SEMGROUP CORP, 10-Q filed on 11/14/2011
Quarterly Report
Document And Entity Information
9 Months Ended
Sep. 30, 2011
Document Type
10-Q 
Amendment Flag
FALSE 
Document Period End Date
Sep. 30, 2011 
Entity Central Index Key
0001489136 
Document Fiscal Year Focus
2011 
Document Fiscal Period Focus
Q3 
Entity Registrant Name
SemGroup Corp 
Current Fiscal Year End Date
--12-31 
Entity Filer Category
Non-accelerated Filer 
Class A
 
Entity Common Stock, Shares Outstanding
41,551,596 
Class B
 
Entity Common Stock, Shares Outstanding
167,890 
Condensed Consolidated Balance Sheets (USD $)
In Thousands
Sep. 30, 2011
Dec. 31, 2010
ASSETS
 
 
Cash and cash equivalents
$ 67,396 
$ 90,159 
Restricted cash
45,330 
65,455 
Accounts receivable (net of allowance of $5,798 at September 30, 2011 and $11,178 at December 31, 2010)
258,490 
238,026 
Inventories
34,185 
129,846 
Assets held for sale
130,436 
 
Other current assets
24,466 
39,605 
Total current assets
560,303 
563,091 
Property, plant and equipment (net of accumulated depreciation of $74,677 at September 30, 2011 and $45,491 at December 31, 2010)
739,497 
781,815 
Investment in White Cliffs (Note 3)
145,138 
152,020 
Goodwill
57,944 
107,823 
Other intangible assets (net of accumulated amortization of $5,718 at September 30, 2011 and $6,677 at December 31, 2010)
14,912 
32,264 
Assets held for sale
113,008 
 
Other assets, net
19,130 
30,175 
Total assets
1,649,932 
1,667,188 
LIABILITIES AND OWNERS' EQUITY
 
 
Accounts payable
156,572 
153,785 
Accrued liabilities
58,147 
63,355 
Payables to pre-petition creditors
43,597 
74,817 
Deferred revenue
17,888 
12,604 
Current portion of long-term debt
9,099 
12 
Liabilities held for sale
4,223 
 
Other current liabilities
1,278 
16,223 
Total current liabilities
290,804 
320,796 
Long-term debt
377,936 
348,431 
Deferred income taxes
79,755 
85,139 
Other noncurrent liabilities
51,813 
57,754 
Commitments and contingencies (Note 8)
 
 
Owners' equity:
 
 
Common stock (Note 9)
416 
415 
Additional paid-in capital
1,027,675 
1,023,727 
Accumulated deficit
(168,117)
(170,189)
Accumulated other comprehensive income (loss)
(10,350)
1,115 
Total owners' equity
849,624 
855,068 
Total liabilities and owners' equity
$ 1,649,932 
$ 1,667,188 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands
Sep. 30, 2011
Dec. 31, 2010
Condensed Consolidated Balance Sheets [Abstract]
 
 
Accounts receivable, allowance
$ 5,798 
$ 11,178 
Property, plant and equipment, accumulated depreciation
74,677 
45,491 
Other intangible assets, accumulated amortization
$ 5,718 
$ 6,677 
Condensed Consolidated Statements Of Operations And Comprehensive Loss (USD $)
In Thousands, except Per Share data
3 Months Ended
Sep. 30,
9 Months Ended
Sep. 30,
2011
2010
2011
2010
Revenues:
 
 
 
 
Product
$ 337,016 
$ 311,123 
$ 971,773 
$ 963,350 
Service
28,762 
46,153 
97,372 
145,775 
Other
27,626 
28,023 
75,432 
68,079 
Total revenues
393,404 
385,299 
1,144,577 
1,177,204 
Expenses:
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
314,743 
293,684 
903,113 
903,248 
Operating
42,278 
42,136 
117,906 
115,403 
General and administrative
17,253 
20,676 
57,633 
68,309 
Depreciation and amortization
13,296 
18,632 
39,556 
58,150 
Loss (gain) on disposal or impairment of long-lived assets, net
(1)
5,192 
(137)
96,581 
Total expenses
387,569 
380,320 
1,118,071 
1,241,691 
Equity in earnings of White Cliffs
4,016 
 
10,166 
 
Operating income (loss)
9,851 
4,979 
36,672 
(64,487)
Other expenses (income):
 
 
 
 
Interest expense
6,019 
21,112 
49,389 
66,509 
Foreign currency transaction loss (gain)
(2,874)
(39)
(3,430)
1,556 
Other expense (income), net
(8,973)
(2,664)
(14,564)
(3,411)
Total other expenses (income), net
(5,828)
18,409 
31,395 
64,654 
Income (loss) from continuing operations before income taxes
15,679 
(13,430)
5,277 
(129,141)
Income tax expense (benefit)
1,308 
2,242 
3,202 
(272)
Income (loss) from continuing operations
14,371 
(15,672)
2,075 
(128,869)
Income (loss) from discontinued operations, net of income taxes
(32)
348 
(3)
1,724 
Net income (loss)
14,339 
(15,324)
2,072 
(127,145)
Less: net income attributable to noncontrolling interests
 
108 
 
225 
Net income (loss) attributable to SemGroup Corporation
14,339 
(15,432)
2,072 
(127,370)
Net income (loss)
14,339 
(15,324)
2,072 
(127,145)
Other comprehensive income (loss), net of income taxes
(18,103)
12,389 
(11,465)
4,932 
Comprehensive loss
(3,764)
(2,935)
(9,393)
(122,213)
Less: comprehensive income attributable to noncontrolling interests
 
108 
 
225 
Comprehensive loss attributable to SemGroup Corporation
$ (3,764)
$ (3,043)
$ (9,393)
$ (122,438)
Net income (loss) attributable to SemGroup Corporation per common share (Note 10):
 
 
 
 
Basic
$ 0.34 
$ (0.37)
$ 0.05 
$ (3.08)
Diluted
$ 0.34 
$ (0.37)
$ (0.15)
$ (3.08)
Condensed Consolidated Statements Of Cash Flows (USD $)
In Thousands
9 Months Ended
Sep. 30,
2011
2010
Cash flows from operating activities:
 
 
Net income (loss)
$ 2,072 
$ (127,145)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
Net unrealized gain related to derivative instruments
(9,394)
(17,662)
Depreciation and amortization
39,556 
58,150 
Loss (gain) on disposal or impairment of long-lived assets, net
(137)
96,581 
Amortization and write down of debt issuance costs
23,235 
16,626 
Deferred tax benefit
(4,019)
(7,058)
Non-cash compensation expense
3,949 
4,682 
Provision for losses on uncollectible accounts receivable, net of recoveries
(5,340)
8,739 
Currency (gain) loss
(3,430)
1,556 
Changes in operating assets and liabilities (Note 11)
(54,726)
62,493 
Net cash provided by (used in) operating activities
(8,234)
96,962 
Cash flows from investing activities:
 
 
Capital expenditures
(50,879)
(31,255)
Proceeds from sale of long-lived assets
1,093 
12,642 
Proceeds from sale of interests in White Cliffs
 
140,765 
Deconsolidation of White Cliffs
 
(5,519)
Investments in White Cliffs
(2,863)
 
Distributions from White Cliffs in excess of equity in earnings
9,745 
 
Proceeds from surrender of life insurance
 
7,016 
Net cash provided by (used in) investing activities
(42,904)
123,649 
Cash flows from financing activities:
 
