SEMGROUP CORP, 10-Q filed on 8/8/2014
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2014
Jul. 31, 2014
Class A
Jul. 31, 2014
Class B
Document Type
10-Q 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Jun. 30, 2014 
 
 
Document Fiscal Period Focus
Q2 
 
 
Document Fiscal Year Focus
2014 
 
 
Entity Registrant Name
SemGroup Corp 
 
 
Entity Central Index Key
0001489136 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
42,642,965 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 75,338 
$ 79,351 
Restricted cash
7,416 
5,119 
Accounts receivable (net of allowance of $3,268 and $3,661, respectively)
334,229 
323,965 
Accounts and Other Receivables, Net, Current
391,915 
Receivable from affiliates
29,801 
67,273 
Inventories
44,380 
44,295 
Other current assets
20,765 
14,011 
Total current assets
903,844 
534,014 
Property, plant and equipment (net of accumulated depreciation of $212,882 and $188,720, respectively)
1,212,421 
1,105,728 
Equity method investments
633,375 
565,124 
Goodwill
69,019 
62,021 
Other intangible assets (net of accumulated amortization of $19,446 and $12,655, respectively)
170,235 
174,838 
Other noncurrent assets, net
33,550 
28,889 
Total assets
3,022,444 
2,470,614 
Current liabilities:
 
 
Accounts payable
261,280 
254,467 
Payable to affiliates
22,711 
62,279 
Accrued liabilities
70,350 
83,429 
Payables to pre-petition creditors
3,136 
3,177 
Warrant liability
76,084 
58,134 
Deferred revenue
22,237 
25,538 
Other current liabilities
575 
12,153 
Current portion of long-term debt
4,357 
37 
Total current liabilities
460,730 
499,214 
Long-term debt
1,213,068 
615,088 
Deferred income taxes
140,071 
100,945 
Other noncurrent liabilities
43,672 
41,504 
Commitments and contingencies (Note 9)
   
   
SemGroup owners’ equity:
 
 
Common stock, $0.01 par value (authorized - 100,000 shares; issued - 43,125 and 42,914 shares, respectively)
427 
425 
Additional paid-in capital
1,193,441 
1,154,516 
Treasury stock, at cost (485 and 438 shares, respectively)
(1,332)
(613)
Accumulated deficit
(101,668)
(97,572)
Accumulated other comprehensive loss
859 
(2,854)
Total SemGroup Corporation owners’ equity
1,091,727 
1,053,902 
Noncontrolling interests in consolidated subsidiaries
73,176 
159,961 
Total owners’ equity
1,164,903 
1,213,863 
Total liabilities and owners’ equity
$ 3,022,444 
$ 2,470,614 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Jun. 30, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 3,268 
$ 3,661 
Accumulated depreciation
212,882 
188,720 
Accumulated amortization
$ 19,446 
$ 12,655 
Common stock, $0.01 par value
$ 0.01 
$ 0.01 
Common stock shares authorized
100,000 
100,000 
Common stock shares issued
43,125 
42,914 
Treasury stock shares
485 
438 
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Jun. 30, 2014
Jun. 30, 2013
Revenues:
 
 
 
 
Product
$ 402,986 
$ 241,253 
$ 830,016 
$ 476,882 
Service
53,450 
31,678 
101,957 
59,335 
Other
25,788 
51,313 
49,134 
75,723 
Total revenues
482,224 
324,244 
981,107 
611,940 
Expenses:
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
368,527 
212,709 
753,640 
425,078 
Operating
59,424 
69,682 
110,202 
110,453 
General and administrative
21,850 
16,898 
40,586 
33,935 
Depreciation and amortization
22,062 
12,814 
45,699 
25,450 
Loss (gain) on disposal of long-lived assets, net
19,315 
(376)
19,257 
(538)
Total expenses
491,178 
311,727 
969,384 
594,378 
Earnings from equity method investments
19,187 
14,861 
34,149 
32,206 
Gain on issuance of common units by equity method investee
8,127 
Operating income
10,233 
27,378 
53,999 
49,768 
Other expenses (income), net:
 
 
 
 
Interest expense
10,360 
4,495 
19,587 
6,891 
Foreign currency transaction loss (gain)
167 
(349)
(516)
(516)
Other expense, net
18,962 
6,467 
17,915 
32,100 
Total other expenses, net
29,489 
10,613 
36,986 
38,475 
Income (loss) from continuing operations before income taxes
(19,256)
16,765 
17,013 
11,293 
Income tax expense (benefit)
(6,672)
9,288 
9,854 
(44,718)
Income (loss) from continuing operations
(12,584)
7,477 
7,159 
56,011 
Income (loss) from discontinued operations, net of income taxes
35 
(5)
67 
Net income (loss)
(12,584)
7,512 
7,154 
56,078 
Less: net income attributable to noncontrolling interests
5,025 
3,943 
11,250 
9,065 
Net income (loss) attributable to SemGroup
(17,609)
3,569 
(4,096)
47,013 
Other comprehensive income (loss), net of income taxes
6,685 
(5,354)
3,713 
(10,412)
Comprehensive income (loss)
(5,899)
2,158 
10,867 
45,666 
Less: comprehensive income attributable to noncontrolling interests
5,025 
3,943 
11,250 
9,065 
Comprehensive income (loss) attributable to SemGroup
$ (10,924)
$ (1,785)
$ (383)
$ 36,601 
Net income (loss) per common share (Note 11):
 
 
 
 
Basic
$ (0.41)
$ 0.08 
$ (0.10)
$ 1.12 
Diluted
$ (0.41)
$ 0.08 
$ (0.10)
$ 1.11 
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2014
Jun. 30, 2013
Cash flows from operating activities:
 
 
Net income
$ 7,154 
$ 56,078 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Net unrealized gain related to derivative instruments
(245)
(1,295)
Depreciation and amortization
45,699 
25,450 
Loss (gain) on disposal of long-lived assets, net
19,257 
(515)
Earnings from equity method investments
(34,149)
(32,206)
Gain on issuance of common units by equity method investee
(8,127)
Distributions from equity investments
36,601 
29,798 
Amortization of debt issuance costs
1,571 
1,060 
Deferred tax expense (benefit)
8,035 
(48,865)
Non-cash equity compensation
3,796 
3,259 
Excess Tax Benefit from Share-based Compensation, Operating Activities
(1,650)
Loss on fair value of warrants
17,949 
32,194 
Provision for uncollectible accounts receivable, net of recoveries
93 
323 
Currency gain
(516)
(516)
Changes in operating assets and liabilities (Note 12)
(39,919)
(9,329)
Net cash provided by operating activities
55,549 
55,436 
Cash flows from investing activities:
 
 
Capital expenditures
(127,668)
(59,877)
Proceeds from sale of long-lived assets
4,020 
544 
Investments in non-consolidated subsidiaries
(67,977)
(81,611)
Payments to acquire businesses
44,508 
Distributions in excess of equity in earnings of affiliates
5,400 
5,582 
Proceeds from Sales of Business, Affiliate and Productive Assets
Net cash used in investing activities
(230,733)
(135,362)
Cash flows from financing activities:
 
