SEMGROUP CORP, 10-Q filed on 11/6/2015
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2015
Oct. 31, 2015
Common Class A [Member]
Oct. 31, 2015
Class B
Document Type
10-Q 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Sep. 30, 2015 
 
 
Document Fiscal Period Focus
Q3 
 
 
Document Fiscal Year Focus
2015 
 
 
Entity Registrant Name
SemGroup Corp 
 
 
Entity Central Index Key
0001489136 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
43,932,265 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2015
Dec. 31, 2014
Current assets:
 
 
Cash and cash equivalents
$ 145,993 
$ 40,598 
Restricted cash
6,980 
Accounts receivable (net of allowance of $2,275 and $3,260, respectively)
333,157 
351,334 
Receivable from affiliates
7,833 
16,819 
Inventories
63,857 
43,532 
Other current assets
20,401 
20,017 
Total current assets
571,241 
479,280 
Property, plant and equipment (net of accumulated depreciation of $300,630 and $245,629, respectively)
1,474,947 
1,256,825 
Equity method investments
547,448 
577,920 
Goodwill
57,592 
58,326 
Other intangible assets (net of accumulated amortization of $27,064 and $20,545, respectively)
164,840 
173,065 
Other noncurrent assets, net
61,500 
44,386 
Total assets
2,877,568 
2,589,802 
Current liabilities:
 
 
Accounts payable
263,625 
257,177 
Payable to affiliates
11,150 
13,460 
Accrued liabilities
90,584 
92,694 
Payables to pre-petition creditors
3,129 
Deferred revenue
11,403 
23,688 
Other current liabilities
1,371 
1,474 
Current portion of long-term debt
37 
40 
Total current liabilities
378,170 
391,662 
Long-term debt
1,044,468 
767,092 
Deferred income taxes
198,297 
161,956 
Other noncurrent liabilities
22,471 
49,655 
Commitments and contingencies (Note 9)
   
   
SemGroup owners’ equity:
 
 
Common stock, $0.01 par value (authorized - 100,000 shares; issued - 44,847 and 44,689 shares, respectively)
439 
436 
Additional paid-in capital
1,236,061 
1,245,877 
Treasury stock, at cost (930 and 862 shares, respectively)
(5,591)
(1,332)
Accumulated deficit
(38,696)
(68,332)
Accumulated other comprehensive loss
(50,891)
(27,141)
Total SemGroup Corporation owners’ equity
1,141,322 
1,149,508 
Noncontrolling interests in consolidated subsidiaries
92,840 
69,929 
Total owners’ equity
1,234,162 
1,219,437 
Total liabilities and owners’ equity
$ 2,877,568 
$ 2,589,802 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Sep. 30, 2015
Dec. 31, 2014
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 2,275 
$ 3,260 
Accumulated depreciation
300,630 
245,629 
Accumulated amortization
$ 27,064 
$ 20,545 
Common stock, $0.01 par value
$ 0.01 
$ 0.01 
Common stock shares authorized
100,000 
100,000 
Common stock shares issued
44,847 
44,689 
Treasury stock shares
930 
862 
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Revenues:
 
 
 
 
Product
$ 313,351 
$ 495,436 
$ 822,218 
$ 1,325,452 
Service
64,091 
65,219 
192,572 
167,176 
Other
19,623 
33,580 
57,811 
82,714 
Total revenues
397,065 
594,235 
1,072,601 
1,575,342 
Expenses:
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
274,639 
458,063 
710,869 
1,211,703 
Operating
53,267 
69,377 
167,157 
179,579 
General and administrative
23,045 
23,296 
78,272 
63,882 
Depreciation and amortization
26,022 
25,200 
74,430 
70,899 
Loss (gain) on disposal or impairment of long-lived assets, net
(951)
1,376 
1,479 
20,633 
Total expenses
376,022 
577,312 
1,032,207 
1,546,696 
Earnings from equity method investments
16,237 
14,223 
60,699 
48,372 
Gain on issuance of common units by equity method investee
136 
18,772 
6,033 
26,899 
Operating income
37,416 
49,918 
107,126 
103,917 
Other expenses (income), net:
 
 
 
 
Interest expense
19,170 
14,807 
50,583 
34,394 
Foreign currency transaction loss (gain)
(385)
128 
(1,199)
(388)
Other income, net
(956)
(21,303)
(15,659)
(3,388)
Total other expense (income), net
17,829 
(6,368)
33,725 
30,618 
Income from continuing operations before income taxes
19,587 
56,286 
73,401 
73,299 
Income tax expense
10,006 
24,090 
29,609 
33,944 
Income from continuing operations
9,581 
32,196 
43,792 
39,355 
Loss from discontinued operations, net of income taxes
(1)
(3)
(5)
Net income
9,580 
32,196 
43,789 
39,350 
Less: net income attributable to noncontrolling interests
4,707 
6,934 
14,153 
18,184 
Net income attributable to SemGroup
4,873 
25,262 
29,636 
21,166 
Other comprehensive loss, net of income taxes
(20,210)
(10,331)
(23,750)
(6,618)
Comprehensive income (loss)
(10,630)
21,865 
20,039 
32,732 
Less: comprehensive income attributable to noncontrolling interests
4,707 
6,934 
14,153 
18,184 
Comprehensive income (loss) attributable to SemGroup
$ (15,337)
$ 14,931 
$ 5,886 
$ 14,548 
Net income attributable to SemGroup per common share (Note 11):
 
 
 
 
Basic
$ 0.11 
$ 0.59 
$ 0.68 
$ 0.50 
Diluted
$ 0.11 
$ 0.59 
$ 0.67 
$ 0.49 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Cash flows from operating activities:
 
 
Net income
$ 43,789 
$ 39,350 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Net unrealized gain related to derivative instruments
(3,316)
(656)
Depreciation and amortization
74,430 
70,899 
Loss on disposal or impairment of long-lived assets, net
1,479 
20,633 
Earnings from equity method investments
(60,699)
(48,372)
Gain on issuance of common units by equity method investee
(6,033)
(26,899)
Gain on sale of common units of equity method investee
(14,517)
(26,748)
Distributions from equity investments
69,898 
61,757 
Amortization of debt issuance costs
3,707 
2,580 
Deferred tax expense
23,469 
25,193 
Non-cash equity compensation
7,760 
6,480 
Excess tax benefit from equity-based awards
(1,650)
Loss on fair value of warrants
23,499 
Provision for uncollectible accounts receivable, net of recoveries
(608)
153 
Currency gain
(1,199)
(388)
Inventory valuation adjustment
1,235 
Changes in operating assets and liabilities (Note 12)
(2,346)
(39,931)
Net cash provided by operating activities
137,049 
105,900 
Cash flows from investing activities:
 
 
Capital expenditures
(352,816)
(194,227)
Proceeds from sale of long-lived assets
2,537 
4,083 
Contributions to equity method investments
(34,059)
(70,730)
Payments to Acquire Businesses, Net of Cash Acquired
44,508 
Proceeds from sale of common units of equity method investee
56,318 
59,744 
Distributions in excess of equity in earnings of affiliates
19,564 
6,565 
Net cash used in investing activities
(308,456)
(239,073)
Cash flows from financing activities:
 