 
Debt issuance costs
(10,639)
(992)
Borrowings on debt and other obligations
153,434 
64,669 
Principal payments on debt and other obligations
(115,425)
(249,665)
Distributions
 
(277)
Net cash provided by (used in) financing activities
27,370 
(186,265)
Effect of exchange rate changes on cash and cash equivalents
1,005 
(390)
Net increase (decrease) in cash and cash equivalents
(22,763)
33,956 
Cash and cash equivalents at beginning of period
90,159 
41,917 
Cash and cash equivalents at end of period
$ 67,396 
$ 75,873 
Overview
Overview

1. OVERVIEW

SemGroup Corporation is a Delaware corporation with its headquarters in Tulsa, Oklahoma. SemGroup Corporation is the successor entity of SemGroup, L.P., which was an Oklahoma limited partnership. The terms "we," "our," "us," "SemGroup," "the Company" and similar language used in these notes to the unaudited condensed consolidated financial statements refer to SemGroup Corporation, SemGroup, L.P., and their subsidiaries.

Basis of presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission. These financial statements include all normal and recurring adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of its operations and its cash flows. Certain reclassifications have been made to conform previously reported balances to the current presentation.

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

Our consolidated financial statements include the accounts of our controlled subsidiaries. All significant transactions between our consolidated subsidiaries have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Although management believes these estimates are reasonable, actual results could differ materially from these estimates. The results of operations for the nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.

Pursuant to the rules and regulations of the Securities and Exchange Commission, the accompanying condensed consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2010, which are included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission.

Reportable segments

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

 

   

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

 

   

an approximate 640-mile pipeline network with 670,000 barrels of associated storage in Kansas and Oklahoma that transports crude oil from producing wells and third-party pipeline connections to several refineries and to a storage facility in Cushing, Oklahoma;

 

   

a crude oil storage facility in Cushing, Oklahoma with a capacity of over 5.0 million barrels and an additional 1.95 million barrels contracted for construction and expected to be placed in service throughout 2012; and

 

   

a 51% ownership interest in White Cliffs Pipeline, L.L.C. ("White Cliffs"), which owns a 527-mile pipeline that transports crude oil from Platteville, Colorado to Cushing, Oklahoma ("White Cliffs Pipeline").

 

   

SemStream, which owns 8,932,031 common units representing limited partner interests in NGL Energy Partners LP ("NGL Energy"), which markets, transports and stores natural gas liquids in the United States, and a 7.5% interest in the general partner of NGL Energy.

 

   

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

 

   

SemGas, which provides natural gas gathering and processing services in the United States. SemGas owns and operates approximately 850 miles of gathering pipeline in Kansas, Oklahoma and Texas and three processing plants in Oklahoma and Texas.

 

   

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

 

   

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

We acquired our ownership interests in NGL Energy on November 1, 2011, in return for our contribution of the primary operating assets of our SemStream business to NGL Energy. We also received $93 million of cash proceeds from this transaction, subject to post-closing adjustments.

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

Assets held for sale

The September 30, 2011 balances of the assets and liabilities that were contributed to NGL Energy on November 1, 2011 are reported on our condensed consolidated balance sheet at September 30, 2011 as "held for sale". Current assets held for sale at September 30, 2011 include $126.6 million of inventory, $2.8 million of derivative assets, and $1.0 million of other current assets. Noncurrent assets held for sale at September 30, 2011 include $47.7 million of property, plant and equipment, $50.1 million of goodwill, $12.4 million of other intangible assets, and $2.9 million of other noncurrent assets. Liabilities held for sale at September 30, 2011 include $3.7 million of derivative liabilities and $0.5 million of other current liabilities.

Bankruptcy

During 2008, SemGroup, L.P. and many of its subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Also during 2008, certain of SemGroup, L.P.'s subsidiaries filed applications for creditor protection in Canada under the Companies' Creditors Arrangement Act. While in bankruptcy, SemGroup, L.P. filed a Plan of Reorganization with the court, which determined, among other things, how pre-petition date obligations would be settled, the equity structure of the reorganized company upon emergence, and the financing arrangements upon emergence. SemGroup Corporation emerged from bankruptcy on November 30, 2009 (the "Emergence Date").

 

New accounting pronouncement

During September 2011, the Financial Accounting Standards Board issued Accounting Standards Update No. 2011-08. This Accounting Standards Update is designed to simplify how entities test goodwill for impairment. Under the new standard, an entity may first assess qualitative factors to determine whether it is more likely than not that the fair value of an asset group is less than the carrying amount, for the purpose of determining whether it is necessary to estimate the fair value of the asset group to which the goodwill relates. We plan to adopt this new standard in 2012.

Inventories
Inventories

2. INVENTORIES

Inventories consist of the following (in thousands):

 

     September 30,
2011
     December 31,
2010
 

Natural gas and natural gas liquids

   $ 1,174       $ 104,134   

Crude oil

     22,634         18,608   

Asphalt and other

     10,377         7,104   
  

 

 

    

 

 

 
   $ 34,185       $ 129,846   
  

 

 

    

 

 

 

In addition to the amounts in the table above, $126.6 million of natural gas liquids inventory is included within current assets held for sale on the condensed consolidated balance sheet at September 30, 2011.

Investment In White Cliffs
Investment In White Cliffs

3. INVESTMENT IN WHITE CLIFFS

Until the end of September 2010, we owned 99.17% of White Cliffs and the remaining interests were held by two unaffiliated parties. During 2010, these parties purchased additional ownership interests in White Cliffs, which reduced our ownership percentage in White Cliffs to 51%. We received $140.8 million of proceeds from these transactions.

Upon purchasing these ownership interests, the other owners gained substantive rights to participate in the management of White Cliffs. Because of this, we deconsolidated White Cliffs at the end of September 2010 and began accounting for it under the equity method. Upon deconsolidating White Cliffs, we recorded our investment at fair value, which approximated 51% of the net book value of White Cliffs (the book value of White Cliffs had been adjusted to fair value on November 30, 2009, in connection with fresh-start reporting). We recorded a loss of $6.8 million upon conversion to the equity method, which is reported within loss on disposal or impairment of long-lived assets in our condensed consolidated statements of operations.

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

 

     September 30,
2011
     December 31,
2010
 

Current assets

   $ 10,239       $ 9,797   

Property, plant and equipment, net

     225,588         234,300   

Goodwill

     17,000         17,000   

Other intangible assets, net

     35,017         40,848   
  

 

 

    

 

 

 

Total assets

   $ 287,844       $ 301,945   
  

 

 

    

 

 

 

Current liabilities

   $ 3,217       $ 3,824   

Members' equity

     284,627         298,121   
  

 

 

    

 

 

 

Total liabilities and members' equity

   $ 287,844       $ 301,945   
  

 

 

    

 

 

 

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

 

     Three Months
Ended
September 30.

2011
     Nine Months
Ended
September 30,
2011
 

Revenue

   $ 17,515       $ 47,878   

Operating, general and administrative expenses

     3,824         10,029   

Depreciation and amortization expense

     5,214         15,622   

Net income

     8,477         22,227   

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

Segments
Segments

4. SEGMENTS

As described in Note 1, we own a portfolio of energy-related businesses. These businesses are organized based on the nature and location of the services they provide. Certain summarized information related to these segments is shown in the tables below. None of the operating segments have been aggregated, other than White Cliffs, which has been included within the SemCrude segment.