 
Debt issuance costs
(155)
(10,263)
Borrowings on credit facilities
533,830 
649,974 
Principal payments on credit facilities and other obligations
(331,518)
(385,012)
Proceeds from issuance of Rose Rock Midstream, L.P. common units, net of offering costs
57,751 
Distributions to noncontrolling interests
(13,209)
(7,496)
Proceeds from Warrant Exercises
224 
Repurchase of common stock for payment of statutory taxes due on equity-based compensation
(719)
(371)
Dividends paid
(19,628)
(7,939)
Proceeds from Issuance of Shares under Incentive and Share-based Compensation Plans, Excluding Stock Options
88 
Excess Tax Benefit from Share-based Compensation, Financing Activities
1,650 
Intercompany borrowings (advances), net
Net cash provided by financing activities
170,339 
296,868 
Effect of exchange rate changes on cash and cash equivalents
832 
1,795 
Change in cash and cash equivalents
(4,013)
218,737 
Cash and cash equivalents at beginning of period
79,351 
80,029 
Cash and cash equivalents at end of period
$ 75,338 
$ 298,766 
Overview
OVERVIEW
OVERVIEW
SemGroup Corporation is a Delaware corporation headquartered in Tulsa, Oklahoma. The terms “we,” “our,” “us,” “SemGroup,” “the Company” and similar language used in these notes to the unaudited condensed consolidated financial statements refer to SemGroup Corporation and its subsidiaries.
Basis of presentation
The accompanying condensed consolidated balance sheet at December 31, 2013, which is derived from audited financial statements, and the unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission ("SEC"). These financial statements include all normal and recurring adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of its operations and its cash flows.
Our condensed consolidated financial statements include the accounts of our controlled subsidiaries. All significant transactions between our consolidated subsidiaries have been eliminated.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Although management believes these estimates are reasonable, actual results could differ materially from these estimates. The results of operations for the three months and six months ended June 30, 2014, are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.
Pursuant to the rules and regulations of the SEC, the accompanying condensed consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States. Certain reclassifications have been made to conform previously reported balances to the current presentation. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2013, which are included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC.
Our significant accounting policies are consistent with those described in our Annual Report on Form 10-K for the year ended December 31, 2013.
Recent accounting pronouncements
In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity - a consensus of the FASB Emerging Issues Task Force,” which indicates that the entire amount of a cumulative translation adjustment ("CTA") related to an entity's investment in a foreign entity should be released when there has been a:
sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity;
loss of a controlling financial interest in an investment in a foreign entity (i.e., the foreign entity is deconsolidated); or
step acquisition for a foreign entity (i.e., when an entity has changed from applying the equity method for an investment in a foreign entity to consolidating the foreign entity).
The ASU does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2013, and interim periods within those years. The Company adopted this guidance in the first quarter of 2014. The impact was not material.
In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which requires an unrecognized tax benefit to be classified as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2013, and interim periods within those years. The Company adopted this guidance in the first quarter of 2014. The impact was not material.
In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The Company will adopt this guidance in the first quarter of 2015. The impact is not expected to be material.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers", which supersedes nearly all existing revenue recognition guidance under 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 is effective for annual periods beginning after December 15, 2016, and interim periods therein, 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). 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 in 2017.
Rose Rock Midstream, L.P.
ROSE ROCK MIDSTREAM, L.P.
ROSE ROCK MIDSTREAM, L.P.
We control the operations of our consolidated subsidiary, Rose Rock Midstream, L.P. ("Rose Rock"), through our ownership of the general partner interest. As of June 30, 2014, we own the 2% general partner interest and a 56.8% limited partner interest made up of 6.8 million common units, 8.4 million subordinated units and 3.75 million Class A units.
On June 23, 2014, we contributed the remaining 33% interest in SemCrude Pipeline, L.L.C. ("SCPL") to Rose Rock for (i) cash of approximately $114.4 million, (ii) the issuance of 2.425 million common units, (iii) the issuance of 1.25 million Class A units, and (iv) an increase of the capital account of the general partner and a related issuance of general partner interest, to allow the general partner to maintain its 2% general partner interest. Subsequent to this transaction, Rose Rock owns 100% of SCPL, which owns a 51% membership interest in White Cliffs Pipeline, L.L.C. ("White Cliffs").
The Class A units are not entitled to receive any distribution of available cash (other than upon liquidation) prior to the first day of the month immediately following the first month for which the average daily throughput volumes on the White Cliffs Pipeline for such month are 125,000 barrels per day or greater. Upon such date, the Class A units will automatically convert into common units.
As the transaction was between entities under common control, Rose Rock recorded its investment in SCPL 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.
We receive distributions from Rose Rock on our common and subordinated units, our 2% general partner interest and incentive distribution rights. Rose Rock intends to pay a minimum quarterly distribution of $0.3625 per unit, to the extent it has sufficient available cash, as defined in Rose Rock’s partnership agreement.  
The following table shows the cash distributions paid or declared during 2014 and 2013 (in thousands, except for per unit amounts):
 
Distribution
Per Unit
 
Distributions Paid/To Be Paid
Quarter Ended
SemGroup
Noncontrolling
Interest
Common Units
Total
Distributions
General
Partner
Incentive
Distributions
Common
Units
Subordinated
Units
December 31, 2012
$
0.4025

 
$
167

$

$
1,163

$
3,377

$
3,624

$
8,331

March 31, 2013
$
0.4300

 
$
179

$
41

$
1,242

$
3,607

$
3,872

$
8,941

June 30, 2013
$
0.4400


$
183

$
72

$
1,271

$
3,692

$
3,962

$
9,180

September 30, 2013
$
0.4500

 
$
232

$
127

$
1,301

$
3,775

$
6,189

$
11,624

December 31, 2013
$
0.4650

 
$
257

$
244

$
2,041

$
3,901

$
6,398

$
12,841

March 31, 2014
$
0.4950


$
278

$
488

$
2,173

$
4,153

$
6,811

$
13,903

June 30, 2014
$
0.5350

*
$
334

$
888

$
3,646

$
4,488

$
7,362

$
16,718


*Expected distributions related to the quarter ended June 30, 2014, which will be paid on August 14, 2014 to unitholders of record as of August 4, 2014.

Certain summarized balance sheet information of Rose Rock is shown below (in thousands):
 
(Unaudited)
 
 
 
June 30,
2014
 
December 31,
2013
Cash
$
3,353

 
$
15,459

Other current assets
669,012

 
306,128

Property, plant and equipment, net
336,377

 
311,616

Equity method investment
271,187

 
224,095

Goodwill
46,059

 
28,322

Other noncurrent assets, net
22,549

 
11,627

Total assets
$
1,348,537

 
$
897,247

 
 
 
 
Current liabilities
$
247,677

 
$
293,031

Long-term debt
847,568

 
245,088

Partners’ capital attributable to SemGroup
180,116

 
120,610

Partners’ capital attributable to noncontrolling interests
73,176

 
159,961

Noncontrolling interests in consolidated subsidiary retained by SemGroup

 
78,557

Total liabilities and equity
$
1,348,537

 
$
897,247


The June 30, 2014 balances for long-term debt and other current assets above include the impact of the issuance of senior unsecured notes by Rose Rock. The offering commenced on June 27, 2014 and proceeds were received on July 2, 2014 and used to pay down Rose Rock's revolving credit facility balance. At June 27, 2014, we recorded the liability for the senior unsecured notes and a receivable for the proceeds. See Note 8 for additional information.
Certain summarized income statement information of Rose Rock for the three months and six months ended June 30, 2014 and 2013 is shown below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
290,432

