SEMGROUP CORP, 10-K filed on 2/28/2014
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2013
Jun. 28, 2013
Jan. 31, 2014
Class A [Member]
Jan. 31, 2014
Class B
Document Type
10-K 
 
 
 
Amendment Flag
false 
 
 
 
Document Period End Date
Dec. 31, 2013 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
Document Fiscal Year Focus
2013 
 
 
 
Entity Registrant Name
SemGroup Corporation 
 
 
 
Entity Central Index Key
0001489136 
 
 
 
Current Fiscal Year End Date
--12-31 
 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
 
Entity Common Stock, Shares Outstanding
 
 
42,452,997 
28,235 
Entity Well-known Seasoned Issuer
Yes 
 
 
 
Entity Public Float
 
$ 2,259,318,526 
 
 
Entity Current Reporting Status
Yes 
 
 
 
Entity Voluntary Filers
No 
 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 79,351 
$ 80,029 
Restricted cash
5,119 
34,678 
Accounts receivable (net of allowance of $3,661 and $3,687 at December 31, 2013 and 2012, respectively)
323,965 
346,169 
Receivable from affiliates
67,273 
6,178 
Inventories
44,295 
34,433 
Other current assets
14,011 
18,516 
Total current assets
534,014 
520,003 
Property, plant and equipment (net of accumulated depreciation of $188,720 and $130,886 at December 31, 2013 and 2012, respectively)
1,105,728 
814,724 
Equity method investments
565,124 
387,802 
Goodwill
62,021 
9,884 
Other intangible assets (net of accumulated amortization of $12,655 and $6,701 at December 31, 2013 and 2012, respectively)
174,838 
7,585 
Other noncurrent assets, net
28,889 
8,181 
Total assets
2,470,614 
1,748,179 
Current liabilities:
 
 
Accounts payable
254,467 
253,623 
Payable to affiliates
62,279 
Accrued liabilities
83,429 
63,831 
Payables to pre-petition creditors
3,177 
32,933 
Warrant liability
58,134 
Deferred revenue
25,538 
18,973 
Other current liabilities
12,153 
4,960 
Current portion of long-term debt
37 
24 
Total current liabilities
499,214 
374,344 
Long-term debt
615,088 
206,062 
Deferred income taxes
100,945 
65,620 
Other noncurrent liabilities
41,504 
80,625 
Commitments and contingencies (Note 17)
   
   
SemGroup Corporation owners’ equity:
 
 
Common stock (Note 18)
425 
420 
Additional paid-in capital
1,154,516 
1,039,189 
Treasury stock, at cost (Note 18)
(613)
(242)
Accumulated deficit
(97,572)
(145,674)
Accumulated other comprehensive loss
(2,854)
(1,299)
Total SemGroup Corporation owners’ equity
1,053,902 
892,394 
Noncontrolling interests in consolidated subsidiaries
159,961 
129,134 
Total owners’ equity
1,213,863 
1,021,528 
Total liabilities and owners’ equity
$ 2,470,614 
$ 1,748,179 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Accounts receivable, net of allowance
$ 3,661 
$ 3,687 
Property, plant and equipment, net of accumulated depreciation
188,720 
130,886 
Other intangible assets, net of accumulated amortization
$ 12,655 
$ 6,701 
Consolidated Statements of Operations and Comprehensive Income (Loss) (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Revenues:
 
 
 
Product
$ 1,145,104 
$ 953,738 
$ 1,237,313 
Service
140,198 
117,721 
123,345 
Other
141,714 
166,038 
104,588 
Total revenues
1,427,016 
1,237,497 
1,465,246 
Expenses:
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
1,020,100 
874,885 
1,144,439 
Operating
223,585 
224,700 
155,041 
General and administrative
78,597 
71,918 
75,447 
Depreciation and amortization
66,409 
48,210 
49,823 
Loss (gain) on disposal or impairment of long-lived assets, net
239 
3,531 
(301)
Total expenses
1,388,452 
1,216,182 
1,425,051 
Earnings from equity method investments
52,477 
36,036 
15,004 
Gain on issuance of common units by equity method investee
26,873 
Operating income (loss)
117,914 
57,351 
55,199 
Other expenses (income):
 
 
 
Interest expense
25,142 
8,902 
60,138 
Foreign currency transaction loss (gain)
(1,633)
298 
(3,450)
Other expense (income), net
45,906 
21,271 
(11,539)
Total other expenses, net
69,415 
30,471 
45,149 
Income (loss) from continuing operations before income taxes
48,499 
26,880 
10,050 
Income tax expense (benefit)
(17,254)
(2,078)
(2,310)
Income (loss) from continuing operations
65,753 
28,958 
12,360 
Income (loss) from discontinued operations, net of income taxes
59 
2,939 
(9,548)
Net income (loss)
65,812 
31,897 
2,812 
Less: net income attributable to noncontrolling interests
17,710 
9,797 
435 
Net income (loss) attributable to SemGroup
48,102 
22,100 
2,377 
Other comprehensive income (loss):
 