"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. SemCanada Crude ceased to be an operating segment during fourth quarter 2010, when we sold its property, plant and equipment and began winding down its operations. As a result, it is included within "Corporate and Other" in the tables below. Eliminations of transactions between segments are also included within "Corporate and Other" in the tables below.

The accounting policies of each segment are the same as the accounting policies of the consolidated Company. Transactions between segments are generally recorded based on prices negotiated between the segments. Certain general and administrative and interest expenses incurred at the corporate level were allocated to the segments, based on our allocation policies in effect at the time. During fourth quarter 2010, we completed a detailed study of these expenses and developed a more refined allocation methodology, which we applied to the allocation of these expenses for the three months and nine months ended September 30, 2011.

 

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

Revenues:

               

External

  $ 105,938      $ 169,933      $ 41,368      $ 15,192      $ 4,230      $ 56,743        —        $ 393,404   

Intersegment

    (1,322     14,725        —          13,158        —          —          (26,561     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    104,616        184,658        41,368        28,350        4,230        56,743        (26,561     393,404   

Expenses:

               

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

    90,660        180,157        —          20,512        152        49,823        (26,561     314,743   

Operating

    4,530        2,523        29,845        2,433        1,564        1,383        —          42,278   

General and administrative

    2,040        2,535        3,378        1,590        1,604        2,825        3,281        17,253   

Depreciation and amortization

    3,122        1,280        2,577        1,528        2,339        1,653        797        13,296   

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

    —          (25     —          4        —          20        —          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    100,352        186,470        35,800        26,067        5,659        55,704        (22,483     387,569   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in earnings of White Cliffs

    4,016        —          —          —          —          —          —          4,016   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    8,280        (1,812     5,568        2,283        (1,429     1,039        (4,078     9,851   

Other expenses (income), net

    (349     (632     1,990        82        312        479        (7,710     (5,828
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

  $ 8,629      $ (1,180   $ 3,578      $ 2,201      $ (1,741   $ 560      $ 3,632      $ 15,679   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 529,427      $ 363,289      $ 253,469      $ 85,019      $ 229,541      $ 91,345      $ 97,842      $ 1,649,932   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Revenues:

               

External

  $ 63,366      $ 125,667      $ 38,755      $ 11,637      $ 9,289      $ 33,331      $ 103,254      $ 385,299   

Intersegment

    7,668        14,243        —          6,399        —          —          (28,310     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    71,034        139,910        38,755        18,036        9,289        33,331        74,944        385,299   

Expenses:

               

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

    41,837        139,625        (42     11,994        —          29,362        70,908        293,684   

Operating

    6,751        1,717        27,432        1,635        1,928        1,300        1,373        42,136   

General and administrative

    3,456        3,445        4,992        1,888        1,279        2,338        3,278        20,676   

Depreciation and amortization

    8,280        1,844        2,419        1,380        2,045        1,532        1,132        18,632   

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

    6,828        (1     1        —          —          (12     (1,624     5,192   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    67,152        146,630        34,802        16,897        5,252        34,520        75,067        380,320   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    3,882        (6,720     3,953        1,139        4,037        (1,189     (123     4,979   

Other expenses (income), net

    7,982        3,453        10,788        1,191        575        (161     (5,419     18,409   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

  $ (4,100   $ (10,173   $ (6,835   $ (52   $ 3,462      $ (1,028   $ 5,296      $ (13,430
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Revenues:

               

External

  $ 301,626      $ 502,428      $ 122,004      $ 42,923      $ 18,815      $ 156,024      $ 757      $ 1,144,577   

Intersegment

    (2,505     44,249        —          31,753        —          —          (73,497     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    299,121        546,677        122,004        74,676        18,815        156,024        (72,740     1,144,577   

Expenses:

               

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

    252,804        534,598        10        52,150        152        136,378        (72,979     903,113   

Operating

    13,683        7,912        80,611        6,282        5,129        4,231        58        117,906   

General and administrative

    6,508        7,917        12,737        4,829        5,276        8,983        11,383        57,633   

Depreciation and amortization

    8,505        4,702        7,746        4,410        6,943        4,912        2,338        39,556   

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

    12        39        —          4        —          (186     (6     (137
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    281,512        555,168        101,104        67,675        17,500        154,318        (59,206     1,118,071   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity in earnings of White Cliffs

    10,166        —          —          —          —          —          —          10,166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    27,775        (8,491     20,900        7,001        1,315        1,706        (13,534     36,672   

Other expenses (income), net

    1,919        14,391        16,661        1,829        740        (145     (4,000     31,395   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

  $ 25,856      $ (22,882   $ 4,239      $ 5,172      $ 575      $ 1,851      $ (9,534   $ 5,277   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
               

 

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

Revenues:

               

External

  $ 159,483      $ 450,025      $ 107,235      $ 37,646      $ 27,673      $ 100,205      $ 294,937      $ 1,177,204   

Intersegment

    11,736        38,941        —          19,624        —          —          (70,301     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    171,219        488,966        107,235        57,270        27,673        100,205        224,636        1,177,204   

Expenses:

               

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

    93,127        471,765        53        38,876        —          86,243        213,184        903,248   

Operating

    21,147        6,778        70,362        4,380        6,037        3,389        3,310        115,403   

General and administrative

    13,442        10,875        15,956        7,166        4,022        8,410        8,438        68,309   

Depreciation and amortization

    24,993        5,074        7,071        4,062        5,916        4,604        6,430        58,150   

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

    6,874        (35     (14     (19     —          (26     89,801        96,581   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    159,583        494,457        93,428        54,465        15,975        102,620        321,163        1,241,691   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    11,636        (5,491     13,807        2,805        11,698        (2,415     (96,527     (64,487

Other expenses, net

    27,041        7,772        18,952        4,396        1,867        140        4,486        64,654   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

  $ (15,405   $ (13,263   $ (5,145   $ (1,591   $ 9,831      $ (2,555   $ (101,013   $ (129,141
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

Financial Instruments
Financial Instruments

5. FINANCIAL INSTRUMENTS

Fair value of financial instruments

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

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

Assets:

                                                                               

Commodity derivatives

  $ 4,050      $ 6,978      $ 10,579      $ (18,225   $ 3,382      $ 97,857      $ 1,993      $ 2,499      $ (97,981   $ 4,368   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 4,050      $ 6,978      $ 10,579      $ (18,225   $ 3,382      $ 97,857      $ 1,993      $ 2,499      $ (97,981   $ 4,368   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

                                                                               

Commodity derivatives

  $ 3,499      $ 7,433      $ 11,037      $ (18,225   $ 3,744      $ 101,563      $ 7,494      $ 3,046      $ (97,981   $ 14,122   

Warrants

    8,934        —          —          —          8,934        —          —          17,192        —          17,192   

Interest rate swaps

    —          413        —          —          413        —          —          —          —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    12,433        7,846        11,037        (18,225     13,091        101,563        7,494        20,238        (97,981     31,314   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net liabilities at fair value

  $ (8,383   $ (868   $ (458   $ —        $ (9,709   $ (3,706   $ (5,501   $ (17,739   $ —        $ (26,946
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Relates primarily to exchange traded futures. Gain and loss positions on multiple contracts are settled net on a daily basis with the exchange.