 
$
161,422

 
$
581,355

 
$
332,654

Cost of products sold
$
255,745

 
$
140,506

 
$
510,282

 
$
288,957

Operating, general and administrative expenses
$
23,007

 
$
9,061

 
$
41,508

 
$
18,040

Depreciation and amortization expense
$
6,267

 
$
3,690

 
$
16,801

 
$
7,197

Earnings from equity method investment
$
12,291

 
$
3,451

 
$
23,371

 
$
6,904

Net income
$
15,130

 
$
9,134

 
$
31,289

 
$
21,128

Noncontrolling interests in consolidated subsidiary retained by SemGroup
$
4,082

 
$

 
$
7,758

 
$

Net income attributable to Rose Rock Midstream, L.P.
$
11,048

 
$
9,134

 
$
23,531

 
$
21,128

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

Our investments in affiliates over which we have significant influence, but for which we do not control the operating decisions of the investee, are accounted for under the equity method. Under the equity method, we do not report the individual assets and liabilities of our investees on our condensed consolidated balance sheets. Instead, our ownership interest is reflected in one line as a noncurrent asset on our condensed consolidated balance sheets. Our equity method investments consist of the following (in thousands):
 
June 30, 2014
 
December 31, 2013
White Cliffs
$
271,187

 
$
224,095

NGL Energy Partners, LP
214,522

 
208,848

Glass Mountain Pipeline, LLC
147,666

 
132,181

Total equity method investments
$
633,375

 
$
565,124


    
Under the equity method, we do not report the individual revenues and expenses of our investees in our condensed consolidated statements of operations and comprehensive income (loss). Instead, our interest in the earnings of our investees is reflected in one line item on our condensed consolidated statements of operations and comprehensive income (loss). Our earnings from equity method investments consist of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
White Cliffs
$
12,291

 
$
10,661

 
$
23,371

 
$
21,100

NGL Energy Energy Partners, LP*
4,968

 
4,200

 
8,559

 
11,116

Glass Mountain Pipeline, LLC
1,928

 

 
2,219

 
(10
)
Total earnings from equity method investments
$
19,187

 
$
14,861

 
$
34,149

 
$
32,206


* Excluding gain on issuance of common units of $8.1 million for the six months ended June 30, 2014.
Cash distributions received from equity method investments consist of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
White Cliffs
$
14,467

 
$
12,889

 
$
28,052

 
$
26,681

NGL Energy Partners, LP
5,671

 
4,426

 
11,012

 
8,698

Glass Mountain Pipeline LLC
2,937

 

 
2,937

 

Total cash distributions received from equity method investments
$
23,075

 
$
17,315

 
$
42,001

 
$
35,379


White Cliffs
We account for our 51% ownership of White Cliffs under the equity method, as the other owners have substantive rights to participate in its management.
In August 2012, the owners of White Cliffs approved an expansion project to construct a 12" pipeline from Platteville, Colorado to Cushing, Oklahoma. For the three months and six months ended June 30, 2014, we contributed $38.3 million and $51.0 million to White Cliffs, respectively. This expansion will increase the pipeline’s capacity to about 150,000 barrels per day and is expected to be fully operational in August 2014. Remaining contributions will be made in 2014 and are expected to total $2.3 million.
Certain unaudited summarized income statement information of White Cliffs for the three months and six months ended June 30, 2014 and 2013 is shown below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
34,533

 
$
30,112

 
$
67,807

 
$
60,785

Operating, general and administrative expenses
$
5,539

 
$
4,113

 
$
12,307

 
$
9,292

Depreciation and amortization expense
$
4,537

 
$
4,715

 
$
8,930

 
$
9,430

Net income
$
24,457

 
$
21,284

 
$
46,570

 
$
42,063


The equity in earnings of White Cliffs for the three months and six months ended June 30, 2014 and 2013 is less than 51% of the net income of White Cliffs for the same periods. This is due to certain general and administrative expenses we incur in managing the operations of White Cliffs that the other owners are not obligated to share. Such expenses are recorded by White Cliffs and are allocated to our ownership interest. White Cliffs recorded $0.4 million and $0.4 million of such general and administrative expense for the three months ended June 30, 2014 and 2013, respectively, and $0.8 million and $0.7 million for the six months ended June 30, 2014 and 2013, respectively.
NGL Energy Partners LP
At June 30, 2014, we owned 9,133,409 common units representing limited partner interests in NGL Energy Partners LP (NYSE: NGL) (“NGL Energy”), which represents approximately 11.5% of the total 79,340,655 limited partner units of NGL Energy outstanding at March 31, 2014, and an 11.78% interest in the general partner of NGL Energy.
At June 30, 2014, the fair market value of our 9,133,409 common unit investment in NGL Energy was $395.8 million, based on a June 30, 2014 closing price of $43.34 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 six months ended June 30, 2014 and 2013, relates to the earnings of NGL Energy for the three months and six months ended March 31, 2014 and 2013, respectively.
Our limited partnership interest was diluted as a result of the issuance of NGL common units in a private placement in connection with the completion of an acquisition. Accordingly, we recorded a non-cash gain of $8.1 million for the six months ended June 30, 2014, which is included in "gain on issuance of common units by equity method investee" in our condensed consolidated statement of operations and comprehensive income (loss). On June 23, 2014, NGL Energy announced it completed the issuance of common units in an underwritten public offering. As a result of this transaction, we expect to record a non-cash gain of approximately $18.8 million in the third quarter 2014.
In the third quarter of 2014, we sold 1,480,841 of our NGL Energy common LP units for $62.5 million. We expect to record a gain of approximately $27.7 million in the third quarter of 2014.
Certain unaudited summarized income statement information of NGL Energy for the three months and six months ended March 31, 2014 and 2013 is shown below (in thousands):
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014

2013
 
2014
 
2013
Revenue
$
3,975,935

 
$
1,617,613

 
$
6,719,380

 
$
2,955,821

Cost of sales
$
3,764,744

 
$
1,481,890

 
$
6,340,773

 
$
2,686,435

Operating, general and administrative expenses
$
110,923

 
$
74,632

 
$
201,676

 
$
139,325

Depreciation and amortization expense
$
37,475

 
$
27,518

 
$
72,969

 
$
46,265

Net income
$
43,146

 
$
22,341

 
$
67,198

 
$
62,818

 
Glass Mountain Pipeline, LLC
We hold a 50% interest in Glass Mountain Pipeline, LLC ("GMP" or "Glass Mountain") which began operations of its pipeline ("the Glass Mountain Pipeline") in the first quarter of 2014. The owner of the remaining 50%, a subsidiary of NGL Energy, is a related party (Note 13). We account for our investment in GMP using the equity method. As of June 30, 2014, we have invested $147.7 million in GMP including our capital contributions, amounts paid to increase our ownership percentage and capitalized interest. We invested $5.1 million and $16.2 million in GMP for the three months and six months ended June 30, 2014, respectively.
The equity in earnings of GMP for the three months and six months ended June 30, 2014 reported in our condensed consolidated statement of operations and comprehensive income (loss) is less than 50% of the net income of GMP for the same period due to amortization of capitalized interest for the period.
Certain unaudited summarized income statement information of GMP for the three months and six months ended June 30, 2014 is shown below (in thousands):
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
Revenue
$
8,891

 
$
12,744

Operating, general and administrative expenses
$
1,158

 
$
2,008

Depreciation and amortization expense
$
3,770

 
$
6,118

Net income
$
3,962

 
$
4,615

Segments
SEGMENTS
SEGMENTS
Our businesses are organized based on the nature and location of the services they provide. Certain summarized information related to our reportable segments is shown in the tables below. None of the operating segments have been aggregated, other than White Cliffs and Glass Mountain, which have been included within the Crude segment. Our investment in NGL Energy is included within the SemStream segment. Although “Corporate and Other” does not represent an operating segment, it is included in the tables below to reconcile segment information to that of the consolidated Company. Eliminations of transactions between segments are also included within “Corporate and Other” in the tables below.
The accounting policies of each segment are the same as the accounting policies of the consolidated Company. Transactions between segments are generally recorded based on prices negotiated between the segments. Certain general and administrative and interest expenses incurred at the corporate level are allocated to the segments, based on our allocation policies in effect at the time.