 
 
Currency translation adjustments
(6,363)
12,635 
(13,075)
Other, net of income tax
4,808 
(59)
(1,915)
Total other comprehensive income (loss)
(1,555)
12,576 
(14,990)
Comprehensive income (loss)
64,257 
44,473 
(12,178)
Less: comprehensive income attributable to noncontrolling interests
17,710 
9,797 
435 
Comprehensive income (loss) attributable to SemGroup
$ 46,547 
$ 34,676 
$ (12,613)
Net income (loss) per common share (Note 18):
 
 
 
Basic
$ 1.14 
$ 0.53 
$ 0.06 
Diluted
$ 1.13 
$ 0.52 
$ (0.06)
Consolidated Statements of Changes in Owners' Equity (USD $)
In Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Treasury Stock [Member]
Accumulated Deficit [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Noncontrolling Interest [Member]
Beginning Balance at Dec. 31, 2010
$ 855,068 
$ 415 
$ 1,023,727 
$ 0 
$ (170,189)
$ 1,115 
$ 0 
Net income (loss)
2,812 
2,377 
435 
Other comprehensive income (loss)
(14,990)
(14,990)
Non-cash equity compensation
8,641 
8,641 
Issuance of common stock under compensation plans
(3)
Net proceeds from issuance of Rose Rock Midstream, L.P. common units
127,134 
127,134 
Ending Balance at Dec. 31, 2011
978,665 
418 
1,032,365 
(167,812)
(13,875)
127,569 
Net income (loss)
31,897 
22,100 
9,797 
Other comprehensive income (loss)
12,576 
12,576 
Distributions to noncontrolling interests
(8,502)
(8,502)
Non-cash equity compensation
6,503 
6,195 
308 
Issuance of common stock under compensation plans
(2)
Repurchase of common stock
(242)
(242)
Other
38 
(38)
Warrants exercised
631 
631 
Ending Balance at Dec. 31, 2012
1,021,528 
420 
1,039,189 
(242)
(145,674)
(1,299)
129,134 
Net income (loss)
65,812 
48,102 
17,710 
Other comprehensive income (loss)
(1,555)
(1,555)
Distributions to noncontrolling interests
(17,647)
(17,647)
Non-cash equity compensation
7,330 
6,524 
806 
Issuance of common stock under compensation plans
(1)
Repurchase of common stock
(371)
(371)
Net proceeds from issuance of Rose Rock Midstream, L.P. common units
210,226 
210,226 
Transfer of SemCrude Pipeline interest to Rose Rock
(67,291)
112,929 
(180,220)
Warrants exercised
21,379 
21,375 
Dividends paid
(25,429)
(25,429)
Unvested dividend equivalent rights
(119)
(71)
(48)
Ending Balance at Dec. 31, 2013
$ 1,213,863 
$ 425 
$ 1,154,516 
$ (613)
$ (97,572)
$ (2,854)
$ 159,961 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Cash flows from operating activities:
 
 
 
Net income (loss)
$ 65,812 
$ 31,897 
$ 2,812 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Net unrealized (gain) loss related to derivative instruments
(974)
1,196 
(14,114)
Depreciation and amortization
66,409 
48,646 
51,189 
Loss (gain) on disposal or impairment of long-lived assets, net
216 
6,621 
(9,497)
Equity earnings from investments
(52,477)
(36,036)
(15,004)
Gain on issuance of common units by equity method investee
(26,873)
Distributions from equity investments
63,651 
36,440 
15,004 
Amortization and write down of debt issuance costs
2,732 
2,425 
30,338 
Deferred tax benefit
(36,274)
(11,818)
(9,847)
Non-cash compensation expense
7,330 
6,503 
8,641 
(Gain) loss on fair value of warrants
46,433 
21,310 
(5,012)
Provision for uncollectible accounts receivable, net of recoveries
(372)
(315)
(7,421)
Currency (gain) loss
(1,633)
298 
(3,450)
Changes in operating assets and liabilities (Note 22)
39,861 
(14,283)
11,408 
Net cash provided by operating activities
173,409 
79,642 
74,041 
Cash flows from investing activities:
 
 
 
Capital expenditures
(215,609)
(119,319)
(65,995)
Proceeds from sale of long-lived assets
1,279 
2,641 
1,125 
Investments in non-consolidated subsidiaries
(173,868)
(78,253)
(3,717)
Payments to acquire businesses
(362,456)
Proceeds from sale of non-consolidated affiliate
3,500 
Proceeds from the sale of SemStream assets
12,250 
93,054 
Distributions in excess of equity in earnings of affiliates
12,246 
17,290 
12,455 
Net cash provided by (used in) investing activities
(738,408)
(161,891)
36,922 
Cash flows from financing activities:
 
 
 