"Level 1" measurements were obtained using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. These include commodity futures contracts that are traded on an exchange. These also include common stock warrants, beginning in September 2011, when the warrants began to be traded on the New York Stock Exchange.

"Level 2" measurements use as inputs market observable and corroborated prices for similar commodity derivative contracts. Assets and liabilities classified as Level 2 include over-the-counter (OTC) traded forward contracts and swaps.

"Level 3" measurements were obtained using information from a pricing service and internal valuation models incorporating observable and unobservable market data. These include commodity derivatives, such as forward contracts and swaps for which there is not a highly liquid market, and therefore are not included in Level 2 above. Level 3 measurements also included common stock warrants until September 2011, when the warrants began to be traded on the New York Stock Exchange. Prior to that point, we used a Black-Scholes pricing model to estimate the fair value of the warrants.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value levels.

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

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

Net liabilities – beginning balance

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

Transfers out of Level 3(*)

     8,934        6        8,940        —          (1,125     (1,125

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

     4,684        3,156        7,840        937        986        1,923   

Settlements

     —          (1,884     (1,884     —          1,706        1,706   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net assets (liabilities) – ending balance

   $ —        $ (458   $ (458   $ (13,989   $ 400      $ (13,589
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ —        $ 3,156      $ 3,156      $ 937      $ 986      $ 1,923   

 

                                                 
     Nine Months
Ended
September 30, 2011
    Nine Months
Ended
September 30, 2010
 
     Warrants     Commodity
Derivatives
    Total     Warrants     Commodity
Derivatives
    Total  

Net liabilities — beginning balance

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

Transfers out of Level 3(*)

     8,934        (419     8,515        —          (1,125     (1,125

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

     8,258        2,783        11,041        2,920        (2,382     538   

Settlements

     —          (2,275     (2,275     —          27,345        27,345   
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net assets (liabilities) — ending balance

   $ —        $ (458   $ (458   $ (13,989   $ 400      $ (13,589
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ —        $ 2,783      $ 2,783      $ 2,920      $ (2,382   $ 538   
 
 

 (*) 

 

These tables recognize transfers in and transfers out as of the beginning of the reporting period for commodity derivatives and at the end of the period for warrants.

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

Commodity derivatives

Our consolidated results of operations and cash flows are impacted by changes in market prices for petroleum products. This exposure to commodity price risk is managed, in part, by entering into various commodity derivatives.

SemCrude seeks to manage the price risk associated with its marketing operations by limiting its net open positions through (i) the concurrent purchase and sale of like quantities of crude oil to create back-to-back transactions that are intended to lock in positive margins based on the timing, location or quality of the crude oil purchased and delivered or (ii) derivative contracts. SemCrude's storage and transportation assets also can 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.

As described in Note 12, we contributed the primary operating assets of SemStream to NGL Energy on November 1, 2011, including all of SemStream's commodity derivatives. Prior to November 1, 2011, SemStream managed commodity price risk by limiting its net open positions subject to outright price risk and basis risk resulting from grade, location or time differences. SemStream did so by selling and purchasing similar quantities of natural gas liquids with purchase and sale transactions for current or future delivery, by entering into future delivery and purchase obligations with futures contracts or other commodity derivatives and employing its storage and transportation assets. SemStream at times hedged its natural gas liquids commodity price exposure with derivatives on commodities other than natural gas liquids due to the limited size of the market for natural gas liquids derivatives. In addition, physical transaction sale and purchase strategies were intended to lock in positive margins for SemStream, e.g., the sales price was sufficient to cover purchase costs, any other fixed and variable costs and SemStream's profit. All marketing activities were subject to our risk management policy, which establishes limits to manage risk and mitigate financial exposure.

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

Swaps – Over the counter transactions where a floating price, basis or index is exchanged for a fixed (or a different floating) price, basis, or index at a preset schedule in the future according to an agreed-upon formula.

Futures contracts – Exchange traded contracts to buy or sell a commodity. These contracts are standardized by the exchange in terms of quality, quantity, delivery period and location for each commodity.

 

Forward contracts – Over the counter contracts to buy or sell a commodity at an agreed upon future date. The buyer and seller agree on specific terms (price, quantity, delivery period, and location) and conditions at the inception of the contract.

The following table sets forth the notional quantities for derivatives entered into (amounts in thousands of barrels):

                                 
     Three Months
Ended
September 30,
2011
     Three Months
Ended
September 30,
2010
     Nine Months
Ended
September 30,
2011
     Nine Months
Ended
September 30,
2010
 

Sales

     5,189         4,493         18,000         8,956   

Purchases

     4,344         3,701         17,716         6,853   

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

                                         
     September 30, 2011      December 31, 2010  
     Other
Current
Assets
     Current
Assets Held
for Sale
     Current
Liabilities
Held for Sale
     Other
Current
Assets
     Other
Current
Liabilities
 

Commodity contracts

   $ 551       $ 2,831       $ 3,744       $ 4,368       $ 14,122   

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

                                 
     Three Months
Ended
September 30,
2011
     Three Months
Ended
September 30,
2010
    Nine Months
Ended
September 30,
2011
     Nine Months
Ended
September 30,
2010
 

Commodity contracts

   $ 2,960       $ (4,345   $ 62       $ 1,903   

Warrants

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

Interest swaps

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

Income Taxes
Income Taxes

6. INCOME TAXES

Due to our emergence from bankruptcy and overall restructuring, we have recorded a full valuation allowance on all U.S. federal and state deferred tax assets. We have determined that no accruals related to uncertainty in tax positions are required. The effective tax rate was 8% for the three months ended September 30, 2011 and (17)% for the three months ended September 30, 2010. The effective tax rate was 61% for the nine months ended September 30, 2011 and less than 1% for the nine months ended September 30, 2010. Significant items that impacted the effective tax rate for each period, as compared to the U.S. Federal statutory rate of 35%, include earnings in foreign jurisdictions taxed at lower rates and the full valuation allowance which was recorded against our deferred tax assets. Further, the foreign earnings are taxed in foreign jurisdictions as well as in the U.S., since they are disregarded entities for U.S. federal income tax purposes. Deferred tax liabilities, with the exception of those related to certain long-lived assets, have been considered as a source of future taxable income in establishing the amount of the valuation allowance. These combined factors, and the magnitude of permanent items impacting the tax rate relative to income from continuing operations before income taxes, result in rates that are not comparable between the periods.

Debt
Debt

7. DEBT

Our debt consists of the following (in thousands):

 

     September 30,
2011
     December 31,
2010
 

SemGroup revolving credit facility

   $ 85,000       $ —     

SemGroup Term Loan A

     74,063         —     

SemGroup Term Loan B

     199,500         —     

Previous SemGroup credit facilities

     —           324,065   

SemLogistics credit facility

     23,438         24,289   

SemMexico credit facility

     4,920         —     

Capital leases

     114         89   
  

 

 

    

 

 

 

Total long-term debt

     387,035         348,443   

Less: current portion of long-term debt

     9,099         12   
  

 

 

    

 

 

 

Noncurrent portion of long-term debt

   $ 377,936       $ 348,431   
  

 

 

    

 

 

 

SemGroup credit agreement

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

The revolving credit facility had a capacity of $350 million at September 30, 2011. This capacity may be used either for cash borrowings or letters of credit, although the maximum letter of credit capacity is $250 million. At September 30, 2011, we had outstanding cash borrowings of $85.0 million on this facility and outstanding letters of credit of $100.2 million. The principal is due on June 20, 2016, and any letters of credit expire on June 13, 2016. Earlier principal payments may be required if we enter into certain transactions to sell assets or obtain new borrowings. We have the right to make additional principal payments without incurring any penalties for early repayment.