 
Three Months Ended June 30, 2014
 
Crude

SemStream

SemCAMS

SemGas

SemLogistics

SemMexico

Corporate
and Other

Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
292,156

 
$

 
$
39,954

 
$
83,162

 
$
3,981

 
$
62,971

 
$

 
$
482,224

Intersegment

 

 

 
9,792

 

 

 
(9,792
)
 

Total revenues
292,156

 

 
39,954

 
92,954

 
3,981

 
62,971

 
(9,792
)
 
482,224

Expenses:
 
 

 

 

 

 

 

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

 

 
71

 
68,231

 
265

 
54,007

 
(9,792
)
 
368,527

Operating
17,689

 

 
28,836

 
8,012

 
1,940

 
2,947

 

 
59,424

General and administrative
6,438

 
(52
)
 
3,574

 
2,240

 
1,529

 
3,112

 
5,009

 
21,850

Depreciation and amortization
7,276

 

 
3,079

 
7,279

 
2,555

 
1,456

 
417

 
22,062

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

 
(915
)
 
20,100

 
(3,634
)
 

 
3,791

 
19,315

Total expenses
287,121

 
(52
)

34,645


105,862


2,655


61,522


(575
)

491,178

Earnings from equity method investments
14,219

 
4,968

 

 

 

 

 

 
19,187

Operating income (loss)
19,254

 
5,020


5,309


(12,908
)

1,326


1,449


(9,217
)

10,233

Other expenses (income), net
5,178

 
(1,277
)
 
3,750

 
2,013

 
83

 
(56
)
 
19,798

 
29,489

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

 
$
6,297

 
$
1,559

 
$
(14,921
)
 
$
1,243

 
$
1,505

 
$
(29,015
)

$
(19,256
)
Total assets at June 30, 2014 (excluding intersegment receivables)
$
1,543,964

 
$
214,522

 
$
316,240

 
$
597,905

 
$
171,490

 
$
113,830

 
$
64,493

 
$
3,022,444



 
Three Months Ended June 30, 2013
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and Other
 
Consolidated
 
 
 
 
 
 
 
(dollars in thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
161,422

 
$

 
$
66,459

 
$
41,908

 
$
2,623

 
$
51,832

 
$

 
$
324,244

Intersegment

 

 

 
5,018

 

 

 
(5,018
)
 

Total revenues
161,422

 


66,459


46,926


2,623


51,832


(5,018
)
 
324,244

Expenses:
 
 
 
 

 

 

 

 

 

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

 

 
1

 
33,567

 

 
43,653

 
(5,018
)
 
212,709

Operating
5,691

 

 
55,508

 
4,289

 
1,848

 
2,346

 

 
69,682

General and administrative
3,568

 
160

 
3,342

 
1,598

 
1,486

 
2,443

 
4,301

 
16,898

Depreciation and amortization
3,690

 

 
2,638

 
2,233

 
2,313

 
1,458

 
482

 
12,814

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

 

 
(4
)
 

 
(347
)
 

 
(376
)
Total expenses
153,430

 
160


61,489


41,683


5,647


49,553


(235
)
 
311,727

Earnings from equity method investments
10,661

 
4,200

 

 

 

 

 

 
14,861

Operating income (loss)
18,653

 
4,040


4,970


5,243


(3,024
)

2,279


(4,783
)
 
27,378

Other expenses (income), net
4,120

 
(1,193
)
 
4,748

 
676

 
357

 
153

 
1,752

 
10,613

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

 
$
5,233


$
222


$
4,567


$
(3,381
)

$
2,126


$
(6,535
)
 
$
16,765

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

 
$

 
$
79,237

 
$
173,848

 
$
8,771

 
$
134,581

 
$

 
$
981,107

Intersegment

 

 

 
19,684

 

 

 
(19,684
)
 

Total revenues
584,670

 

 
79,237

 
193,532

 
8,771

 
134,581

 
(19,684
)
 
981,107

Expenses:
 
 
 
 

 

 
 
 

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

 

 
138

 
146,813

 
615

 
115,476

 
(19,684
)
 
753,640

Operating
32,828

 

 
52,502

 
15,456

 
4,020

 
5,396

 

 
110,202

General and administrative
10,380

 
61

 
7,554

 
4,212

 
2,951

 
5,863

 
9,565

 
40,586

Depreciation and amortization
18,758

 

 
5,908

 
12,248

 
5,050

 
2,883

 
852

 
45,699

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

 
(915
)
 
20,104

 
(3,634
)
 
(28
)
 
3,791

 
19,257

Total expenses
572,187

 
61

 
65,187

 
198,833

 
9,002

 
129,590

 
(5,476
)
 
969,384

Earnings from equity method investments
25,590

 
8,559

 

 

 

 

 

 
34,149

Gain on issuance of common units by equity method investee

 
8,127

 

 

 

 

 

 
8,127

Operating income (loss)
38,073

 
16,625


14,050


(5,301
)

(231
)

4,991


(14,208
)
 
53,999

Other expenses (income), net
9,841

 
(2,541
)
 
7,905

 
3,702

 
334

 
(101
)
 
17,846

 
36,986

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

 
$
19,166

 
$
6,145

 
$
(9,003
)
 
$
(565
)
 
$
5,092

 
$
(32,054
)
 
$
17,013

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

 
$

 
$
102,240

 
$
76,562

 
$
5,658

 
$
94,826

 
$

 
$
611,940

Intersegment

 

 

 
9,103

 

 

 
(9,103
)
 

Total revenues
332,654

 

 
102,240

 
85,665

 
5,658

 
94,826

 
(9,103
)
 
611,940

Expenses:
 
 
 
 

 

 
 
 

 

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

 

 
184

 
62,738

 

 
82,302

 
(9,103
)
 
425,078

Operating
11,429

 
1

 
82,392

 
8,433

 
3,687

 
4,511

 

 
110,453

General and administrative
7,418

 
316

 
7,487

 
3,189

 
2,606

 
4,665

 
8,254

 
33,935

Depreciation and amortization
7,197

 

 
5,294

 
4,361

 
4,653

 
2,938

 
1,007

 
25,450

Loss (gain) on disposal of long-lived assets, net
(25
)
 
6

 

 
(6
)
 

 
(513
)
 

 
(538
)
Total expenses
314,976

 
323

 
95,357

 
78,715

 
10,946

 
93,903

 
158

 
594,378

Earnings from equity method investments
21,090

 
11,116

 

 

 

 