 
Debt issuance costs
(6,289)
(8,670)
Borrowings on credit facilities and issuance of senior unsecured notes, net of discount
802,208 
1,074,244 
Principal payments on credit facilities and other obligations
(525,037)
(896,261)
Rose Rock Midstream, L.P. equity issuance
89,119 
Distributions to noncontrolling interests
(29,780)
(20,571)
Proceeds from Warrant Exercises
86 
Repurchase of common stock for payment of statutory taxes due on equity-based compensation
(4,259)
(719)
Dividends paid
(49,836)
(31,149)
Proceeds from issuance of common stock under employee stock purchase plan
909 
340 
Excess tax benefit from equity-based awards
1,650 
Net cash provided by financing activities
277,035 
118,950 
Effect of exchange rate changes on cash and cash equivalents
(233)
1,921 
Change in cash and cash equivalents
105,395 
(12,302)
Cash and cash equivalents at beginning of period
40,598 
79,351 
Cash and cash equivalents at end of period
$ 145,993 
$ 67,049 
Overview
OVERVIEW
OVERVIEW
SemGroup Corporation is a Delaware corporation headquartered in Tulsa, Oklahoma. The terms "we," "our," "us," "SemGroup," "the Company" and similar language used in these notes to the unaudited condensed consolidated financial statements refer to SemGroup Corporation and its subsidiaries.
Basis of presentation
The accompanying condensed consolidated balance sheet at December 31, 2014, which is derived from audited financial statements, and the unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission ("SEC"). These financial statements include all normal and recurring adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of its operations and its cash flows.
Our condensed consolidated financial statements include the accounts of our controlled subsidiaries. All significant transactions between our consolidated subsidiaries have been eliminated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Although management believes these estimates are reasonable, actual results could differ materially from these estimates. The results of operations for the three months and nine months ended September 30, 2015, are not necessarily indicative of the results to be expected for the full year ending December 31, 2015.
Pursuant to the rules and regulations of the SEC, the accompanying condensed consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States. Certain reclassifications have been made to conform previously reported balances to the current presentation. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2014, which are included in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC.
Our significant accounting policies are consistent with those described in our Annual Report on Form 10-K for the year ended December 31, 2014.
Recent accounting pronouncements
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, "Inventory (Topic 330): Simplifying the Measurement of Inventory," which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value rather than the lower of cost or market. The standard will be effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new guidance shall be applied prospectively and early adoption is permitted. The Company will adopt this guidance in the first quarter of 2017. The impact is not expected to be material.
In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which is designed to simplify presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard will be effective for U.S. public companies for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The new guidance shall be applied on a retrospective basis for all periods presented. The Company will adopt this guidance in the first quarter of 2016. The impact is not expected to be material.
In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which adds requirements that limited partnerships must meet to qualify as voting interest entities and modifies the evaluation of whether limited partnerships are variable interest entities or voting interest entities. It also eliminates the presumption that a general partner should consolidate a limited partnership. This guidance is effective for public companies for fiscal years beginning after December 15, 2015. The Company will adopt this guidance in the first quarter of 2016. The impact is not expected to be material.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which supersedes nearly all existing revenue recognition guidance under accounting principles generally accepted in the United States ("U.S. GAAP"). The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard permits using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 by one year. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard. We will adopt this guidance in the first quarter of 2018.
In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The Company adopted this guidance in the first quarter of 2015. The impact was not material.
Rose Rock Midstream, L.P.
ROSE ROCK MIDSTREAM, L.P.
ROSE ROCK MIDSTREAM, L.P.
We control the operations of our consolidated subsidiary, Rose Rock Midstream, L.P. (NYSE: RRMS) ("Rose Rock"), through our ownership of the general partner interest. As of September 30, 2015, we own the 2% general partner interest and a 55.2% limited partner interest.
On January 1, 2015, certain operational targets were achieved by White Cliffs Pipeline, L.L.C. ("White Cliffs") and all 3,750,000 Class A units held by the Company were converted to common units on a one-for-one basis. The conversion did not impact the total number of Rose Rock's outstanding units representing limited partner interests.
On February 13, 2015, we contributed the Wattenberg Oil Trunkline ("WOT") and our 50% ownership interest in Glass Mountain Pipeline, LLC ("Glass Mountain") to Rose Rock for (i) cash of approximately $251.2 million, (ii) the issuance of 1.75 million common units, and (iii) an increase of the capital account of the general partner and a related issuance of general partner interest, to allow the general partner to maintain its 2% general partner interest.
As the transaction was between entities under common control, Rose Rock recorded the acquired assets and liabilities based on SemGroup's historical cost. The purchase price in excess of historical cost was treated as an equity transaction with SemGroup, which reduced the partners' capital accounts of Rose Rock's general and limited partners on a pro-rata basis.
Additionally, the acquisition of WOT created a change in reporting entity which required Rose Rock's historical results to be recast as if WOT had been part of Rose Rock in prior periods. The historical summarized financial information of Rose Rock has been recast to reflect this change. The impact to prior periods was not significant. Prior period earnings of WOT have been allocated to the general partner. The acquisition of the equity method investment in Glass Mountain did not create a change in reporting entity. As such, prior periods have not been recast to include the historical results of Glass Mountain. There was no impact to SemGroup as these entities are all reported within the Crude segment.
On February 17, 2015, certain targets specified in Rose Rock’s partnership agreement were achieved and all 8,389,709 subordinated units held by the Company were converted to common units. The conversion did not impact the total number of Rose Rock’s outstanding units representing limited partner interests.
Cash distributions
We receive distributions from Rose Rock on our common units, our 2% general partner interest and incentive distribution rights. Rose Rock intends to pay a minimum quarterly distribution of $0.3625 per unit, to the extent it has sufficient available cash, as defined in Rose Rock’s partnership agreement.  
The following table shows the cash distributions paid or declared during 2015 and 2014 (in thousands, except for per unit amounts):
 
Distribution
Per Unit
 
Distributions Paid/To Be Paid
Quarter Ended
SemGroup
Noncontrolling
Interest
Common Units
Total
Distributions
General
Partner
Incentive
Distributions
Common
Units
Subordinated
Units
December 31, 2013
$
0.4650

 
$
257

$
244

$
2,041

$
3,901

$
6,398

$
12,841

March 31, 2014
$
0.4950


$
278

$
488

$
2,173

$
4,153

$
6,811

$
13,903

June 30, 2014
$
0.5350

 
$
334

$
888

$
3,646

$
4,488

$
7,362

$
16,718

September 30, 2014
$
0.5750

 
$
377

$
1,835

$
3,918

$
4,824

$
7,912

$
18,866

December 31, 2014
$
0.6200

 
$
485

$
3,487

$
6,551

$
5,202

$
8,544

$
24,269

March 31, 2015
$
0.6350

 
$
568

$
4,450

$
13,148

$

$
10,213

$
28,379

June 30, 2015
$
0.6500

 
$
590

$
4,979

$
13,458

$

$
10,456

$
29,483

September 30, 2015
$
0.6600

*
$
604

$
5,333

$
13,665

$

$
10,619

$
30,221


*Expected distributions related to the quarter ended September 30, 2015, which will be paid on November 13, 2015 to unitholders of record as of November 3, 2015.

