be required to pay additional funds to satisfy the total settlement amount for this specified group of claims. If this were to become probable of occurring, we would be required to record a liability and a corresponding expense.
Blueknight claim
Blueknight Energy Partners, L.P. (“Blueknight”), which was formerly a subsidiary of SemGroup, together with other entities related to Blueknight, entered into a Shared Services Agreement on April 7, 2009, with SemCrude, L.P., now known as Rose Rock Midstream Crude, L.P. (“SemCrude”) and SemManagement, L.L.C. (which are currently subsidiaries of SemGroup). The services provided by SemCrude to Blueknight under this agreement included assisting Blueknight with movement of crude oil belonging to Blueknight’s customers and with the operation of Blueknight’s Oklahoma pipeline system and its Cushing, Oklahoma terminal. Under the subsequent amendments to the agreements beginning in May 2010, certain of these services were phased out, and Blueknight began to perform all services necessary for the movement of its crude oil and the operation of its Cushing terminal without SemCrude’s assistance.
In a letter dated August 18, 2011, Blueknight claimed that SemCrude owes Blueknight approximately 141,000 barrels of crude oil. We responded to Blueknight’s letter denying their charges and requesting documentation from Blueknight of its claim. On February 14, 2012, after months of interaction between the parties through which Blueknight was requested to substantiate its claim, Blueknight filed suit against SemCrude and other related companies in the District Court of Oklahoma County, Oklahoma. On May 1, 2012, the case was transferred to Tulsa County, Oklahoma. On July 2, 2012, the Tulsa County District Court appointed a Special Master to review terminal operations accounting records and determine whether 141,000 barrels of crude oil owned by Blueknight is missing after three months of operations in April through June, 2010. On June 11, 2013, the Special Master’s Report was filed with the District Court finding a shortage in Blueknight’s Cushing terminal and Oklahoma pipeline system of 148,000 barrels. However, after a review of all records created during that three month time period, the Special Master was unable to determine how the shortage might have occurred and was unable to determine the ownership of the potential shortage.
We are currently seeking discovery in the District Court of documentation and testimony on the potential cause and the impact, if any, of the shortage found by the Special Master. On February 20, 2014, the District Court issued an order denying all requests for summary judgment and ordering discovery to go forward. 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.
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 $40.9 million at March 31, 2014, which is included within other noncurrent liabilities on our condensed consolidated balance sheets. This amount was calculated using the $97.5 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 March 31, 2014, such commitments included the following (in thousands):
 
Volume
(Barrels)
 
Value
Fixed price purchases
100

 
$
9,027

Fixed price sales
115

 
$
11,525

Floating price purchases
11,593

 
$
1,123,992

Floating price sales
13,901

 
$
1,218,407


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 continues through June 2023, subsequent to the extension of the agreement in the second quarter of 2013. At March 31, 2014, approximately $25.8 thousand was due under the contract and the amount of future obligation is approximately $84.7 million. SemGas further has a take or pay contractual obligation related to pipeline transportation. This obligation will begin in April 2014 and continue through October 2014. The amount of future obligation is approximately $1.3 million. SemGas also enters into contracts under which we are responsible for marketing the majority of the gas and natural gas liquids produced by the counterparties to the agreements. The majority of SemGas’ revenues were generated from such contracts.
See Note 3 for commitments related to Glass Mountain 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, 2013 to March 31, 2014 (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, 2013
$
425

 
$
1,154,516

 
$
(613
)
 
$
(97,572
)
 
$
(2,854
)
 
$
159,961

 
$
1,213,863

Net income

 

 

 
13,588

 

 
6,150

 
19,738

Other comprehensive income (loss), net of income taxes

 

 

 

 
(2,972
)
 

 
(2,972
)
Distributions to noncontrolling interests

 

 

 

 

 
(6,398
)
 
(6,398
)
Dividends paid

 
(9,382
)


 

 

 

 
(9,382
)
Unvested dividend equivalent rights

 
(37
)
 

 

 

 
(23
)
 