 

 
32,206

Operating income (loss)
38,768

 
10,793

 
6,883

 
6,950

 
(5,288
)
 
923

 
(9,261
)
 
49,768

Other expenses (income), net
7,291

 
(2,161
)
 
9,459

 
1,269

 
1,113

 
(318
)
 
21,822

 
38,475

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

 
$
12,954

 
$
(2,576
)
 
$
5,681

 
$
(6,401
)
 
$
1,241

 
$
(31,083
)
 
$
11,293

Inventories
Inventories
INVENTORIES
Inventories consist of the following (in thousands):
 
June 30,
2014
 
December 31,
2013
Crude oil
$
27,911

 
$
30,779

Asphalt and other
16,469

 
13,516

Total inventories
$
44,380

 
$
44,295

Financial Instruments
FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS
Fair value of financial instruments
We record certain financial assets and liabilities at fair value at each balance sheet date. The tables below summarize the balances of these assets and liabilities at June 30, 2014 and December 31, 2013 (in thousands):

 
June 30, 2014
 
December 31, 2013
 
Level 1
 
Netting*
 
Total
 
Level 1
 
Netting*
 
Total
Assets:
 
 
 
 

 
 
 
 
 

Commodity derivatives
$
185

 
$

 
$
185

 
$
36

 
$
(36
)
 
$

Total assets
185

 

 
185

 
36

 
(36
)
 

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Commodity derivatives
$

 
$

 
$

 
$
96

 
$
(36
)
 
$
60

Warrants
76,084

 

 
76,084

 
58,134

 

 
58,134

Total liabilities
76,084

 

 
76,084

 
58,230

 
(36
)
 
58,194

Net assets (liabilities) at fair value
$
(75,899
)
 
$

 
$
(75,899
)
 
$
(58,194
)
 
$

 
$
(58,194
)
*Relates primarily to exchange traded futures. Gain and loss positions on multiple contracts are settled net on a daily basis with the exchange.
“Level 1” measurements are based on inputs consisting of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. These include commodity futures contracts that are traded on an exchange. These also include common stock warrants (Note 10) which are traded on the New York Stock Exchange.
“Level 2” measurements are based on inputs consisting of market observable and corroborated prices for similar derivative contracts. Assets and liabilities classified as Level 2 include OTC traded physical fixed priced purchases and sales forward contracts.
“Level 3” measurements are based on inputs from a pricing service and/or internal valuation models incorporating observable and unobservable market data. These include commodity derivatives, such as forwards and swaps for which there is not a highly liquid market and therefore are not included in Level 2 above.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value levels. At June 30, 2014, all of our physical fixed price forward purchases and sales contracts were being accounted for as normal purchases and normal sales.
There were no financial assets or liabilities classified as Level 2 or Level 3 during the three months and six months ended June 30, 2014 and 2013, as such no rollforward of activity has been presented.
Commodity derivative contracts
Our consolidated results of operations and cash flows are impacted by changes in market prices for petroleum products. This exposure to commodity price risk is managed, in part, by entering into various commodity derivatives.
We seek to manage the price risk associated with our marketing operations by limiting our net open positions through (i) the concurrent purchase and sale of like quantities of petroleum products to create back-to-back transactions that are intended to lock in positive margins based on the timing, location or quality of the petroleum products purchased and delivered or (ii) derivative contracts. Our storage and transportation assets can also be used to mitigate location and time basis risk. All marketing activities are subject to our Comprehensive Risk Management Policy, which establishes limits in order to manage risk and mitigate financial exposure.
Our commodity derivatives can be comprised of swaps, future contracts and forward contracts of crude oil and natural gas liquids. These are defined as follows:
Swaps – OTC transactions where a floating price, basis or index is exchanged for a fixed (or a different floating) price, basis or index at a preset schedule in the future, according to an agreed-upon formula.
Futures contracts – Exchange traded contracts to buy or sell a commodity. These contracts are standardized by the exchange in terms of quality, quantity, delivery period and location for each commodity.
Forward contracts – OTC contracts to buy or sell a commodity at an agreed upon future date. The buyer and seller agree on specific terms (price, quantity, delivery period and location) and conditions at the inception of the contract.
The following table sets forth the notional quantities for commodity derivative instruments entered into (in thousands of barrels):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Sales
1,135

 
720

 
1,950

 
1,330

Purchases
1,005

 
615

 
1,815

 
1,290


We have not designated any of our commodity derivative instruments as accounting hedges. We record the fair value of our commodity derivative instruments on our condensed consolidated balance sheets in other current assets and other current liabilities in the following amounts (in thousands):
 
June 30, 2014
 
December 31, 2013
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
$
185

 
$

 
$

 
$
60


We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. Our margin deposit balances were $1.1 million and $0.8 million at June 30, 2014 and December 31, 2013, respectively. These margin account balances have not been offset against our net commodity derivative instrument (contract) positions. Had these margin deposits been netted against our net commodity derivative instrument (contract) positions as of June 30, 2014 and December 31, 2013, we would have had net asset positions of $1.3 million and $0.8 million, respectively.
Realized and unrealized gains (losses) from our commodity derivatives were recorded to product revenue in the following amounts (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Commodity contracts
$
(1,942
)
 
$
(233
)
 
$
(2,749
)
 
$
(777
)

Warrants
As described in Note 10, upon emergence from bankruptcy, we issued certain common stock warrants. These warrants are recorded at fair value in current liabilities on the condensed consolidated balance sheets, with changes in the fair value recorded to other expense (income).
Concentrations of risk
During the three months ended June 30, 2014, one customer of our Crude segment accounted for more than 10% of our consolidated revenue at approximately 38%. We purchased approximately $145 million of product from two third-party suppliers of our Crude segment, which represented approximately 39% of our costs of products sold.
During the six months ended June 30, 2014, one customer of our Crude segment accounted for more than 10% of our consolidated revenue at approximately 35%. We purchased approximately $275 million of product from two third-party suppliers of our Crude segment, which represented approximately 36% of our costs of products sold.
At June 30, 2014, one third-party customer of our Crude segment accounted for approximately 20% of our consolidated accounts receivable.
Income Taxes
INCOME TAXES
INCOME TAXES

The effective tax rate was 35% and 55% for the three months ended June 30, 2014 and 2013, respectively, and 58% and (396)% for the six months ended June 30, 2014 and 2013, respectively. The rate for the three months ended June 30, 2014 is impacted by the disallowance of a foreign loss on cross jurisdictional intercompany debt waivers which had no net impact to U.S. taxes and by the net favorable resolution of Canadian income tax audits for periods through December 2009. The rate for the six months ended June 30, 2014 is impacted by $3.1 million Canadian withholding tax paid on remittances to the U.S. The rate for the six months ended June 30, 2013 is impacted by a discrete tax benefit of $50.9 million for the partial release of our valuation allowance which was recorded for the three months ended March 31, 2013. Significant items that impacted the effective tax rate for each period, as compared to the U.S. federal statutory rate of 35%, include earnings in foreign jurisdictions taxed at lower rates, a noncontrolling interest in Rose Rock for which taxes are not provided, warrant expense which is not deductible for tax purposes, and the impact of the valuation allowance or release recorded against our deferred tax assets. Further, the foreign earnings are taxed in foreign jurisdictions as well as in the U.S., since they are disregarded entities for U.S. federal income tax purposes. Deferred tax liabilities, with the exception of those related to certain long-lived assets, have been considered as a source of future taxable income in establishing the amount of the valuation allowance. These combined factors, and the magnitude of permanent items impacting the tax rate relative to income from continuing operations before income taxes, result in rates that are not comparable between the periods.