Summarized financial information
Certain summarized balance sheet information of Rose Rock is shown below (in thousands):
 
(Unaudited)
 
 
 
September 30,
2015
 
December 31,
2014
Cash
$
44,011

 
$
3,625

Other current assets
304,634

 
271,144

Property, plant and equipment, net
425,820

 
396,066

Equity method investment
430,168

 
269,635

Goodwill
36,116

 
36,116

Other noncurrent assets, net
32,746

 
29,677

Total assets
$
1,273,495

 
$
1,006,263

 
 
 
 
Current liabilities
$
270,452

 
$
265,682

Long-term debt
744,468

 
432,092

Partners’ capital attributable to SemGroup
165,735

 
238,560

Partners’ capital attributable to noncontrolling interests
92,840

 
69,929

Total liabilities and partners' capital
$
1,273,495

 
$
1,006,263


Certain summarized income statement information of Rose Rock for the three months and nine months ended September 30, 2015 and 2014 is shown below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
241,086

 
$
376,856

 
$
599,082

 
$
961,526

Cost of products sold
$
195,244

 
$
333,646

 
$
464,614

 
$
843,928

Operating, general and administrative expenses
$
23,420

 
$
26,574

 
$
79,976

 
$
69,165

Depreciation and amortization expense
$
10,634

 
$
8,395

 
$
31,385

 
$
27,153

Earnings from equity method investment
$
17,115

 
$
16,289

 
$
55,662

 
$
39,660

Net income
$
16,421

 
$
16,520

 
$
48,089

 
$
47,834

Noncontrolling interests in consolidated subsidiary retained by SemGroup
$

 
$

 
$

 
$
7,758

Net income attributable to Rose Rock Midstream, L.P.
$
16,421

 
$
16,520

 
$
48,089

 
$
40,076

Equity Method Investments
EQUITY METHOD INVESTMENTS
EQUITY METHOD INVESTMENTS

Our equity method investments consist of the following (in thousands):
 
September 30, 2015
 
December 31, 2014
White Cliffs
$
287,090

 
$
269,635

NGL Energy Partners LP
117,280

 
162,246

Glass Mountain
143,078

 
146,039

Total equity method investments
$
547,448

 
$
577,920


    
Our earnings from equity method investments consist of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
White Cliffs
$
16,047

 
$
16,289

 
$
50,682

 
$
39,660

NGL Energy Partners LP*
(878
)
 
(4,482
)
 
5,037

 
4,077

Glass Mountain
1,068

 
2,416

 
4,980

 
4,635

Total earnings from equity method investments
$
16,237

 
$
14,223

 
$
60,699

 
$
48,372


* Excluding gain on issuance of common units of $0.1 million and $18.8 million for the three months ended September 30, 2015 and 2014 and $6.0 million and $26.9 million for the nine months ended September 30, 2015 and 2014
Cash distributions received from equity method investments consist of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
White Cliffs
$
20,631

 
$
17,029

 
$
65,336

 
$
45,081

NGL Energy Partners LP
4,752

 
6,450

 
14,235

 
17,462

Glass Mountain
2,971

 
2,842

 
9,891

 
5,779

Total cash distributions received from equity method investments
$
28,354

 
$
26,321

 
$
89,462

 
$
68,322


White Cliffs
Certain unaudited summarized income statement information of White Cliffs for the three months and nine months ended September 30, 2015 and 2014 is shown below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
49,027

 
$
42,211

 
$
152,150

 
$
110,018

Operating, general and administrative expenses
$
8,446

 
$
4,055

 
$
25,844

 
$
16,362

Depreciation and amortization expense
$
8,746

 
$
5,807

 
$
25,871

 
$
14,737

Net income
$
31,835

 
$
32,349

 
$
100,428

 
$
78,919


The equity in earnings of White Cliffs for the three months and nine months ended September 30, 2015 and 2014 is less than 51% of the net income of White Cliffs for the same periods. This is due to certain general and administrative expenses we incur in managing the operations of White Cliffs that the other owners are not obligated to share. Such expenses are recorded by White Cliffs and are allocated to our ownership interest. White Cliffs recorded $0.4 million and $0.4 million of such general and administrative expense for the three months ended September 30, 2015 and 2014, respectively. White Cliffs recorded $1.1 million and $1.2 million of such general and administrative expense for the nine months ended September 30, 2015 and 2014, respectively.
The members of White Cliffs are required to contribute capital to White Cliffs to fund various projects. For the nine months ended September 30, 2015, we contributed $31.0 million to these projects, including $22.7 million of contributions for an expansion project adding approximately 65,000 barrels per day of capacity. Remaining contributions related to the expansion project will be paid in 2015 and 2016 and are expected to total $14.0 million. The project is expected to be completed during the first half of 2016.
NGL Energy Partners LP
At September 30, 2015, we owned 4,652,568 common units representing limited partner interests in NGL Energy Partners LP (NYSE: NGL) ("NGL Energy"), which represents approximately 4.5% of the total 104,181,253 limited partner units of NGL Energy outstanding at June 30, 2015, and an 11.78% interest in the general partner of NGL Energy.
At September 30, 2015, the fair market value of our 4,652,568 common unit investment in NGL Energy was $92.9 million, based on a September 30, 2015 closing price of $19.97 per common unit. This does not reflect our 11.78% interest in the general partner of NGL Energy. The fair value of our limited partner investment in NGL Energy is categorized as a Level 1 measurement, as it is based on quoted market prices.
Our policy is to record our equity in earnings of NGL Energy on a one-quarter lag, as we do not expect information on the earnings of NGL Energy to always be available in time to consistently record the earnings in the quarter in which they are generated. Accordingly, the equity in earnings from NGL Energy, which is reflected in our condensed consolidated statements of operations and comprehensive income (loss) for the three months and nine months ended September 30, 2015 and 2014, relates to the earnings of NGL Energy for the three months and nine months ended June 30, 2015 and 2014, respectively.
During the three and nine months ended June 30, 2015, NGL issued common units which diluted our limited partnership interest. As we record activity on a one-quarter lag, we recognized non-cash gains of $0.1 million and $6.0 million, respectively, associated with these issuances for the three and nine months ended September 30, 2015.
During the nine months ended September 30, 2015, we sold 1,999,533 of our NGL Energy common units for $56.3 million, net of related costs of $0.5 million. We recorded net gains related to these sales of $14.5 million in "other expense (income)" in our condensed consolidated statement of operations and comprehensive income (loss) for the nine months ended September 30, 2015.
Certain unaudited summarized income statement information of NGL Energy for the three months and nine months ended June 30, 2015 and 2014 is shown below (in thousands):
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
3,538,469

 
$
3,648,614

 
$
11,311,386

 
$
10,367,994

Cost of sales
$
3,322,551

 
$
3,534,053

 
$
10,567,240

 
$
9,874,826

Operating, general and administrative expenses
$
170,816

 
$
95,741

 
$
494,673

 
$
297,417

Depreciation and amortization expense
$
59,831

 
$
39,375

 
$
164,306

 
$
112,344

Net income (loss)
$
(38,526
)
 
$
(39,910
)
 
$
47,147

 
$
27,288

 
Glass Mountain
Certain unaudited summarized income statement information of Glass Mountain for the three months and nine months ended September 30, 2015 and 2014 is shown below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
8,348

 
$
8,708

 
$
29,257

 
$
21,452

Cost of sales
$
253

 
$

 
$
2,235

 
$

Operating, general and administrative expenses
$
1,950

 
$
23

 
$
4,861

 
$
2,031

Depreciation and amortization expense
$
3,903

 
$
3,745

 
$
11,879

 
$
9,863

Net income
$
2,242

 
$
4,939

 
$
10,278

 
$
9,554


The equity in earnings of Glass Mountain for the three months and nine months ended September 30, 2015 reported in our condensed consolidated statement of operations and comprehensive income (loss) is less than 50% of the net income of Glass Mountain for the same period due to amortization of capitalized interest for the period.
For the nine months ended September 30, 2015, we contributed $2.0 million to Glass Mountain related to capital projects.
Segments
SEGMENTS
SEGMENTS
Our businesses are organized based on the nature and location of the services they provide. Certain summarized information related to our reportable segments is shown in the tables below. None of the operating segments have been aggregated. Our investment in NGL Energy is included within the SemStream segment. Although "Corporate and Other" does not represent an operating segment, it is included in the tables below to reconcile segment information to that of the consolidated Company. Eliminations of transactions between segments are also included within "Corporate and Other" in the tables below.
The accounting policies of each segment are the same as the accounting policies of the consolidated Company. Transactions between segments are generally recorded based on prices negotiated between the segments. Certain general and administrative and interest expenses incurred at the corporate level are allocated to the segments, based on our allocation policies in effect at the time.