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

 

     Term
Loan A
     Term
Loan B
 

Three months ended December 31, 2011

   $ 938       $ 500   

Year ended December 31, 2012

     4,500         2,000   

Year ended December 31, 2013

     6,375         2,000   

Year ended December 31, 2014

     9,375         2,000   

Year ended December 31, 2015

     16,875         2,000   

Year ended December 31, 2016

     36,000         2,000   

Year ended December 31, 2017

     —           2,000   

Year ended December 31, 2018

     —           187,000   
  

 

 

    

 

 

 

Total

   $ 74,063       $ 199,500   
  

 

 

    

 

 

 

During November 2011, we made principal payments of $25.2 million on the Term Loan A and $67.9 million on the Term Loan B, using proceeds received from a transaction with NGL Energy (described in Note 12).

 

   

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

 

   

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

 

   

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

The alternate base rate is calculated as:

 

   

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

 

   

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

At September 30, 2011, there was $85 million of outstanding revolving cash borrowings, $60 million of which incurred interest at the Eurodollar rate and $25 million of which incurred interest at the alternate base rate. The interest rate in effect at September 30, 2011 on the $60 million of Eurodollar rate borrowings was 3.70%, calculated as LIBOR of 0.20% plus a margin of 3.5%. The interest rate in effect at September 30, 2011 on the $25 million of alternate base rate borrowings was 5.75%, calculated as the prime rate of 3.25% plus a margin of 2.5%. The interest rate in effect at September 30, 2011 on the Term Loan A was 3.74%, determined under the Eurodollar rate. This was calculated as LIBOR of 0.24% plus a margin of 3.5%.

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

 

   

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

 

   

a margin of 4.5%.

The alternate base rate is calculated as:

 

   

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

 

   

a margin of 3.5%.

 

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

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

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

Fees are charged on any outstanding letters of credit at a rate that ranges from 2.5% to 4.0%, depending on a leverage ratio specified in the credit agreement. At September 30, 2011, the rate in effect was 3.5%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit. A commitment fee of 0.5% is charged on any unused capacity on the revolving credit facility. In addition, we are charged an annual administrative fee of $0.1 million. We also paid $11.6 million of fees to lenders and advisors that are recorded in other noncurrent assets and are being amortized over the life of the agreement.

We recorded interest expense related to the new SemGroup revolving credit facility of $2.3 million for the three months ended September 30, 2011, and $2.6 million for the nine months ended September 30, 2011, including amortization of debt issuance costs. We recorded interest expense related to the new SemGroup Term Loans of $3.7 million for the three months ended September 30, 2011, and $4.1 million for the nine months ended September 30, 2011, including amortization of debt issuance costs.

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

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

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

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

Previous term loan and revolving credit facilities

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

 

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

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

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

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

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

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

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

Rose Rock credit facility

On November 10, 2011, our subsidiary Rose Rock Midstream, L.P. ("Rose Rock") entered into a $150 million five-year senior secured revolving credit facility agreement. The credit facility under this agreement will not become effective until the date on which certain conditions listed in the agreement have been met or waived, including the completion of an initial public offering of the limited partnership units of Rose Rock on or prior to March 30, 2012.

This credit agreement provides for a revolving credit facility of $150 million. The agreement also provides that the revolving credit facility may, under certain conditions, be increased by up to $200 million. The credit facility includes a $75 million sub-limit for the issuance of letters of credit for the account of Rose Rock or its loan parties.

At Rose Rock's option, amounts borrowed under the credit agreement will bear interest at either the Eurodollar rate or an alternate base rate ("ABR"), plus, in each case, an applicable margin. Until the date the financial statements relating to the first quarter after the effective date of the credit agreement have been delivered, the applicable margin relating to any Eurodollar loan will be 2.75% and with respect to any ABR loan will be 1.75%. After such financial statements have been delivered, the applicable margin will range from 2.25% to 3.25% in the case of a Eurodollar rate loan, and from 1.25% to 2.25% in the case of an ABR loan, in each case, based on a leverage ratio.

All amounts outstanding under the agreement will be due and payable on the fifth anniversary of the effective date of the credit facility under the agreement.

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

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

The credit agreement restricts Rose Rock's ability to make certain types of payments relating to its capital stock, including the declaration or payment of dividends; provided that Rose Rock may make quarterly distributions of available cash so long as no default under the agreement then exists or would result therefrom. The agreement will be:

 

   

guaranteed by all of Rose Rock's material domestic subsidiaries; and

 

   

secured by a lien on substantially all of the property and assets of Rose Rock and the guarantors, subject to customary exceptions.

SemLogistics credit facilities

SemLogistics entered into a credit agreement in December 2010, which includes a £15 million term loan and a £15 million revolving credit facility (U.S. $23.4 million each, at the September 30, 2011 exchange rate). The proceeds from this new facility were used to retire SemLogistics' previous credit facility.

The term loan is to be repaid with quarterly payments of £250,000 (U.S. $0.4 million at the September 30, 2011 exchange rate) during 2013, quarterly payments of £750,000 (U.S. $1.2 million at the September 30, 2011 exchange rate) during 2014 and 2015, and a final payment of £8,750,000 (U.S. $13.7 million at the September 30, 2011 exchange rate) on December 31, 2015. SemLogistics has the right to make early principal payments without incurring any penalties for early repayment. In the event of a change in control of SemLogistics, the outstanding balance will be due and payable within 30 days.

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

Interest is charged on both the term loan and the revolving loans (including letters of credit) at a floating rate, which is calculated as LIBOR plus a margin that ranges from 1.75% to 2.5%, depending on whether SemLogistics meets certain financial ratios specified in the agreement. The interest rate in effect at September 30, 2011 was 2.71%, which was calculated as 1.75% plus the LIBOR rate of 0.96%. Interest on the term loan and revolving facility are payable quarterly. A commitment fee of 0.50% is charged on any unused commitments under the facility and is payable quarterly. In addition, SemLogistics paid fees of $1.3 million upon inception of the facility, which were recorded to other noncurrent assets and are being amortized over the life of the facility.

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

 

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

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

SemLogistics recorded interest expense of $0.3 million for the three months ended September 30, 2011 and $0.9 million for the nine months ended September 30, 2011, including amortization of debt issuance costs. SemLogistics recorded interest expense of $0.9 million for the three months ended September 30, 2010 and $2.4 million for the nine months ended September 30, 2010, including amortization of debt issuance costs. SemLogistics recorded the fair value of the interest swaps as a noncurrent liability of $0.4 million at September 30, 2011, with a corresponding adjustment to other comprehensive income (net of income taxes).

SemMexico credit facilities

During 2010, SemMexico entered into a credit agreement that allowed SemMexico to borrow up to 80 million Mexican pesos at any time through June 2011. Borrowings on this facility are required to be repaid with monthly payments through May 2013. At September 30, 2011, borrowings of $66.7 million pesos (U.S. $4.9 million) were outstanding on this facility. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.5%. At September 30, 2011, the interest rate in effect was 6.31%, calculated as 1.5% plus the bank prime rate of 4.81%.