(60
)
Non-cash equity compensation

 
2,070

 

 

 

 
260

 
2,330

Issuance of common stock under compensation plans
2

 
1,857

 

 

 

 

 
1,859

Repurchase of common stock

 

 
(719
)
 

 

 

 
(719
)
Balance at March 31, 2014
$
427

 
$
1,149,024

 
$
(1,332
)
 
$
(83,984
)
 
$
(5,826
)
 
$
159,950

 
$
1,218,259


Accumulated other comprehensive loss
The following table presents the changes in the components of accumulated other comprehensive loss from December 31, 2013 to March 31, 2014 (in thousands):
 
Currency
Translation
 
Employee
Benefit
Plans
 
Total
Balance at December 31, 2013
$
(4,508
)
 
$
1,654

 
$
(2,854
)
Currency translation adjustment, net of income tax benefit of $1,850
(2,970
)
 

 
(2,970
)
Changes related to benefit plans, net of income tax benefit

 
(2
)
 
(2
)
Balance at March 31, 2014
$
(7,478
)
 
$
1,652

 
$
(5,826
)

There were no significant items reclassified out of accumulated other comprehensive loss to net income for the three months ended March 31, 2014.
Common stock
During the three months ended March 31, 2014, we issued 3,440 shares under the Employee Stock Purchase Plan and 136,528 shares related to our equity based compensation awards. Of these vested shares related to compensation awards, recipients sold back to the Company 11,120 shares to satisfy tax withholding obligations which are being recognized at cost as treasury stock on the condensed consolidated balance sheet.
Equity-based compensation
At March 31, 2014, there were approximately 522,000 unvested shares that have been granted under our director and employee compensation programs. The par value of these shares is not reflected in common stock on the condensed consolidated balance sheet, as these shares have not yet vested. For certain of the awards, the number of shares that will vest is contingent upon our achievement of certain specified targets. If we meet the specified maximum targets, approximately 184,000 additional shares could vest.
The holders of certain restricted stock awards granted prior to 2013 are entitled to equivalent dividends (“UDs”) to be received upon vesting of the restricted stock awards. At March 31, 2014, the value of the UDs to be settled in stock related to unvested restricted stock awards was approximately $100 thousand. This is equivalent to 1,518 Class A shares based on the quarter end close of business market price of our Class A shares of $65.68 per share. Dividends related to the restricted stock awards issued subsequent to 2012 will be settled in cash upon vesting. At March 31, 2014, the value of the UDs to be settled in cash related to unvested restricted stock awards was approximately $108,000.
During the three months ended March 31, 2014, we granted 134,246 restricted stock awards with a weighted average grant date fair value of $82.80 per award.
On April 1, 2014, we granted 63,766 restricted stock awards. These awards will be ratably vested over five years.
Warrants
Upon emergence from bankruptcy, we issued 1,634,210 warrants. The Plan of Reorganization specified that we were to issue an additional 544,737 warrants in settlement of the pre-petition claims. As of March 31, 2014, we have issued 241,264 of the warrants and will issue the remainder as the process of resolving the claims progresses. At March 31, 2014 we had 1,360,823 warrants outstanding including warrants required to be issued in settlement of pre-petition claims. At March 31, 2014, the fair value of these warrants included in the condensed consolidated balance sheet was $57.2 million based on the March 31, 2014 closing price of $42.00 per warrant. The warrants are traded on the New York Stock Exchange under the ticker symbol SEMGWS. We classify the warrant fair value as a Level 1 measurement. There were no warrants exercised during the three months ended March 31, 2014. The warrants expire on November 30, 2014.
Dividends
The following table sets forth the quarterly dividends per share declared and/or paid to shareholders for the periods indicated:

Quarter Ending
 
Dividend Per Share
 
Date Declared
 
Date of Record
 
Date Paid
June 30, 2013
 
$
0.19

 
May 8, 2013
 
May 20, 2013
 
May 30, 2013
September 30, 2013
 
$
0.20

 
August 8, 2013
 
August 19, 2013
 
August 30, 2013
December 31, 2013
 
$
0.21

 
November 11, 2013
 
November 22, 2013
 
December 3, 2013
March 31, 2014
 
$
0.22

 
February 25, 2014
 
March 10, 2014
 
March 20, 2014
June 30, 2014
 
$
0.24

 
May 8, 2014
 
May 19, 2014
 
May 29, 2014
Earnings Per Share
EARNINGS PER SHARE
EARNINGS PER SHARE

Earnings per share is calculated based on income from continuing and discontinued operations less any income attributable to noncontrolling interests. Income attributable to noncontrolling interests represents third-party limited partner unitholders' interests in the earnings of our consolidated subsidiary, Rose Rock.  Rose Rock allocates net income to its limited partners based on the distributions pertaining to the current period's available cash as defined by Rose Rock's partnership agreement. After adjusting for the appropriate period's distributions, the remaining undistributed earnings or excess distributions over earnings, if any, are allocated to Rose Rock's general partner, limited partners and participating securities in accordance with the contractual terms of Rose Rock's partnership agreement and as further prescribed under the two-class method. Incentive distribution rights do not participate in undistributed earnings.
Basic earnings (loss) per share is calculated based on the weighted average shares outstanding during the period. Diluted earnings (loss) per share includes the dilutive effect of warrants and unvested equity compensation awards.
The following summarizes the calculation of basic earnings per share for the three months ended March 31, 2014 and 2013 (in thousands, except per share amounts):

 
Three Months Ended March 31, 2014
 
Three Months Ended March 31, 2013
 
Continuing
Operations
 
Discontinued
Operations
 
Net
 
Continuing
Operations
 
Discontinued
Operations
 
Net
Income (loss)
$
19,743

 
$
(5
)
 
$
19,738

 
$
48,534

 
$
32

 
$
48,566

less: Income attributable to noncontrolling interests
6,150

 

 
6,150

 
5,143

 

 
5,143

Numerator
$
13,593

 
$
(5
)
 
$
13,588

 
$
43,391

 
$
32

 
$
43,423

Common stock issued and to be issued pursuant to Plan of Reorganization
41,400

 
41,400

 
41,400

 
41,400

 
41,400

 
41,400

Weighted average common stock outstanding issued under compensation plans and warrant exercises
1,231

 
1,231

 
1,231

 
670

 
670

 
670

Denominator
42,631

 
42,631

 
42,631

 
42,070

 
42,070

 
42,070

Basic earnings per share
$
0.32

 
$

 
$
0.32

 
$
1.03

 
$

 
$
1.03



The following summarizes the calculation of diluted earnings per share for the three months ended March 31, 2014 and 2013 (in thousands, except per share amounts):

 
Three Months Ended March 31, 2014
 
Three Months Ended March 31, 2013
 
Continuing
Operations
 
Discontinued
Operations
 
Net
 
Continuing
Operations
 
Discontinued
Operations
 
Net
Income (loss)
$
19,743

 
$
(5
)
 
$
19,738

 
$
48,534

 
$
32

 
$
48,566

less: Income attributable to noncontrolling interests
6,150

 

 
6,150

 
5,143

 

 
5,143

less: Income resulting from the change in fair value of warrants
980

 

 
980

 

 

 

Numerator
$
12,613

 
$
(5
)
 
$
12,608

 
$
43,391

 
$
32

 
$
43,423

Common stock issued and to be issued pursuant to Plan of Reorganization
41,400

 
41,400

 
41,400

 
41,400

 
41,400

 
41,400

Weighted average common stock outstanding issued under compensation plans and warrant exercises
1,231

 
1,231

 
1,231

 
670

 
670

 
670

Effect of warrants outstanding
825

 
825

 
825

 

 

 