 
Three Months Ended September 30, 2015
 
Crude

SemStream

SemCAMS

SemGas

SemLogistics

SemMexico

Corporate
and Other

Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
241,086

 
$

 
$
33,152

 
$
60,908

 
$
5,659

 
$
56,260

 
$

 
$
397,065

Intersegment

 

 

 
4,162

 

 

 
(4,162
)
 

Total revenues
241,086

 

 
33,152

 
65,070

 
5,659

 
56,260

 
(4,162
)
 
397,065

Expenses:
 
 

 

 

 

 

 

 
 
Costs of products sold, exclusive of depreciation and amortization shown below
195,244

 

 
27

 
36,915

 

 
46,615

 
(4,162
)
 
274,639

Operating
19,329

 

 
21,062

 
8,475

 
1,955

 
2,447

 
(1
)
 
53,267

General and administrative
7,733

 
7

 
3,600

 
2,376

 
1,757

 
2,823

 
4,749

 
23,045

Depreciation and amortization
10,634

 

 
3,198

 
8,601

 
2,173

 
993

 
423

 
26,022

Loss (gain) on disposal or impairment of long-lived assets, net
(603
)
 

 
(917
)
 
445

 

 
124

 

 
(951
)
Total expenses
232,337

 
7


26,970


56,812


5,885


53,002


1,009


376,022

Earnings (loss) from equity method investments
17,115

 
(878
)
 

 

 

 

 

 
16,237

Gain on issuance of common units by equity method investee

 
136

 

 

 

 

 

 
136

Operating income (loss)
25,864

 
(749
)

6,182


8,258


(226
)

3,258


(5,171
)

37,416

Other expenses (income), net
16,030

 
(1,352
)
 
1,702

 
3,504

 
1,021

 
143

 
(3,219
)
 
17,829

Income (loss) from continuing operations before income taxes
$
9,834

 
$
603

 
$
4,480

 
$
4,754

 
$
(1,247
)
 
$
3,115

 
$
(1,952
)

$
19,587

Total assets at September 30, 2015 (excluding intersegment receivables)
$
1,377,143

 
$
117,280

 
$
586,944

 
$
722,615

 
$
157,087

 
$
98,029

 
$
(181,530
)
 
$
2,877,568



 
Three Months Ended September 30, 2014
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
376,856

 
$

 
$
53,800

 
$
87,103

 
$
1,299

 
$
75,177

 
$

 
$
594,235

Intersegment

 

 

 
9,726

 

 

 
(9,726
)
 

Total revenues
376,856

 


53,800


96,829


1,299


75,177


(9,726
)
 
594,235

Expenses:
 
 
 
 

 

 

 

 

 

Costs of products sold, exclusive of depreciation and amortization shown below
333,646

 

 
97

 
68,722

 

 
65,324

 
(9,726
)
 
458,063

Operating
22,057

 

 
33,537

 
8,965

 
2,148

 
2,670

 

 
69,377

General and administrative
4,696

 
30

 
3,836

 
2,312

 
1,595

 
2,928

 
7,899

 
23,296

Depreciation and amortization
8,395

 

 
5,113

 
7,064

 
2,543

 
1,655

 
430

 
25,200

Loss (gain) on disposal of long-lived assets, net
291

 

 
(35
)
 
(12
)
 
1,139

 
(7
)
 

 
1,376

Total expenses
369,085

 
30


42,548


87,051


7,425


72,570


(1,397
)
 
577,312

Earnings (loss) from equity method investments
18,705

 
(4,482
)
 

 

 

 

 

 
14,223

Gain on issuance of common units by equity method investee

 
18,772

 

 

 

 

 

 
18,772

Operating income (loss)
26,476


14,260


11,252


9,778


(6,126
)

2,607


(8,329
)

49,918

Other expenses (income), net
10,526

 
(28,041
)
 
3,920

 
2,330

 
969

 
31

 
3,897

 
(6,368
)
Income (loss) from continuing operations before income taxes
$
15,950

 
$
42,301


$
7,332


$
7,448


$
(7,095
)

$
2,576


$
(12,226
)

$
56,286

 
Nine Months Ended September 30, 2015
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
606,057

 
$

 
$
98,791

 
$
181,454

 
$
17,090

 
$
169,209

 
$

 
$
1,072,601

Intersegment

 

 

 
16,594

 

 

 
(16,594
)
 

Total revenues
606,057

 

 
98,791

 
198,048

 
17,090

 
169,209

 
(16,594
)
 
1,072,601

Expenses:
 
 

 

 

 
 
 

 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
473,522

 

 
235

 
114,344

 

 
139,362

 
(16,594
)
 
710,869

Operating
64,446

 

 
63,058

 
25,320

 
6,610

 
7,724

 
(1
)
 
167,157

General and administrative
19,687

 
22

 
11,169

 
7,080

 
5,680

 
7,588

 
27,046

 
78,272

Depreciation and amortization
31,385

 

 
9,451

 
23,098

 
6,367

 
3,083

 
1,046

 
74,430

Loss (gain) on disposal of long-lived assets, net
(530
)
 

 
(917
)
 
1,894

 

 
105

 
927

 
1,479

Total expenses
588,510

 
22

 
82,996

 
171,736

 
18,657

 
157,862

 
12,424

 
1,032,207

Earnings from equity method investments
55,662

 
5,037

 

 

 

 

 

 
60,699

Gain on issuance of common units by equity method investee

 
6,033

 

 

 

 

 

 
6,033

Operating income (loss)
73,209

 
11,048


15,795


26,312


(1,567
)

11,347


(29,018
)
 
107,126

Other expenses (income), net
39,759

 
(18,527
)
 
8,034

 
9,624

 
1,705

 
268

 
(7,138
)
 
33,725

Income (loss) from continuing operations before income taxes
$
33,450

 
$
29,575

 
$
7,761

 
$
16,688

 
$
(3,272
)
 
$
11,079

 
$
(21,880
)
 
$
73,401

 
Nine Months Ended September 30, 2014
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
961,526

 
$

 
$
133,037

 
$
260,951

 
$
10,070

 
$
209,758

 
$

 
$
1,575,342

Intersegment

 

 

 
29,410

 

 

 
(29,410
)
 

Total revenues
961,526

 

 
133,037

 
290,361

 
10,070

 
209,758

 
(29,410
)
 
1,575,342

Expenses:
 
 

 

 

 
 
 

 

 
 
Costs of products sold, exclusive of depreciation and amortization shown below
843,928

 

 
235

 
215,535

 
615

 
180,800

 
(29,410
)
 
1,211,703

Operating
54,885

 

 
86,039

 
24,421

 
6,168

 
8,066

 

 
179,579

General and administrative
15,076

 
91

 
11,390

 
6,524

 
4,546

 
8,791

 
17,464

 
63,882

Depreciation and amortization
27,153

 