SemMexico also has outstanding letters of credit of 197 million Mexican pesos at September 30, 2011 (U.S. $14.5 million at the September 30, 2011 exchange rate). Fees are generally charged on outstanding letters of credit at a rate of 0.45%.

During 2011, SemMexico entered into an additional credit agreement that allows SemMexico to borrow up to 56 million Mexican pesos (U.S. $4.1 million at the September 30, 2011 exchange rate) at any time during the term of the facility, which matures in February 2012. Borrowings would be unsecured and would bear interest at the bank prime rate in Mexico plus 1.7%.

SemMexico recorded interest expense of $0.1 million during the three months ended September 30, 2011 and $0.2 million during the nine months ended September 30, 2011 related to these facilities.

SemCrude Pipeline credit facility

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

Interest was generally charged on the SemCrude Pipeline credit facility at a floating rate, which was calculated as 6% plus the greater of LIBOR or 1.5%. In addition, we paid $4.8 million in fees to the lender at the inception of the agreement, which have been fully amortized. We recorded interest expense related to this facility of $4.1 million during the three months ended September 30, 2010 and $11.0 million during the nine months ended September 30, 2010, including amortization of debt issuance costs.

Fair value

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

Commitments And Contingencies
Commitments And Contingencies

8. COMMITMENTS AND CONTINGENCIES

Bankruptcy matters

(a) Confirmation Order appeals

Manchester Securities appeal. On October 21, 2009, Manchester Securities Corporation, a creditor of SemGroup Holdings, L.P. (one of our subsidiaries), filed an objection to the Plan of Reorganization. In the objection, Manchester argued that the Plan of Reorganization should not be confirmed because it did not provide for an alleged $50 million claim of SemGroup Holdings, L.P. against SemCrude Pipeline, L.L.C. (another of our subsidiaries). On October 28, 2009, the bankruptcy court overruled the objection and entered the confirmation order approving the Plan of Reorganization. On November 4, 2009, Manchester filed a notice of appeal of the confirmation order. On December 4, 2009, Manchester's appeal was docketed in the United States District Court for the District of Delaware. We filed a motion to dismiss the appeal as equitably moot. On February 18, 2011, the District Court granted our motion to dismiss the appeal. On March 22, 2011, Manchester filed a notice to appeal this order. The parties have filed briefs in this matter, but a date has not yet been set for oral arguments. While we believe that this action is without merit and are vigorously defending this matter on appeal, an adverse ruling on this action could have a material adverse impact on us.

Luke Oil appeal. On October 21, 2009, Luke Oil Company, C&S Oil/Cross Properties, Inc., Wayne Thomas Oil and Gas and William R. Earnhardt Company (collectively, "Luke Oil") filed an objection to the Plan of Reorganization "to the extent that the Plan of Reorganization may alter, impair, or otherwise adversely affect Luke Oil's legal rights or other interests." On October 28, 2009, the bankruptcy court overruled the Luke Oil objection and entered the confirmation order. On November 6, 2009, Luke Oil filed a notice of appeal. On December 23, 2009, Luke Oil's appeal was docketed in the United States District Court for the District of Delaware. We filed a motion to dismiss the appeal as equitably moot. Luke Oil has filed a motion to stay the briefing on our motion to dismiss. On February 18, 2011, the District Court denied the stay motion and ordered the parties to complete briefing. The parties have filed briefs in this matter, but the court has not yet ruled on the motion to dismiss. While we believe that this action is without merit and are vigorously defending this matter on appeal, an adverse ruling on this action could have a material adverse impact on us.

(b) Investigations

Around the time of our bankruptcy filings, several governmental agencies launched investigations regarding the circumstances of the filings. The mandate and scope of these investigations were very broad and the investigations are ongoing.

Bankruptcy examiner. On October 14, 2008, the bankruptcy court appointed an examiner to (i) investigate the circumstances surrounding our trading strategy prior to bankruptcy filings; (ii) investigate the circumstances surrounding certain insider transactions and the formation of SemGroup Energy Partners L.P. (a former subsidiary); (iii) investigate the circumstances surrounding the potential improper use of borrowed funds and funds generated from operations and the liquidation of assets to satisfy margin calls related to our trading strategy and that of certain entities owned or controlled by former officers and directors of the general partner of SemGroup, L.P.; (iv) determine whether any directors, officers or employees of the general partner of SemGroup, L.P. participated in fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of our affairs; and (v) determine whether the SemGroup debtor estates have causes of action against current or former officers, directors, or employees of the general partner of SemGroup, L.P. arising from such participation. The examiner's report was filed with the bankruptcy court on April 15, 2009.

Certain current and prior employees of the general partner of SemGroup, L.P. are referenced in the examiner's report and the report's conclusions may suggest possible civil or criminal liability on their part. To the extent such claims exist, they are property of a litigation trust that was established for the benefit of pre-petition creditors pursuant to the Plan of Reorganization, and are not property of the reorganized SemGroup Corporation. This litigation trust is pursuing claims against certain former officers, at its own expense. We may incur expenses, which are not expected to be material, related to information and document requests of the litigation trust related to such claims. Any indemnification obligations to such officers by SemGroup, L.P. were discharged under the Plan of Reorganization.

 

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

CFTC. On June 19, 2008, we received a request for voluntary production from the Commodity Futures Trading Commission ("CFTC"). Subsequent to the bankruptcy filings, the CFTC sent other requests for voluntary production. The CFTC has also served subpoenas upon us requiring us to produce various documents and for the depositions of our representatives. We continue to comply with the CFTC's requests. We are unaware of any currently pending formal charges against us by the CFTC.

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

(c) Claims reconciliation process

A large number of parties have made claims against us for obligations alleged to have been incurred prior to our bankruptcy filing. On September 15, 2010, the bankruptcy court entered an order estimating the contingent, unliquidated and disputed claims and authorizing distributions to holders of allowed claims. Pursuant to that order we have begun making distributions to the claimants. We continue to attempt to settle unresolved claims.

Pursuant to the Plan of Reorganization, we committed to settle authorized and allowed bankruptcy claims by paying a specified amount of cash, issuing a specified number of warrants, and issuing a specified number of shares of SemGroup Corporation common stock. We do not believe the resolution of the remaining outstanding claims will exceed the total amount of consideration established under the Plan of Reorganization for all claimants; instead, the resolution of the remaining claims in some cases will impact the relative share of the established pool of common stock and warrants that certain claimants receive.

However, under certain circumstances we could be required to pay additional funds to settle the specified group of claims to be settled with cash. Pursuant to the Plan of Reorganization, a specified amount of restricted cash was set aside at the Emergence Date, which we expect to be sufficient to settle this group of claims. Since the Emergence Date, we have made significant progress in resolving these claims, and we continue to believe that the cash set aside at the Emergence Date will be sufficient to settle these claims. However, we have not yet reached a resolution of all of these claims, and if the total settlement amount of all of these claims exceeds the specified amount, we will be required to pay additional funds to satisfy the total settlement amount for this specified group of claims. If this were to become probable of occurring, we would be required to record a liability and a corresponding expense.