Due to our emergence from bankruptcy and overall restructuring, we recorded a full valuation allowance on all U.S. federal and state deferred tax assets in all periods prior to March 31, 2013. Deferred tax assets are reduced by a valuation allowance when a determination is made that it is more likely than not that some, or all, of the deferred tax assets will not be realized based on the weight of all available evidence. Evidence which is objectively verifiable carries a higher weight in the analysis. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income of the appropriate character within the carryback and carryforward period available under the tax law. Sources of taxable income include future reversals of existing taxable temporary differences, future earnings and available tax planning strategies.

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

We have determined that no accruals related to uncertainty in tax positions are required. All income tax years of the Company ending after the emergence from bankruptcy remain open for examination in all jurisdictions. In foreign jurisdictions, all tax years within the relevant statute of limitations for periods prior to the emergence from bankruptcy remain open for examination. Currently, there are no examinations in progress for our federal, state or foreign jurisdictions.
Long-Term Debt
Long-Term Debt
LONG-TERM DEBT
Our long-term debt consisted of the following (in thousands):
 
June 30,
2014
 
December 31,
2013
SemGroup 7.50% senior unsecured notes
$
300,000

 
$
300,000

SemGroup corporate revolving credit facility
65,500

 
70,000

Rose Rock 5.625% senior unsecured notes
400,000

 

Rose Rock credit facility
447,500

 
245,000

SemMexico credit facility
4,318

 

Capital leases
107

 
125

Total long-term debt
$
1,217,425

 
$
615,125

less: current portion of long-term debt
4,357

 
37

Noncurrent portion of long-term debt
$
1,213,068

 
$
615,088


SemGroup senior unsecured notes
For the three months and six months ended June 30, 2014, we incurred $5.8 million and $11.7 million, respectively, of interest expense related to the 7.5% senior unsecured notes (the "Notes") including the amortization of debt issuance costs. For the three months and six months ended June 30, 2013, we incurred $1.1 million of interest expense related to the Notes including amortization of debt issuance costs. At June 30, 2014, we had $5.8 million of unamortized debt issuance costs related to the Notes included in other noncurrent assets on our condensed consolidated balance sheet.
At June 30, 2014, we were in compliance with the terms of the Notes.
SemGroup corporate credit agreement
Our revolving credit facility has a capacity of $500 million. This capacity may be used either for cash borrowings or letters of credit, although the maximum letter of credit capacity is $250 million. At June 30, 2014, we had $65.5 million outstanding cash borrowings on this facility and outstanding letters of credit of $3.9 million.
The interest rate in effect at June 30, 2014 on $65.5 million of alternate base rate ("ABR") borrowings was 4.5%. At June 30, 2014, the rate in effect on letters of credit was 2.25%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit.
At June 30, 2014, $5.6 million in capitalized loan fees, net of accumulated amortization, was recorded in other noncurrent assets, which is being amortized over the life of the facility.
We recorded interest expense related to the SemGroup revolving credit facility of $2.0 million and $1.5 million for the three months ended June 30, 2014 and 2013, respectively, including amortization of debt issuance costs. We recorded interest expense related to the SemGroup revolving credit facility of $3.7 million and $2.8 million for the six months ended June 30, 2014 and 2013, respectively, including amortization of debt issuance costs.
At June 30, 2014, we were in compliance with the terms of the credit agreement.
The credit agreement is guaranteed by all of our material domestic subsidiaries (except for Rose Rock Midstream, L.P. and its general partner and subsidiaries) and secured by a lien on substantially all of our property and assets, subject to customary exceptions.
Rose Rock senior unsecured notes
On June 27, 2014, Rose Rock and its wholly-owned subsidiary, Rose Rock Finance Corporation ("Finance Corp."), as co-issuer, agreed to sell $400 million of 5.625% senior unsecured notes due 2022 (the “Rose Rock 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 Notes are guaranteed by all of Rose Rock's existing subsidiaries other than Finance Corp.
The net proceeds from the offering of $391.9 million, after underwriters' fees and offering expenses, were received on July 2, 2014. As we entered into the agreement with the initial purchasers on June 27, 2014, we recorded the liability for the Rose Rock Notes on that date and recorded a receivable for the proceeds. The net proceeds from the offering were used to repay amounts borrowed under Rose Rock's revolving credit facility and for general partnership purposes.
The Rose Rock Notes are governed by an indenture between Rose Rock, its subsidiary guarantors, Finance Corp. and Wilmington Trust, National Association, as trustee (the “Rose Rock Indenture”). The Rose Rock 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 under the Rose Rock Indenture.
The Rose Rock Indenture includes customary events of default. A default would permit the trustee or holders of at least 25% in aggregate principal amounts of the Rose Rock Notes then outstanding to declare all amounts owing under the Rose Rock Notes to be due and payable.
The Rose Rock 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 Rose Rock Notes under the Rose Rock Indenture from time to time, subject to the terms of the Rose Rock Indenture.
Except as described below, the Rose Rock Notes are not redeemable at Rose Rock's option prior to July 15, 2017. From and after July 15, 2017, Rose Rock may redeem the Rose Rock 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 July 15 of each of the years indicated below:
Year
 