 
11,021

 
19,312

 
7,593

 
4,538

 
1,282

 
70,899

Loss (gain) on disposal of long-lived assets, net
230

 

 
(950
)
 
20,092

 
(2,495
)
 
(35
)
 
3,791

 
20,633

Total expenses
941,272

 
91

 
107,735

 
285,884

 
16,427

 
202,160

 
(6,873
)
 
1,546,696

Earnings from equity method investments
44,295

 
4,077

 

 

 

 

 

 
48,372

Gain on issuance of common units by equity method investee

 
26,899

 

 

 

 

 

 
26,899

Operating income (loss)
64,549


30,885


25,302


4,477


(6,357
)

7,598


(22,537
)

103,917

Other expenses (income), net
20,367

 
(30,582
)
 
11,825

 
6,032

 
1,303

 
(70
)
 
21,743

 
30,618

Income (loss) from continuing operations before income taxes
$
44,182

 
$
61,467

 
$
13,477

 
$
(1,555
)
 
$
(7,660
)
 
$
7,668

 
$
(44,280
)
 
$
73,299

Inventories
Inventories
INVENTORIES
Inventories consist of the following (in thousands):
 
September 30,
2015
 
December 31,
2014
Crude oil
$
49,048

 
$
26,722

Asphalt and other
14,809

 
16,810

Total inventories
$
63,857

 
$
43,532



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

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

 
 
 
 
 

Assets
$
5,355

 
$
(364
)
 
$
4,991

 
$
3,311

 
$
(1,637
)
 
$
1,674

Liabilities
$
364

 
$
(364
)
 
$

 
$
1,637

 
$
(1,637
)
 
$

*Relates primarily to exchange traded futures. Gain and loss positions on multiple contracts are settled net on a daily basis with the exchange.
"Level 1" measurements are based on inputs consisting of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. These include commodity futures contracts that are traded on an exchange.
"Level 2" measurements are based on inputs consisting of market observable and corroborated prices for similar derivative contracts. Assets and liabilities classified as Level 2 include over the counter ("OTC") traded physical fixed priced purchases and sales forward contracts.
"Level 3" measurements are based on inputs from a pricing service and/or internal valuation models incorporating observable and unobservable market data. These include commodity derivatives, such as forwards and swaps for which there is not a highly liquid market and therefore are not included in Level 2 above.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value levels. At September 30, 2015, all of our physical fixed price forward purchases and sales contracts were being accounted for as normal purchases and normal sales.
There were no financial assets or liabilities recorded at fair value which were classified as Level 2 or Level 3 during the three months and nine months ended September 30, 2015 and 2014. As such, no rollforward of Level 3 activity has been presented.
Commodity derivative contracts
Our consolidated results of operations and cash flows are impacted by changes in market prices for petroleum products. This exposure to commodity price risk is managed, in part, by entering into various commodity derivatives.
We seek to manage the price risk associated with our marketing operations by limiting our net open positions through (i) the concurrent purchase and sale of like quantities of petroleum products to create back-to-back transactions that are intended to lock in positive margins based on the timing, location or quality of the petroleum products purchased and delivered or (ii) derivative contracts. Our storage and transportation assets can also be used to mitigate location and time basis risk. All marketing activities are subject to our Comprehensive Risk Management Policy, which establishes limits in order to manage risk and mitigate financial exposure.
Our commodity derivatives can be comprised of swaps, futures contracts and forward contracts of crude oil, natural gas and natural gas liquids. These are defined as follows:
Swaps – OTC transactions where a floating price, basis or index is exchanged for a fixed (or a different floating) price, basis or index at a preset schedule in the future, according to an agreed-upon formula.
Futures contracts – Exchange traded contracts to buy or sell a commodity. These contracts are standardized by the exchange in terms of quality, quantity, delivery period and location for each commodity.
Forward contracts – OTC contracts to buy or sell a commodity at an agreed upon future date. The buyer and seller agree on specific terms (price, quantity, delivery period and location) and conditions at the inception of the contract.
The following table sets forth the notional quantities for commodity derivative instruments entered into (in thousands of barrels):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Sales
5,735

 
1,525

 
19,187

 
3,475

Purchases
5,775

 
1,313

 
19,188

 
3,128


We have not designated any of our commodity derivative instruments as accounting hedges. We have recorded the fair value of our commodity derivative instruments on our condensed consolidated balance sheets in other current assets and other current liabilities in the following amounts (in thousands):
 
September 30, 2015
 
December 31, 2014
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
$
4,991

 
$

 
$
1,674

 
$


We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. Our margin accounts were in a net liability position as of September 30, 2015 of $2.3 million. At December 31, 2014, our margin deposit balance was $0.8 million. These margin account balances have not been offset against our net commodity derivative instrument (contract) positions. Had these margin deposits been netted against our net commodity derivative instrument (contract) positions as of September 30, 2015 and December 31, 2014, we would have had net asset positions of $2.6 million and $2.5 million, respectively.
Realized and unrealized gains (losses) from our commodity derivatives were recorded to product revenue in the following amounts (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Commodity contracts
$
6,036

 
$
4,047

 
$
3,768

 
$
1,298


Concentrations of risk
During the three months ended September 30, 2015, two customers of our Crude segment accounted for more than 10% of our consolidated revenues at approximately 43%. We purchased approximately $40.3 million of product from one third-party supplier of our Crude segment, which represented approximately 15% of our costs of products sold.
During the nine months ended September 30, 2015, two customers of our Crude segment accounted for more than 10% of our consolidated revenues at approximately 38%. We purchased approximately $93.2 million of product from one third-party supplier of our Crude segment, which represented approximately 13% of our costs of products sold.
At September 30, 2015, one third-party customer of our Crude segment accounted for approximately 37% of our consolidated accounts receivable.
Income Taxes
INCOME TAXES
INCOME TAXES

The effective tax rate was 51% and 43% for the three months ended September 30, 2015 and 2014, respectively, and 40% and 46% for the nine months ended September 30, 2015 and 2014, respectively. The rate for the nine months ended September 30, 2014 is impacted by disallowance of a foreign loss on cross jurisdictional intercompany debt waivers which had no net impact to U.S. taxes, by the net favorable resolution of Canadian income tax audits for periods through December 2009 and $3.1 million Canadian withholding tax paid on remittances to the U.S. Significant items that impacted the effective tax rate for each period, as compared to the U.S. federal statutory rate of 35%, include earnings in foreign jurisdictions taxed at lower rates and a non-controlling interest in Rose Rock for which taxes are not provided. Further, the foreign earnings are taxed in foreign jurisdictions as well as in the U.S., since they are disregarded entities for U.S. federal income tax purposes.

We have a valuation allowance on a small portion of our state net operating loss carryovers with shorter carryover periods and our foreign tax credit carryover. We have not released the valuation allowance on the foreign tax credits due to the foreign tax credit limitation and the relative subjectivity of forecasts of the relational magnitude of U.S. and foreign taxable income in future periods, as well as the shorter carryover period available for the credits. Deferred tax assets are reduced by a valuation allowance when a determination is made that it is more likely than not that some, or all, of the deferred tax assets will not be realized based on the weight of all available evidence. Evidence which is objectively verifiable carries a higher weight in the analysis. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income of the appropriate character within the carryback and carryforward period available under the tax law. Sources of taxable income include future reversals of existing taxable temporary differences, future earnings and available tax planning strategies.