PEMEX lawsuit

On May 26, 2011, PEMEX Exploración y Producción ("PEMEX") filed a lawsuit against several defendants, including SemCrude, L.P. The lawsuit alleged that SemCrude purchased at least $10.4 million of condensate that had been stolen from PEMEX. The lawsuit did not allege that SemCrude knew the condensate had been stolen, and stated that PEMEX "does not allege that SemCrude acted with intent or knowledge that it was a part of any conspiracy". The lawsuit sought damages from SemCrude in the amount of the purchased condensate, plus attorney's fees and statutory penalties. On September 29, 2011, PEMEX filed a notice of dismissal that dismissed SemCrude from the lawsuit.

 

Blueknight claim

Blueknight Energy Partners, L.P. ("Blueknight"), which was formerly a subsidiary of SemGroup, together with other entities related to Blueknight, entered into a Shared Services Agreement on April 7, 2009, with SemCrude, L.P. and SemManagement, L.L.C. (which are currently subsidiaries of SemGroup). The services provided by SemCrude to Blueknight under this agreement included the coordination of movement of crude oil belonging to Blueknight's customers and the operation of Blueknight's Oklahoma pipeline system and its Cushing, Oklahoma terminal. Under the subsequent amendments to the agreements beginning in May 2010, certain of these services were phased out, and Blueknight began to manage the movement of its crude oil and the operation of its Cushing terminal.

In a letter dated August 18, 2011, Blueknight claimed that SemCrude owes Blueknight approximately 141,000 barrels of crude oil. We responded to Blueknight's letter on August 26, 2011, denying their charges and requesting documentation from Blueknight of its claim. On October 18, 2011, we received a response from Blueknight and we are currently reviewing their documentation. We cannot reliably predict the outcome of this matter, as we have not yet completed our evaluation of the basis for their claim.

Other matters

We are party to various other claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of our management, the ultimate resolution of these claims, legal actions, and complaints, after consideration of amounts accrued, insurance coverage, and other arrangements, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, the outcome of such matters is inherently uncertain, and estimates of our contingent liabilities may change materially as circumstances develop.

Environmental

We may from time to time experience leaks of petroleum products from our facilities, as a result of which we may incur remediation obligations or property damage claims. In addition, we are subject to numerous environmental regulations. Failure to comply with these regulations could result in the assessment of fines or penalties by regulatory authorities.

The Kansas Department of Health and Environment ("the KDHE") initiated discussions during our bankruptcy proceeding regarding six of our sites in Kansas (five owned by SemCrude and one owned by SemGas) that KDHE believes, based on their historical use, may have soil or groundwater contamination in excess of state standards. At the present time, no contamination has been confirmed. KDHE sought our agreement to undertake assessments of these sites to determine whether they are contaminated. We reached an agreement with KDHE on this matter and entered into a Consent Agreement and Final Order with KDHE to conduct environmental assessments on the sites and to pay KDHE's costs associated with their oversight of this matter. At the present time, no violation of law has been alleged and the amount of this potential cleanup cannot be determined because the test results from all of these sites have not yet been received.

A water pipeline break occurred at a SemCAMS facility during August 2010. This resulted in a spill of material that was predominantly salt water containing a small amount of hydrocarbons. The incident is under investigation by Environment Canada and Alberta Environment, and we have accrued a liability of $0.4 million at September 30, 2011 for estimated fines and environmental contributions.

Asset retirement obligations

We will be required to incur significant removal and restoration costs when we retire our natural gas gathering and processing facilities in Canada. We have recorded an asset retirement obligation liability of $34.6 million at September 30, 2011, which is included within other noncurrent liabilities on our consolidated balance sheets. This amount was calculated using the $104.0 million cost we estimate we would incur to retire these facilities, discounted based on our risk-adjusted cost of borrowing at the Emergence Date, taking into consideration the estimated timing of remediation.

 

The calculation of the liability for an asset retirement obligation requires the use of significant estimates, including those related to the length of time before the assets will be retired, cost inflation over the assumed life of the assets, actual remediation activities to be required, and the rate at which such obligations should be discounted. Future changes in these estimates could result in material changes in the value of the recorded liability. In addition, future changes in laws or regulations could require us to record additional asset retirement obligations. The $104.0 million estimated cost represents only our proportionate share of the obligations associated with these facilities. An additional $43.6 million of estimated costs are attributable to third-party owners' proportionate share of the obligations. If an owner fails to perform on its obligations, the other owners (including SemGroup) could be obligated to bear that party's share of the remediation costs.

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

Purchase and sale commitments

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

 

 

     Volume
(barrels)
     Value ($)  

Fixed price sales

     70         6,938   

Floating price purchases

     18,292         1,544,786   

Floating price sales

     18,423         1,599,354   

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).

In addition, our SemGas segment enters into contracts under which we are responsible for marketing the majority of the gas and natural gas liquids produced by the counterparties to the agreements. During the nine months ended September 30, 2011, the majority of SemGas' revenues were generated from such contracts.

In addition to the commitments shown in the table above, our SemStream segment had entered into certain commitments as of September 30, 2011 to purchase and sell petroleum products at specified future dates. Our rights and obligations under these contracts were transferred to NGL Energy on November 1, 2011 upon our contribution of the primary operating assets of the SemStream segment to NGL Energy (as described in Note 12).

Owners' Equity
Owners' Equity

9. OWNERS' EQUITY

Unaudited condensed consolidated statement of changes in owners' equity

The following table shows the changes in our consolidated owners' equity accounts from December 31, 2010 to September 30, 2011 (in thousands):

 

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

Balance at December 31, 2010

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

Net income

     —           —          2,072        —          2,072   

Other comprehensive loss, net of income taxes

     —           —          —          (11,465     (11,465

Share-based compensation expense

     —           3,949        —          —          3,949   

Issuance of common stock under compensation plans

     1         (1     —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 416       $ 1,027,675      $ (168,117   $ (10,350   $ 849,624   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 30, 2011, other comprehensive loss consists primarily of currency translation adjustments.

Common stock

Upon emergence from bankruptcy, we issued 40,882,496 shares of common stock. The Plan of Reorganization specified that we were to issue an additional 517,500 shares of common stock in settlement of pre-petition claims. As of September 30, 2011, we have issued 182,121 shares of this stock, and we will issue the remainder as the process of resolving the claims progresses. The owners' equity balances on the consolidated balance sheets include the shares that are required to be issued in settlement of pre-petition claims. The shares of common stock reflected on the consolidated balance sheet at September 30, 2011 are summarized below:

 

Shares issued on Emergence Date

     40,882,496   

Shares subsequently issued in settlement of pre-petition claims

     182,121   

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

     335,379   

Issuance of shares under employee and director compensation programs

     244,162   

Shares issued upon exercise of warrants

     7   
  

 

 

 

Total shares

     41,644,165   

Par value per share

   $ 0.01   
  

 

 

 

Common stock on September 30, 2011 consolidated balance sheet

   $ 416,442   
  

 

 

 

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

On October 28, 2011, we adopted a limited duration Stockholders Rights Plan (the "Rights Plan") and declared a dividend of one right on each outstanding share of our Class A common stock. Under the Rights Plan, the rights generally will become exercisable only if a person or group acquires beneficial ownership of 10% or more of our Class A common stock in a transaction not approved by our Board of Directors. In that situation, each holder of a right (other than the acquiring person, whose rights will become void and will not be exercisable) will be entitled to purchase, at the then-current price, additional shares of Class A common stock having a value of twice the exercise price of the right. In addition, if we are acquired in a merger or other business combination after an unapproved party acquires more than 10% of our Class A common stock, each holder of the right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company's stock having a value of twice the exercise price of the right.