Percentage
2017
 
104.219%
2018
 
102.813%
2019
 
101.406%
2020 and thereafter
 
100.000%

Prior to July 15, 2017, 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 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 July 15, 2017, Rose Rock may also redeem all or part of the Rose Rock 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 July 15, 2017 redemption price from the table above plus all required interest payments due through July 15, 2017, computed using a discount rate based on a published United States Treasury Rate plus 50 basis points, over the principal value of such Note.
In the event of a change of control, Rose Rock is required to offer to repurchase the Rose Rock Notes at an amount equal to 101% of the principal plus accrued and unpaid interest.
The Rose Rock 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 settlement date of the Rose Rock Notes so that holders of the Rose Rock Notes can exchange the Rose Rock Notes and related guarantees for registered notes (the "Exchange Notes") and guarantees that have substantially identical terms as the Rose Rock 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 January 15th and July 15th to holders of record on January 1st and July 1st each year until maturity. At June 30, 2014, we had $8.7 million of unamortized debt issuance costs related to the Notes included in other noncurrent assets on our consolidated balance sheet.
At June 30, 2014, we were in compliance with the terms of the Rose Rock Indenture.
Rose Rock credit facility
Our Rose Rock credit facility has a capacity of $585 million including a $150 million sub-limit for letters of credit. At June 30, 2014, there was $447.5 million outstanding cash borrowings under the Rose Rock revolving credit facility, which incurred interest at the ABR plus an applicable margin. The interest rate in effect at June 30, 2014 on ABR borrowings was 4.0%. On July 2, 2014, the proceeds from the Rose Rock Notes were used to pay down the revolver balance.
At June 30, 2014, Rose Rock had $30.0 million in outstanding letters of credit, and the rate in effect was 1.75%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit.
Rose Rock had $54.6 million of Secured Bilateral Letters of Credit outstanding at June 30, 2014. 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 recorded $2.6 million and $2.5 million of interest expense related to this facility during the three months ended June 30, 2014 and 2013, respectively. We recorded $4.9 million and $4.2 million of interest expense related to this facility during the six months ended June 30, 2014 and 2013, respectively, including amortization of debt issuance costs.
At June 30, 2014, $4.3 million in capitalized loan fees, net of accumulated amortization, was recorded in other noncurrent assets, which is being amortized over the life of the facility.
At June 30, 2014, we were in compliance with the terms of the credit agreement.
SemMexico facilities
At June 30, 2014, SemMexico had borrowings of 56 million Mexican pesos ($4.3 million at the June 30, 2014 exchange rate) outstanding on its 56 million Mexican pesos (U.S. $4.3 million at the June 30, 2014 exchange rate) revolving credit facility, which matures in July 2014. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.50%. The balance was repaid in July 2014.
At June 30, 2014, SemMexico had no outstanding borrowings on its 44 million Mexican pesos (U.S. $3.4 million at the June 30, 2014 exchange rate) revolving credit facility, which matures in June 2015. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.50%.
SemMexico had outstanding letters of credit of 331.7 million Mexican pesos at June 30, 2014 (U.S. $25.6 million at the June 30, 2014 exchange rate). Fees on outstanding letters of credit range from a rate of 0.45% to 0.70%.
SemMexico recorded interest expense of $0.1 million during the three months and six months ended 2014 and 2013, respectively.
At June 30, 2014, we were in compliance with the terms of these facilities.
Capitalized interest
During the six months ended June 30, 2014 and 2013, we capitalized interest from our credit facilities of $0.8 million and $1.8 million, respectively.
Fair value
We estimate the fair value of the Notes to be $329 million and the fair value of the Rose Rock Notes to be $405 million at June 30, 2014, based on unadjusted, transacted market prices, which is categorized as a Level 1 measurement. We estimate that the fair value of our other long-term debt was not materially different than the recorded values at June 30, 2014. It is our belief that neither the market interest rates nor our credit profile have changed significantly enough to have had a material impact on the fair value of our other debt outstanding at June 30, 2014. This estimate is categorized as a Level 3 measurement.
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
Bankruptcy matters
On July 22, 2008 (the “Petition Date”), SemGroup, L.P. and certain subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Also on July 22, 2008, SemGroup, L.P.'s Canadian subsidiaries filed for creditor protection in Canada. Later during 2008, certain other U.S. subsidiaries filed petitions for reorganization. While in bankruptcy, SemGroup, L.P. filed a plan of reorganization with the court, which was confirmed on October 28, 2009 (the “Plan of Reorganization”). The Plan of Reorganization determined, among other things, how pre-Petition Date obligations would be settled, the equity structure of the reorganized company upon emergence, and the financing arrangements upon emergence. SemGroup Corporation emerged from bankruptcy protection on November 30, 2009 (the “Emergence Date”).
(a)
Confirmation order appeal
Luke Oil appeal. On October 21, 2009, Luke Oil Company, C&S Oil/Cross Properties, Inc., Wayne Thomas Oil and Gas and William R. Earnhardt Company (collectively, “Luke Oil”) filed an objection to the Plan of Reorganization “to the extent that the Plan of Reorganization may alter, impair, or otherwise adversely affect Luke Oil’s legal rights or other interests.” On October 28, 2009, the bankruptcy court overruled the Luke Oil objection and entered the confirmation order. On November 6, 2009, Luke Oil filed a Notice of Appeal. On December 23, 2009, Luke Oil’s appeal was docketed in the United States District Court for the District of Delaware. We filed a motion to dismiss the appeal as equitably moot. On May 21, 2012, the District Court entered an order granting our motion to dismiss Luke Oil's appeal of the confirmation order. On June 18, 2012, Luke Oil filed its Notice of Appeal, notifying the District Court and the parties to the lawsuit that it was appealing the decision of the District Court to the United States Court of Appeals for the Third Circuit. On August 27, 2013, the United States Court of Appeals for the Third Circuit issued an opinion, and on September 18, 2013 issued a judgment, reversing the District Court’s dismissal of the confirmation order and remanding the case to the District Court for consideration on the merits of Luke Oil’s appeal of the confirmation order. On January 28, 2014, the parties reached agreement to settle all outstanding disputes. A settlement agreement was executed by the parties pursuant to which each party granted the other a release of claims and causes of action and on March 5, 2014 the Appeal was dismissed.
(b)
Investigations
Around the time of our predecessor's bankruptcy filings, several governmental agencies launched investigations regarding the circumstances of the filings. The mandate and scope of these investigations were very broad and the investigations are ongoing.
Bankruptcy examiner. On October 14, 2008, the bankruptcy court appointed an examiner to (i) investigate the circumstances surrounding our predecessor's trading strategy prior to bankruptcy filings; (ii) investigate the circumstances surrounding certain insider transactions and the formation of SemGroup Energy Partners L.P. (a former subsidiary); (iii) investigate the circumstances surrounding the potential improper use of borrowed funds and funds generated from operations and the liquidation of assets to satisfy margin calls related to our predecessor's trading strategy and that of certain entities owned or controlled by former officers and directors of the general partner of SemGroup, L.P.; (iv) determine whether any directors, officers or employees of the general partner of SemGroup, L.P. participated in fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of our affairs; and (v) determine whether the SemGroup debtor estates have causes of action against current or former officers, directors, or employees of the general partner of SemGroup, L.P. arising from such participation. The examiner’s report was filed with the bankruptcy court on April 15, 2009.
Certain current and prior employees of the general partner of SemGroup, L.P. are referenced in the examiner’s report and the report’s conclusions may suggest possible civil or criminal liability on their part. To the extent such claims exist, they are property of a litigation trust that was established for the benefit of pre-petition creditors pursuant to the Plan of Reorganization, and are not property of the reorganized SemGroup Corporation. This litigation trust is pursuing claims against certain former officers, at its own expense. We may incur expenses, which are not expected to be material, related to information and document requests of the litigation trust related to such claims. Any indemnification obligations to such officers by SemGroup, L.P. were discharged under the Plan of Reorganization.
CFTC. On June 19, 2008, we received a request for voluntary production from the Commodity Futures Trading Commission (“CFTC”). Subsequent to the bankruptcy filings, the CFTC sent other requests for voluntary production. The CFTC has also served subpoenas upon us requiring us to produce various documents and for the depositions of our representatives. We continue to comply with the CFTC’s requests. We are unaware of any currently pending formal charges against us by the CFTC.
(c)
Claims reconciliation process
A large number of parties have made claims against us for obligations alleged to have been incurred prior to our predecessor's bankruptcy filing. On September 15, 2010, the bankruptcy court entered an order estimating the contingent, unliquidated and disputed claims and authorizing distributions to holders of allowed claims. Pursuant to that order we have begun making distributions to the claimants. We continue to attempt to settle unresolved claims.
Pursuant to the Plan of Reorganization, we committed to settle authorized and allowed bankruptcy claims by paying a specified amount of cash, issuing a specified number of warrants, and issuing a specified number of shares of SemGroup Corporation common stock. We do not believe the resolution of the remaining outstanding claims will exceed the total amount of consideration established under the Plan of Reorganization for all claimants; instead, the resolution of the remaining claims in some cases will impact the relative share of the established pool of common stock and warrants that certain claimants receive.
However, under certain circumstances we could be required to pay additional funds to settle the specified group of claims to be settled with cash. Pursuant to the Plan of Reorganization, a specified amount of restricted cash was set aside at the Emergence Date, which we expect to be sufficient to settle this group of claims. Since the Emergence Date, we have made significant progress in resolving these claims, and we continue to believe that the cash set aside at the Emergence Date will be sufficient to settle these claims. However, we have not yet reached a resolution of all of these claims, and if the total settlement amount of all of these claims exceeds the specified amount, we will be required to pay additional funds to satisfy the total settlement amount for this specified group of claims. If this were to become probable of occurring, we would be required to record a liability and a corresponding expense.
Blueknight claim
Blueknight Energy Partners, L.P. (“Blueknight”), which was formerly a subsidiary of SemGroup, together with other entities related to Blueknight, entered into a Shared Services Agreement on April 7, 2009, with SemCrude, L.P., now known as Rose Rock Midstream Crude, L.P. (“SemCrude”) and SemManagement, L.L.C. (which are currently subsidiaries of SemGroup). The services provided by SemCrude to Blueknight under this agreement included assisting Blueknight with movement of crude oil belonging to Blueknight’s customers and with the operation of Blueknight’s Oklahoma pipeline system and its Cushing, Oklahoma terminal. Under the subsequent amendments to the agreements beginning in May 2010, certain of these services were phased out, and Blueknight began to perform all services necessary for the movement of its crude oil and the operation of its Cushing terminal without SemCrude’s assistance.
In a letter dated August 18, 2011, Blueknight claimed that SemCrude owes Blueknight approximately 141,000 barrels of crude oil. We responded to Blueknight’s letter denying their charges and requesting documentation from Blueknight of its claim. On February 14, 2012, after months of interaction between the parties through which Blueknight was requested to substantiate its claim, Blueknight filed suit against SemCrude and other related companies in the District Court of Oklahoma County, Oklahoma. On May 1, 2012, the case was transferred to Tulsa County, Oklahoma. On July 2, 2012, the Tulsa County District Court appointed a Special Master to review terminal operations accounting records and determine whether 141,000 barrels of crude oil owned by Blueknight is missing after three months of operations in April through June, 2010. On June 11, 2013, the Special Master’s Report was filed with the District Court finding a shortage in Blueknight’s Cushing terminal and Oklahoma pipeline system of 148,000 barrels. However, after a review of all records created during that three month time period, the Special Master was unable to determine how the shortage might have occurred and was unable to determine the ownership of the potential shortage.
We are currently seeking discovery in the District Court of documentation and testimony on the potential cause and the impact, if any, of the shortage found by the Special Master. On February 20, 2014, the District Court issued an order denying all requests for summary judgment and ordering discovery to go forward. We will continue to defend our position; however, we cannot predict the outcome.
Environmental
We may from time to time experience leaks of petroleum products from our facilities and, as a result of which, we may incur remediation obligations or property damage claims. In addition, we are subject to numerous environmental regulations. Failure to comply with these regulations could result in the assessment of fines or penalties by regulatory authorities.
The Kansas Department of Health and Environment (“the KDHE”) initiated discussions during our bankruptcy proceeding regarding six of our sites in Kansas (five owned by Crude and one owned by SemGas) that KDHE believes, based on their historical use, may have soil or groundwater contamination in excess of state standards. KDHE sought our agreement to undertake assessments of these sites to determine whether they are contaminated. We reached an agreement with KDHE on this matter and entered into a Consent Agreement and Final Order with KDHE to conduct environmental assessments on the sites and to pay KDHE’s costs associated with their oversight of this matter. We have conducted Phase II investigations at all sites. Four of the sites have limited amounts of soil contamination that will be excavated and/or remediated on site. Four of the sites appear to have ground water contamination that may require further delineation and/or ongoing monitoring. Work plans have been submitted to, and approved by, the KDHE. We do not anticipate any penalties or fines for these historical sites.
Other matters
We are party to various other claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of our management, the ultimate resolution of these claims, legal actions and complaints, after consideration of amounts accrued, insurance coverage and other arrangements, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, the outcome of such matters is inherently uncertain, and estimates of our consolidated liabilities may change materially as circumstances develop.
Asset retirement obligations
We will be required to incur significant removal and restoration costs when we retire our natural gas gathering and processing facilities in Canada. We have recorded an asset retirement obligation liability of $43.7 million at June 30, 2014, which is included within other noncurrent liabilities on our condensed consolidated balance sheets. This amount was calculated using the $101.4 million cost we estimate we would incur to retire these facilities, discounted based on our risk-adjusted cost of borrowing and the estimated timing of remediation.
The calculation of the liability for an asset retirement obligation requires the use of significant estimates, including those related to the length of time before the assets will be retired, cost inflation over the assumed life of the assets, actual remediation activities to be required, and the rate at which such obligations should be discounted. Future changes in these estimates could result in material changes in the value of the recorded liability. In addition, future changes in laws or regulations could require us to record additional asset retirement obligations.
Our other segments may also be subject to removal and restoration costs upon retirement of their facilities. However, we are unable to predict when, or if, our pipelines, storage tanks and other facilities would become completely obsolete and require decommissioning. Accordingly, we have not recorded a liability or corresponding asset, as both the amount and timing of such potential future costs are indeterminable.
Purchase and sale commitments
We routinely enter into agreements to purchase and sell petroleum products at specified future dates. We account for derivatives at fair value with the exception of commitments which have been designated as normal purchases and sales for which we do not record assets or liabilities related to these agreements until the product is purchased or sold. At June 30, 2014, such commitments included the following (in thousands):
 