We have determined that no accruals related to uncertainty in tax positions are required. All income tax years of the Company ending after the emergence from bankruptcy remain open for examination in all jurisdictions. In foreign jurisdictions, all tax years within the relevant statute of limitations for periods prior to the emergence from bankruptcy remain open for examination. Currently, there are no examinations in progress for our federal or state jurisdictions. No foreign jurisdictions are currently under audit.
Long-Term Debt
Long-Term Debt
LONG-TERM DEBT
Our long-term debt consisted of the following (in thousands):
 
September 30,
2015
 
December 31,
2014
SemGroup 7.50% senior unsecured notes due 2021
$
300,000

 
$
300,000

SemGroup corporate revolving credit facility

 
35,000

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

 
400,000

Rose Rock 5.625% senior unsecured notes due 2023
344,410

 

Rose Rock revolving credit facility

 
32,000

SemMexico revolving credit facility

 

Capital leases
95

 
132

Total long-term debt
$
1,044,505

 
$
767,132

Less: current portion of long-term debt
37

 
40

Noncurrent portion of long-term debt
$
1,044,468

 
$
767,092


SemGroup senior unsecured notes due 2021
For the three months ended September 30, 2015 and 2014, we incurred $5.8 million and $5.8 million, respectively, of interest expense related to $300 million of 7.50% senior unsecured notes due 2021 (the "SemGroup Notes") including the amortization of debt issuance costs. For the nine months ended September 30, 2015 and 2014, we incurred $17.5 million and $17.5 million, respectively, of interest expense related to the SemGroup Notes including amortization of debt issuance costs.
SemGroup corporate revolving credit facility
At September 30, 2015, we had no outstanding cash borrowings on our $500 million revolving credit facility.
At September 30, 2015, we had outstanding letters of credit under the facility of $4.5 million, for which the rate in effect was 2.0%.
We incurred interest expense related to the SemGroup revolving credit facility of $0.8 million and $1.2 million for the three months ended September 30, 2015 and 2014, respectively, including amortization of debt issuance costs. We incurred interest expense related to the SemGroup revolving credit facility of $2.8 million and $4.9 million for the nine months ended September 30, 2015 and 2014, respectively, including amortization of debt issuance costs.
Rose Rock senior unsecured notes due 2022
At September 30, 2015, Rose Rock had outstanding $400 million of 5.625% senior unsecured notes due 2022 (the "Rose Rock 2022 Notes"). For the three months ended September 30, 2015 and 2014, we incurred $5.9 million and $5.8 million, respectively, of interest expense related to the Rose Rock 2022 Notes including amortization of debt issuance costs. For the nine months ended September 30, 2015 and 2014, we incurred $17.6 million and $5.8 million, respectively, of interest expense related to the Rose Rock 2022 Notes including amortization of debt issuance costs.
Rose Rock senior unsecured notes due 2023
On May 14, 2015, Rose Rock and its wholly-owned subsidiary, Rose Rock Finance Corporation ("Finance Corp."), as co-issuer, sold $350 million of 5.625% senior unsecured notes due 2023 (the “Rose Rock 2023 Notes”) to certain initial purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons outside the United States pursuant to Regulation S of the Securities Act. The Rose Rock 2023 Notes are guaranteed by all of Rose Rock's existing subsidiaries other than Finance Corp. Such guarantees of the Rose Rock 2023 Notes are full and unconditional and constitute the joint and several obligations of the subsidiary guarantors.
The Rose Rock 2023 notes were sold at 98.345% of par, a discount of $5.8 million. The discount is reported as a reduction to the face value of the Rose Rock 2023 Notes on our condensed consolidated balance sheets and is being amortized over the life of the Rose Rock 2023 Notes using the interest method. At September 30, 2015, the unamortized discount was $5.6 million.
The net proceeds from the offering of $337.7 million, after the discount and $6.5 million of underwriters' fees and offering expenses, were used to repay amounts borrowed under Rose Rock's revolving credit facility and for general partnership purposes.
The Rose Rock 2023 Notes are governed by an indenture among Rose Rock, its subsidiary guarantors, Finance Corp. and Wilmington Trust, National Association, as trustee (the “Indenture”). The Indenture includes customary covenants, including limitations on Rose Rock's ability to incur additional indebtedness or issue certain preferred shares; pay dividends and make certain distributions, investments and other restricted payments; create certain liens; sell assets; enter into transactions with affiliates; merge, consolidate, sell or otherwise dispose of all or substantially all of its assets; and designate its subsidiaries as unrestricted subsidiaries under the Indenture.
The Indenture includes customary events of default. A default would permit the trustee or holders of at least 25% in aggregate principal amount of the Rose Rock 2023 Notes then outstanding to declare all amounts owing under the Rose Rock 2023 Notes to be due and payable.
The Rose Rock 2023 Notes are effectively subordinated in right of payment to any of Rose Rock's, and the subsidiary guarantors', existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness.
Rose Rock may issue additional notes under the Indenture from time to time, subject to the terms of the Indenture.
Except as described below, the Rose Rock 2023 Notes are not redeemable at Rose Rock's option prior to May 15, 2019. From and after May 15, 2019, Rose Rock may redeem the Rose Rock 2023 Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if redeemed during the twelve-month period beginning on May 15 of each of the years indicated below:
Year
 