Effect of dilutive securities
305

 
305

 
305

 
276

 
276

 
276

Denominator
43,761

 
43,761

 
43,761

 
42,346

 
42,346

 
42,346

Diluted earnings per share
$
0.29

 
$

 
$
0.29

 
$
1.02

 
$

 
$
1.03


During the three months ended March 31, 2013, we recorded expenses of $25.8 million related to the change in fair value of the warrants. Because the mark to market valuation of the warrants resulted in losses, the warrants would have been antidilutive and, therefore, were not included in the computation of diluted earnings per share for the three months ended March 31, 2013.
Supplemental Cash Flow Information
SUPPLEMENTAL CASH FLOW INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes the changes in the components of operating assets and liabilities shown on our condensed consolidated statements of cash flows (in thousands):

 
Three Months Ended March 31,
 
2014
 
2013
Decrease (increase) in restricted cash
$
(2,585
)
 
$
25

Decrease (increase) in accounts receivable
(58,879
)
 
(5,014
)
Decrease (increase) in receivable from affiliates
14,992

 
1,070

Decrease (increase) in inventories
3,715

 
(3,153
)
Decrease (increase) in derivatives and margin deposits
(546
)
 
764

Decrease (increase) in other current assets
1,636

 
4,333

Decrease (increase) in other assets
(33
)
 
14

Increase (decrease) in accounts payable and accrued liabilities
49,754

 
(2,756
)
Increase (decrease) in payable to affiliates
(24,075
)
 

Increase (decrease) in payables to pre-petition creditors
(2
)
 
(16
)
Increase (decrease) in other noncurrent liabilities
(2,525
)
 
(578
)
 
$
(18,548
)
 
$
(5,311
)
  

Other supplemental disclosures
In the first quarter of 2013, we recorded 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 related to Rose Rock's purchase of a 33% interest in SemCrude Pipeline, L.L.C. from SemGroup.
We paid cash interest of $3.6 million and $0.6 million for the three months ended March 31, 2014 and 2013, respectively.
We paid cash for income taxes (net of refunds received) of $12.2 million and $1.3 million for the three months ended March 31, 2014 and 2013, respectively.
We incurred liabilities for construction work in process that had not been paid of $10.0 million and $5.8 million as of March 31, 2014 and 2013, respectively. Such amounts are not included in capital expenditures on the consolidated statements of cash flows.
Related Party Transactions
RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS
NGL Energy Partners LP and subsidiaries (Gavilon, LLC and High Sierra Crude Oil and Marketing, LLC)
As described in Note 3, we own interests in NGL Energy, which we account for under the equity method.
During the three months ended March 31, 2014 and 2013, we generated the following transactions with NGL Energy and its subsidiaries (in thousands):
 
Three Months Ended March 31,
 
2014
 
2013
Revenues
$
172,438

 
$
178,714

Purchases
$
157,691

 
$
139,924

Reimbursements from NGL Energy for transition services
$
42

 
$
90


Transactions with NGL Energy and its subsidiaries primarily relate to marketing, leased storage and transportation services of crude oil, including buy/sell transactions. In accordance with ASC 845-10-15, these transactions were reported as revenue on a net basis in our condensed consolidated statements of operations and comprehensive income because the purchases of inventory and subsequent sales of the inventory were with the same counterparty. For comparability, prior year amounts above have been recast to include transactions with Gavilon, LLC, which was not a related party until December 2013.
White Cliffs
As described in Note 3, we account for our ownership interest in White Cliffs under the equity method. During the three months ended March 31, 2014 and 2013, we generated storage revenue from White Cliffs of approximately $0.8 million and $0.6 million, respectively. We incurred $0.9 million of cost for the three months ended March 31, 2014 related to transportation fees for shipments on White Cliffs.
Legal services
The law firm of Conner & Winters, LLP, of which Mark D. Berman is a partner, performs legal services for us. Mr. Berman is the spouse of Candice L. Cheeseman, General Counsel and Secretary. Mr. Berman does not perform any legal services for us. SemGroup paid $0.3 million and $0.5 million in legal fees and related expenses to this law firm during the three months ended March 31, 2014 and 2013, respectively (of which $54.0 thousand was paid by White Cliffs during the three months ended March 31, 2014).
Condensed Consolidating Guarantor Financial Statements (Notes)
Condensed Consolidating Guarantor Financial Statements [Text Block]
14.
CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS

Our Notes are guaranteed by certain of our subsidiaries as follows: SemGas, L.P., SemCanada, L.P., SemCanada II, L.P., SemMaterials, L.P., SemGroup Europe Holding, L.L.C., SemOperating G.P., L.L.C., SemMexico, L.L.C., SemDevelopment, L.L.C., Rose Rock Midstream Holdings, LLC, Wattenberg Holding, LLC, Glass Mountain Holding, LLC and Mid-America Midstream Gas Services, L.L.C. (collectively, the "Guarantors").
Each of the Guarantors is 100% owned by SemGroup Corporation (the "Parent"). Such guarantees of the Notes are full and unconditional and constitute the joint and several obligations of the Guarantors. There are no significant restrictions upon the ability of the Parent or any of the Guarantors to obtain funds from its respective subsidiaries by dividend or loan. None of the assets of the Guarantors represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act.
Unaudited condensed consolidating financial statements for the Parent, the Guarantors and non-guarantors as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013 are presented on an equity method basis in the tables below (in thousands).
Intercompany receivable and payable balances, including notes receivable and payable, are capital transactions primarily to facilitate the capital needs of our subsidiaries. As such, subsidiary intercompany balances have been reported as a reduction to equity on the condensed consolidating Guarantor balance sheets. The Parent's net intercompany balance, including note receivable, and investments in subsidiaries have been reported in equity method investments on the condensed consolidating Guarantor balance sheets. Intercompany transactions, such as daily cash management activities, have been reported as financing activities within the condensed consolidating Guarantor statements of cash flows. The Parent's investing activities with subsidiaries, such as the drop down of a 33% interest in SemCrude Pipeline, L.L.C. to Rose Rock in the first quarter of 2013, have been reflected as cash flows from investing activities. Quarterly cash distributions from Rose Rock representing a return on capital have been included in the Parent's cash flows from operations. These balances are eliminated through consolidating adjustments below.
Condensed Consolidating Guarantor Balance Sheets
 
 
March 31, 2014
 
 
Parent
 
Guarantors
 
Non-guarantors
 
Consolidating Adjustments
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
4,491

 
$

 
$
72,440

 
$
(1,973
)
 
$
74,958

Restricted cash
 
3,855

 

 
3,817

 

 
7,672

Accounts receivable, net
 
640

 
23,152

 
357,357

 

 
381,149

Receivable from affiliates
 
762

 
15,096

 
40,995

 
(4,572
)
 
52,281

Inventories
 

 
(682
)
 
39,504

 

 
38,822

Other current assets
 
8,072

 
56

 
3,698

 

 
11,826

Total current assets
 
17,820

 
37,622


517,811


(6,545
)

566,708

Property, plant and equipment, net
 
3,921

 
403,988

 
729,631

 

 
1,137,540

Equity method investments
 
1,575,400

 
561,556

 
169,000

 
(1,712,418
)
 
593,538

Goodwill
 

 
23,839

 
38,084

 

 
61,923

Other intangible assets, net
 
29

 
161,361

 
10,411

 

 
171,801

Other noncurrent assets, net
 
16,682

 
1,339

 
11,863

 

 
29,884

Total assets
 
$
1,613,852

 
$
1,189,705


$
1,476,800


$
(1,718,963
)

$
2,561,394

LIABILITIES AND OWNERS’ EQUITY
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
244

 
$
30,690

 
$
292,586

 
$

 
$
323,520

Payable to affiliates
 
171

 
28

 
42,576

 
(4,572
)
 
38,203

Accrued liabilities
 
10,311

 
14,874

 
44,513

 
(5
)
 
69,693

Payables to pre-petition creditors
 
3,128

 

 
51

 

 
3,179

Deferred revenue
 

 

 
23,204

 

 
23,204

Warrant liability
 
57,155