Volume
(Barrels)
 
Value
Fixed price purchases
145

 
$
13,348

Fixed price sales
175

 
$
17,720

Floating price purchases
9,329

 
$
949,093

Floating price sales
12,080

 
$
1,047,077


Certain of the commitments shown in the table above relate to agreements to purchase product from a counterparty and to sell a similar amount of product (in a different location) to the same counterparty. Many of the commitments shown in the table above are cancellable by either party, as long as notice is given within the time frame specified in the agreement (generally 30 to 120 days).
Our SemGas segment has a take or pay contractual obligation related to the fractionation of natural gas liquids. This obligation continues through June 2023, subsequent to the extension of the agreement in the second quarter of 2013. At June 30, 2014, approximately $25.8 thousand was due under the contract and the amount of future obligation is approximately $82.8 million. SemGas further has a take or pay contractual obligation related to pipeline transportation. This obligation began in April 2014 and continues through October 2014. The amount of future obligation is approximately $0.7 million. SemGas also enters into contracts under which we are responsible for marketing the majority of the gas and natural gas liquids produced by the counterparties to the agreements. The majority of SemGas’ revenues were generated from such contracts.
See Note 3 for commitments related to the White Cliffs expansion project.
Equity
EQUITY
EQUITY
Unaudited condensed consolidated statement of changes in owners’ equity
The following table shows the changes in our consolidated owners’ equity accounts from December 31, 2013 to June 30, 2014 (in thousands):
 
Common
Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
Total
Owners’
Equity
Balance at December 31, 2013
$
425

 
$
1,154,516

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

 
$
1,213,863

Net income (loss)

 

 

 
(4,096
)
 

 
11,250

 
7,154

Other comprehensive income, net of income taxes

 

 

 

 
3,713

 

 
3,713

Distributions to noncontrolling interests

 

 

 

 

 
(13,209
)