Percentage
2019
 
102.813%
2020
 
101.406%
2021 and thereafter
 
100.000%

Prior to May 15, 2018, Rose Rock may, at its option, on one or more occasions, redeem up to 35% of the sum of the original aggregate principal amount of the Rose Rock 2023 Notes at a redemption price equal to 105.625% of the aggregate principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings of Rose Rock, or the parent of Rose Rock to the extent such net proceeds are contributed to Rose Rock, subject to certain conditions.
Prior to May 15, 2019, Rose Rock may also redeem all or part of the Rose Rock 2023 Notes at a price equal to the principal plus a premium equal to the greater of 1% of the principal or the excess of the present value of the May 15, 2019 redemption price from the table above plus all required interest payments due through May 15, 2019, computed using a discount rate based on a published United States Treasury Rate plus 50 basis points, over the principal value of such Rose Rock 2023 Note.
In the event of a change of control, Rose Rock is required to offer to repurchase the Rose Rock 2023 Notes at an amount equal to 101% of the principal plus accrued and unpaid interest.
The Rose Rock 2023 Notes are also subject to a Registration Rights Agreement which requires Rose Rock to file a registration statement with the SEC and to use commercially reasonable efforts to consummate such exchange offer within one year of the settlement date of the Rose Rock 2023 Notes so that holders of the Rose Rock 2023 Notes can exchange the Rose Rock 2023 Notes and related guarantees for registered notes (the "Exchange Notes") and guarantees that have substantially identical terms as the Rose Rock 2023 Notes and related guarantees. The guarantees of the Exchange Notes will be full and unconditional and will constitute the joint and several obligations of the subsidiary guarantors. Failure to meet the terms of the Registration Rights Agreement will require Rose Rock to pay incremental interest of 0.25% per annum, increased by an additional 0.25% per annum for each 90-day period for which registration default continues (up to a maximum of 1.0% per annum).
Interest on the Rose Rock Notes is payable in arrears on May 15th and November 15th to holders of record on May 1st and November 1st each year until maturity.
For the three months and nine months ended September 30, 2015, we incurred $5.2 million and $7.9 million, respectively, of interest expense related to the Rose Rock 2023 Notes including amortization of debt issuance costs.
Rose Rock revolving credit facility
At September 30, 2015, Rose Rock had no outstanding cash borrowings under the $585 million Rose Rock revolving credit facility.
At September 30, 2015, Rose Rock had $38.9 million in outstanding letters of credit, and the rate in effect was 2.50%.
Rose Rock had $25.9 million of Secured Bilateral Letters of Credit outstanding at September 30, 2015. The interest rate in effect was 1.75%. secured bilateral letters of credit are external to the facility and do not reduce availability for borrowing on the revolving credit facility.
We incurred $1.4 million and $2.0 million of interest expense related to this facility during the three months ended September 30, 2015 and 2014, respectively, including letters of credit and amortization of debt issuance costs. We incurred $5.6 million and $6.9 million of interest expense related to this facility during the nine months ended September 30, 2015 and 2014, respectively, including letters of credit and amortization of debt issuance costs.
SemMexico revolving credit facility
SemMexico had a $44 million Mexican pesos (U.S. $2.6 million at the September 30, 2015 exchange rate) revolving credit facility, which matured in May 2015. At the time of the maturity, there were no outstanding borrowings.
SemMexico had a $56 million Mexican pesos (U.S. $3.3 million at the September 30, 2015 exchange rate) revolving credit facility, which matured in July 2015. At the time of the maturity, there were no outstanding borrowings.
On May 22, 2015, SemMexico entered into a $100 million Mexican pesos (U.S. $5.8 million at the September 30, 2015 exchange rate) revolving credit facility, which matures in May 2018. There were no outstanding borrowings on the facility at September 30, 2015. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.50%.
At September 30, 2015, SemMexico had an outstanding letter of credit of $292.8 million Mexican pesos (U.S. $17.1 million at the September 30, 2015 exchange rate). The interest rate in effect was 0.25%.
Capitalized interest
During the nine months ended September 30, 2015 and 2014, we capitalized interest of $1.0 million and $1.0 million, respectively.
Fair value
We estimate the fair value of the SemGroup Notes, the Rose Rock 2022 Notes and the Rose Rock 2023 Notes to be $298 million, $352 million and $310 million, respectively, at September 30, 2015, based on unadjusted, transacted market prices, which are categorized as Level 1 measurements.
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
Bankruptcy matters
On July 22, 2008 (the "Petition Date"), SemGroup, L.P. and certain subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Also on July 22, 2008, SemGroup, L.P.'s Canadian subsidiaries filed for creditor protection in Canada. Later during 2008, certain other U.S. subsidiaries filed petitions for reorganization. While in bankruptcy, SemGroup, L.P. filed a plan of reorganization with the court, which was confirmed on October 28, 2009 (the "Plan of Reorganization"). The Plan of Reorganization determined, among other things, how pre-Petition Date obligations would be settled, the equity structure of the reorganized company upon emergence and the financing arrangements upon emergence. SemGroup Corporation emerged from bankruptcy protection on November 30, 2009 (the "Emergence Date").
Claims reconciliation process
A large number of parties made claims against us for obligations alleged to have been incurred prior to our predecessor's bankruptcy filing. We have resolved or settled all of these outstanding claims and have made all required distributions. The Plan of Reorganization has therefore been fully administered. On November 7, 2014, SemGroup Corporation and the other reorganized debtors moved for a final decree from the bankruptcy court closing the debtors’ bankruptcy cases. The United States Bankruptcy Court for the District of Delaware granted the request and entered its Order Granting Motion of Remaining Debtors for Entry of Final Decree on December 18, 2014. Accordingly, the bankruptcy cases for SemCrude, L.P., Eaglwing, L.P., SemCanada II, L.P., SemCanada L.P., SemGas, L.P., SemGroup, L.P., SemMaterials, L.P., and SemStream, L.P. have been closed. As part of its decree, the Court retained jurisdiction over certain on-going adversary proceedings, but the debtors have estimated and paid the claims associated with these remaining adversaries, leaving the non-debtor parties to the adversaries to resolve their remaining claims amongst themselves. On January 2, 2015, Bettina M. Whyte, the duly appointed Trustee of the SemGroup Litigation Trust (the “Litigation Trustee”), filed a notice of appeal of the Bankruptcy Court’s December 18, 2014 order closing the aforementioned bankruptcy cases. However, the Bankruptcy Court’s order of final decree was effective upon entry, and the appeal does not stay the effect of the order. The Litigation Trustee’s appeal to the United States District Court for the District of Delaware is currently pending and will be opposed by SemGroup Corporation and the other remaining reorganized debtors.
Dimmit County, TX claims
An employee of Rose Rock Midstream Field Services, LLC was involved in a tractor trailer accident on January 15, 2015 in Dimmit County, Texas.  A second accident followed resulting in six fatalities and multiple injuries. At this time, the following lawsuits have been filed in either the District Court of Zavala County, Texas or the District Court of Dimmit County, Texas: Olga D. Rubio and Carlos Rubio, Individually and on Behalf of All Statutory Wrongful Death Beneficiaries of Carlos Rubio, Jr., Deceased vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; David Rodriguez and Maribel Rodriguez vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; David Rodriguez and Maribel Rodrigues, Plaintiffs and Alejandra Abigail Ortega, Individually and as next friend of K.A.P., a minor, and as Representative of the Estate of Eduardo Pena, and Julian Pena and Nelva G. Suifuentes Pena Intervenors vs. Rose Rock Midstream Field Services, LLC, Jesus Riojas, and Roberto Rivera; Derek Muhlenbruch vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; and Agustin Lara, Sr., Individually, and Elsa Zamarripa, Individually and as Representative of the Estate of Justin Lara, Deceased vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; Jorge A Porras vs. Rose Rock Midstream Field Services, LLC; Nancy Garcia vs. Rose Rock Midstream Field Services, LLC; Veronica Veyro vs. Rose Rock Midstream Field Services, LLC; Veronica Veyro a/n/f of Sergio Veyro, Jr. vs. Rose Rock Midstream Field Services, LLC; Veronica Veyro as Rep of Estate of Sergio Veyro Sr., Deceased vs. Rose Rock Midstream Field Services, LLC; Veronica Kimberly Veyro vs. Rose Rock Midstream Field Services, LLC; Roberto Rivera-Castilla vs. Rose Rock Midstream Field Services, LLC; Mary Alice Medellin vs. Rose Rock Midstream Field Services, LLC; Mary Medellin as Rep of Estate of Juan Medellin, Jr. vs. Rose Rock Midstream Field Services, LLC; Mary Medellin on behalf of those entitled to recover for the Wrongful Death of Juan Medellin, Jr. vs. Rose Rock Midstream Field Services, LLC; Elizabeth Rolon vs. Rose Rock Midstream Field Services, LLC; Juan Francisco Medellin, III vs. Rose Rock Midstream Field Services, LLC and David Rodriguez and Maribel Rodriguez vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas. In August 2015, Rose Rock Midstream, L.P. and SemGroup Corporation were added as Defendants. We are currently working with counsel for the interested parties to investigate the accident, and no determination of liability has been made.  Mediation including all parties is scheduled for the first week of November 2015. Trial on all these cases is currently scheduled to begin on February 9, 2016. We will continue to defend our position and believe that any liability that may arise from this incident will be covered by our insurance; however, we cannot predict the outcome.
Blueknight claim
Blueknight Energy Partners, L.P. ("Blueknight"), which was formerly a subsidiary of SemGroup, LP, together with other entities related to Blueknight, entered into a Shared Services Agreement on April 7, 2009, with SemCrude, L.P., now known as Rose Rock Midstream Crude, L.P. ("SemCrude") and SemManagement, L.L.C. (which are currently subsidiaries of SemGroup). The services provided by SemCrude to Blueknight under this agreement included from time to time certain operational tasks as requested by Blueknight in order that Blueknight could operate its Oklahoma pipeline system and its Cushing, Oklahoma terminal. Under the subsequent amendments to the agreement certain of these services were phased out, and Blueknight began to perform all services necessary for operation of its Cushing terminal without SemCrude’s assistance.
In a letter dated August 18, 2011, Blueknight claimed that SemCrude owed Blueknight approximately 141,000 barrels of crude oil, and that SemCrude came to possess this oil as a result of a breach of the agreement and other tortious conduct. We responded to Blueknight’s letter denying their charges and requesting documentation from Blueknight of its claim for missing barrels. On February 14, 2012, after months of interaction between the parties through which Blueknight was requested to substantiate its claim, Blueknight filed suit against SemCrude and other related companies in the District Court of Oklahoma County, Oklahoma. On May 1, 2012, the case was transferred to Tulsa County, Oklahoma. On July 2, 2012, the Tulsa County District Court appointed a Special Master to review terminal operations accounting records and determine whether 141,000 barrels of crude oil owned by Blueknight is missing after three months of operations in April through June, 2010. On June 11, 2013, the Special Master’s Report was filed with the District Court finding a shortage in Blueknight’s Cushing terminal and Oklahoma pipeline system of 148,000 barrels. However, after a review of all records created during that three month time period, the Special Master was unable to determine how the shortage might have occurred and was unable to determine the ownership of the potential shortage.