 

We may redeem the rights for $0.001 per right at any time before an event that causes the rights to become exercisable. Under the Rights Plan's terms, the rights will expire one day after the date of our 2012 Annual Meeting of Stockholders.

Equity-based compensation

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

Warrants

Upon emergence from bankruptcy, we issued 1,634,210 warrants. The Plan of Reorganization specified that we were to issue an additional 544,737 warrants in settlement of pre-petition claims. As of September 30, 2011, we have issued 191,703 of these warrants, and we will issue the remainder as the process of resolving the claims progresses. The warrants reflected on our consolidated balance sheet at September 30, 2011 are summarized below:

 

Warrants issued on Emergence Date

     1,634,210   

Warrants issued in settlement of pre-petition claims

     191,703   

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

     353,034   

Warrants exercised

     (7
  

 

 

 

Total warrants

     2,178,940   

Fair value per warrant at September 30, 2011

   $ 4.10   
  

 

 

 

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

   $  8,933,654   
  

 

 

 

Each warrant entitles the holder to purchase one share of common stock for $25 at any time before the November 30, 2014 expiration date. The closing price of our common stock was $19.96 per share on September 30, 2011. In the event of a change in control of the Company, the holders of the warrants would have the right to sell the warrants to us, and we would have the right to purchase the warrants from the holders. In either case, the price to be paid for the warrants would be calculated using a standard pricing model with inputs specified in the warrants agreement.

Earnings Per Share
Earnings Per Share

10. EARNINGS PER SHARE

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

 

     Three Months Ended September 30, 2011      Three Months Ended September 30, 2010  
     Continuing      Discontinued            Continuing     Discontinued         
     Operations      Operations     Net      Operations     Operations      Net  

Income (loss)

   $ 14,371       $ (32 )     $ 14,339       $ (15,672   $ 348       $ (15,324

less: Income attributable to noncontrolling interests

     —           —          —           108        —           108   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Numerator

   $ 14,371       $ (32   $ 14,339       $ (15,780   $ 348       $ (15,432

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

     242         242        242         —          —           —     

Denominator

     41,642         41,642        41,642         41,400        41,400         41,400   

Basic earnings (loss) per share

   $ 0.35       $ (0.00 )     $ 0.34       $ (0.38   $ 0.01       $ (0.37

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

 

     Nine Months Ended September 30, 2011      Nine Months Ended September 30, 2010  
     Continuing      Discontinued            Continuing     Discontinued         
     Operations      Operations     Net      Operations     Operations      Net  

Income (loss)

   $ 2,075       $ (3   $ 2,072       $ (128,869   $ 1,724       $ (127,145

less: Income attributable to noncontrolling interests

     —           —          —           225        —           225   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Numerator

   $ 2,075       $ (3   $ 2,072       $ (129,094   $ 1,724       $ (127,370

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

     221         221        221         —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Denominator

     41,621         41,621        41,621         41,400        41,400         41,400   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings (loss) per share

   $ 0.05       $ (0.00   $ 0.05       $ (3.12   $ 0.04       $ (3.08
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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

 

     Three Months Ended September 30, 2011      Three Months Ended September 30, 2010  
     Continuing      Discontinued            Continuing     Discontinued         
     Operations      Operations     Net      Operations     Operations      Net  

Income (loss)

   $ 14,371       $ (32 )     $ 14,339       $ (15,672   $ 348       $ (15,324

less: Income attributable to noncontrolling interests

     —           —          —           108        —           108   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Numerator

   $ 14,371       $ (32 )     $ 14,339       $ (15,780   $ 348       $ (15,432

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

     242         242        242         —          —           —     

Dilutive effect of stock-based compensation

     316         316        316         —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Denominator

     41,958         41,958        41,958         41,400        41,400         41,400   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings (loss) per share

   $ 0.34       $ (0.00 )     $ 0.34       $ (0.38   $ 0.01       $ (0.37
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     Nine Months Ended September 30, 2011     Nine Months Ended September 30, 2010  
     Continuing     Discontinued           Continuing     Discontinued         
     Operations     Operations     Net     Operations     Operations      Net  

Income (loss)

   $ 2,075      $ (3   $ 2,072      $ (128,869   $ 1,724       $ (127,145

less: Income attributable to noncontrolling interests

     —          —          —          225        —           225   

less: Income resulting from change in fair value of warrants

     8,258        —          8,258        —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Numerator

   $ (6,183   $ (3   $ (6,186   $ (129,094   $ 1,724       $ (127,370

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

     221        221        221        —          —           —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Denominator

     41,621        41,621        41,621        41,400        41,400         41,400   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Diluted earnings (loss) per share

   $ (0.15   $ (0.00   $ (0.15   $ (3.12   $ 0.04       $ (3.08
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Since we experienced losses from continuing operations during the three and nine months ended September 30, 2010, the equity-based compensation (described in Note 9) did not cause any dilution. For the three months ended September 30, 2011 and for the three and nine months ended September 30, 2010, the average price of our common stock was at or below the exercise price of the warrants, and therefore the warrants did not cause any dilution for these periods.

Supplemental Cash Flow Information
Supplemental Cash Flow Information

11. SUPPLEMENTAL CASH FLOW INFORMATION

The following table summarizes the components of the changes in operating assets and liabilities shown on our condensed consolidated statements of cash flows (amounts in thousands):

 

     Nine Months
Ended
September  30,
2011
    Nine Months
Ended
September 30,
2010
 

Decrease in restricted cash

   $ 19,963      $ 175,990   

Decrease (increase) in accounts receivable

     (18,977     1,470   

Decrease (increase) in inventories

     (27,497     27,833   

Decrease in other current assets

     8,454        82,035   

Increase (decrease) in accounts payable and accrued liabilities

     8,159        (22,271

Decrease in payables to pre-petition creditors

     (35,652     (219,567

Increase (decrease) in other current and noncurrent assets and liabilities

     (9,176     17,003   
  

 

 

   

 

 

 

Total changes in operating assets and liabilities

   $ (54,726   $ 62,493   
  

 

 

   

 

 

 
Contribution Of Primary Operating Assets Of Semstream To NGL Energy
Contribution Of Primary Operating Assets Of Semstream To NGL Energy

12. CONTRIBUTION OF PRIMARY OPERATING ASSETS OF SEMSTREAM TO NGL ENERGY

On November 1, 2011, we contributed the primary operating assets of our SemStream segment to NGL Energy. The assets we contributed included the majority of SemStream's inventory, derivative assets, other current assets, property, plant, and equipment, goodwill, other intangible assets, and other noncurrent assets. As part of this transaction, NGL Energy assumed certain liabilities of the SemStream segment, including its derivative liabilities. We did not contribute any of the assets or liabilities of SemStream's Arizona residential business to NGL Energy.

In return for this contribution, we received $93 million of cash from NGL Energy, 8,932,031 common units representing limited partner interests in NGL Energy, and a 7.5% interest in the general partner of NGL Energy. Also as part of this transaction, we agreed to waive our distribution rights on certain of the common units for a specified period of time. We estimate that the fair value of the ownership interests in NGL Energy that we received in this transaction was approximately $184 million at November 1, 2011. The cash proceeds we received are subject to post-closing adjustments.