The parties completed discovery in the District Court, where substantial documentation was exchanged and deposition testimony was taken. After the parties attended mediation, a confidential settlement was executed on September 11, 2015. In exchange for mutual releases, a dismissal with prejudice of all claims and counter-claims, and without any party admitting fault or liability whatsoever, SemGroup agreed to pay Blueknight $12.3 million in cash. The dismissal with prejudice of all claims and counter-claims was filed in the Tulsa County District Court case on September 22, 2015, and the suit is now closed.
Environmental
We may, from time to time, experience leaks of petroleum products from our facilities and, as a result of which, we may incur remediation obligations or property damage claims. In addition, we are subject to numerous environmental regulations. Failure to comply with these regulations could result in the assessment of fines or penalties by regulatory authorities.
The Kansas Department of Health and Environment ("the KDHE") initiated discussions during our bankruptcy proceeding regarding six of our sites in Kansas (five owned by Crude and one owned by SemGas) that KDHE believes, based on their historical use, may have soil or groundwater contamination in excess of state standards. KDHE sought our agreement to undertake assessments of these sites to determine whether they are contaminated. We reached an agreement with KDHE on this matter and entered into a Consent Agreement and Final Order with KDHE to conduct environmental assessments on the sites and to pay KDHE’s costs associated with their oversight of this matter. We have conducted Phase II investigations at all sites. Four of the sites have limited amounts of soil contamination that will be excavated and/or remediated on site. Four of the sites appeared to have ground water contamination requiring further delineation and/or ongoing monitoring. Work plans have been submitted to, and approved by, the KDHE. One site was closed and we anticipate closure in 2015 for one of the remaining five sites. Groundwater beneath two sites is being monitored until contaminants achieve regulatory threshold for closure and will not require active remediation.  Two sites are in the process of completing assessment and characterization and will be remediated if necessary. We do not anticipate any penalties or fines for these historical sites.
Other matters
We are party to various other claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of our management, the ultimate resolution of these claims, legal actions and complaints, after consideration of amounts accrued, insurance coverage and other arrangements, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, the outcome of such matters is inherently uncertain, and estimates of our consolidated liabilities may change materially as circumstances develop.
Asset retirement obligations
We will be required to incur significant removal and restoration costs when we retire our natural gas gathering and processing facilities in Canada. During the second quarter of 2015, we completed a reevaluation of our asset retirement obligations and recorded reductions to the liability and offsetting asset of $26.0 million. The reduction was largely due to a change in the estimated timing of the retirement of the facilities. At September 30, 2015, we have an asset retirement obligation liability of $16.0 million, which is included within other noncurrent liabilities on our condensed consolidated balance sheets. This amount was calculated using the $121.6 million cost we estimate we would incur to retire these facilities, discounted based on our risk-adjusted cost of borrowing and the estimated timing of remediation.
The calculation of the liability for an asset retirement obligation requires the use of significant estimates, including those related to the length of time before the assets will be retired, cost inflation over the assumed life of the assets, actual remediation activities to be required, and the rate at which such obligations should be discounted. Future changes in these estimates could result in material changes in the value of the recorded liability. In addition, future changes in laws or regulations could require us to record additional asset retirement obligations.
Our other segments may also be subject to removal and restoration costs upon retirement of their facilities. However, we are unable to predict when, or if, our pipelines, storage tanks and other facilities would become completely obsolete and require decommissioning. Accordingly, we have not recorded a liability or corresponding asset, as both the amount and timing of such potential future costs are indeterminable.
Purchase and sale commitments
We routinely enter into agreements to purchase and sell petroleum products at specified future dates. We account for derivatives at fair value with the exception of commitments which have been designated as normal purchases and sales for which we do not record assets or liabilities related to these agreements until the product is purchased or sold. At September 30, 2015, such commitments included the following (in thousands):
 
Volume
(Barrels)
 
Value
Fixed price purchases
2,635

 
$
116,683

Fixed price sales
3,485

 
$
156,359

Floating price purchases
17,683

 
$
797,546

Floating price sales
22,268

 
$
915,732


Certain of the commitments shown in the table above relate to agreements to purchase product from a counterparty and to sell a similar amount of product (in a different location) to the same counterparty. Many of the commitments shown in the table above are cancellable by either party, as long as notice is given within the time frame specified in the agreement (generally 30 to 120 days).
Our SemGas segment has a take or pay contractual obligation related to the fractionation of natural gas liquids through June 2023. At September 30, 2015, no amounts were due under the contract. The approximate amount of future obligation is as follows (in thousands):
For year ending:
 
December 31, 2015
$
2,705

December 31, 2016
11,804

December 31, 2017
11,938

December 31, 2018
10,060

December 31, 2019
9,121

Thereafter
24,392

Total expected future payments
$
70,020


SemGas further has a take or pay contractual obligation related to pipeline transportation through October 2015. The amount of future obligation is approximately $0.4 million. SemGas also enters into contracts under which we are responsible for marketing the majority of the gas and natural gas liquids produced by the counterparties to the agreements. The majority of SemGas’ revenues were generated from such contracts.
Rose Rock has a take-or-pay obligation with our equity method investee, White Cliffs, for approximately 5,000 barrels per day of space on White Cliffs' pipeline subject to completion of an expansion project related to Rose Rock's Platteville facilities. The agreement became effective in October 2015 and has a term of 5 years. Annual payments to White Cliffs under the agreement are expected to be $9.4 million.
See Note 3 for capital contribution requirements related to the White Cliffs expansion.
Equity
EQUITY
EQUITY
Unaudited condensed consolidated statement of changes in owners’ equity
The following table shows the changes in our consolidated owners’ equity accounts from December 31, 2014 to September 30, 2015 (in thousands):
 
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Noncontrolling
Interests
Total
Owners’
Equity
Balance at December 31, 2014
$
436

$
1,245,877

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

$
1,219,437

Net income



29,636


14,153

43,789

Other comprehensive loss, net of income taxes




(23,750
)

(23,750
)
Distributions to noncontrolling interests





(29,780
)
(29,780
)
Dividends paid

(49,836
)




(49,836
)
Unvested dividend equivalent rights

(246
)