Debt issuance costs
(14,936)
(707)
(12,533)
Borrowings on debt and other obligations
1,268,474 
318,000 
263,905 
Principal payments on debt and other obligations
(859,412)
(222,066)
(503,189)
Distributions to noncontrolling interests
(17,647)
(8,502)
Proceeds from warrant exercises
225 
Repurchase of common stock
(371)
(242)
Dividends paid
(25,429)
Proceeds from issuance of Rose Rock Midstream, L.P. common units, net of offering costs
210,226 
127,134 
Net cash provided by (used in) financing activities
561,130 
86,483 
(124,683)
Effect of exchange rate changes on cash and cash equivalents
3,191 
(610)
(34)
Change in cash and cash equivalents
(678)
3,624 
(13,754)
Change in cash and cash equivalents included in discontinued operations
2,792 
(454)
Change in cash and cash equivalents from continuing operations
(678)
6,416 
(14,208)
Cash and cash equivalents at beginning of period
80,029 
73,613 
87,821 
Cash and cash equivalents at end of period
$ 79,351 
$ 80,029 
$ 73,613 
Overview
Overview
OVERVIEW
SemGroup Corporation is a Delaware corporation headquartered in Tulsa, Oklahoma that provides diversified services for end-users and consumers of crude oil, natural gas, natural gas liquids, refined products and asphalt. SemGroup Corporation began operations on November 30, 2009, as the successor entity of SemGroup, L.P., which was an Oklahoma limited partnership.
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 applications for creditor protection in Canada under the Companies’ Creditors Arrangement Act (the “CCAA”). 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 determined, among other things, how pre-Petition Date obligations would be settled, the equity structure of the reorganized company upon emergence, and the financing arrangements upon emergence. SemGroup Corporation emerged from bankruptcy on November 30, 2009 (the “Emergence Date”).
The accompanying consolidated financial statements include the activities of SemGroup Corporation and its subsidiaries. The terms “we,” “our,” “us,” “the Company” and similar language used in these notes to consolidated financial statements refer to SemGroup Corporation and its subsidiaries.
Our reportable segments include the following:
Crude conducts crude oil transportation, storage, terminalling, gathering and marketing operations in the United States. Crude’s assets include:
the 2% general partner interest and a 51.6% limited partner interest in Rose Rock Midstream, L.P. ("Rose Rock"), which owns an approximate 624-mile crude oil pipeline network in Kansas and Oklahoma, a crude oil gathering, storage and marketing business in the Bakken Shale in North Dakota and Montana, a crude oil storage facility in Cushing, Oklahoma with a capacity of 7.35 million barrels and a crude oil trucking fleet of over 130 transport trucks and trailers;
a 51% ownership interest in White Cliffs Pipeline, L.L.C. (“White Cliffs”), which owns a 527-mile pipeline that transports crude oil from Platteville, Colorado to Cushing, Oklahoma (the "White Cliffs Pipeline”); and
a 50% ownership interest in Glass Mountain Pipeline LLC ("Glass Mountain" or "GMP"), which constructed and will maintain and operate a 210-mile crude oil pipeline system (the "Glass Mountain Pipeline") originating in Alva and Arnett, Oklahoma and terminating at Cushing, Oklahoma.
SemStream, which owns 9,133,409 common units representing 12.8% of the total limited partner interests, as of September 30, 2013, in NGL Energy Partners LP (“NGL Energy”) (NYSE: NGL), which owns and operates wholesale and retail propane storage and distribution assets, crude oil logistics and water treatment services in the United States, and a 11.78% interest in the general partner of NGL Energy. We report the results of our investment in NGL Energy on a one-quarter lag (Note 5).
SemCAMS, which provides natural gas gathering and processing services in Alberta, Canada. SemCAMS owns working interests in, and operates, four natural gas processing plants and a network of approximately 600 miles of natural gas gathering and transportation pipelines.
SemGas, which provides natural gas gathering and processing services in the United States. SemGas owns and operates over 1,300 miles of gathering pipelines in Kansas, Oklahoma, and Texas and three processing plants in Oklahoma and Texas.
SemLogistics, which provides refined product and crude oil storage services in the United Kingdom. SemLogistics owns a facility in Wales that has a storage capacity of approximately 8.7 million barrels.
SemMexico, which purchases, produces, stores, and distributes liquid asphalt cement products in Mexico. SemMexico operates twelve manufacturing plants, one emulsion distribution terminal and three portable rail unloading facilities.
Consolidation And Basis Of Presentation
Consolidation and Basis of Presentation
CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
Consolidated subsidiaries
Our consolidated financial statements include the accounts of our controlled subsidiaries, including Rose Rock. All significant transactions between our consolidated subsidiaries have been eliminated. Outside ownership interests in consolidated subsidiaries are reported as noncontrolling interests in the consolidated financial statements.
Proportionally consolidated assets
Our SemCAMS segment owns undivided interests in certain natural gas gathering and processing assets, for which we record only our proportionate share of the assets on the consolidated balance sheets. The net book value of the property, plant and equipment recorded by us associated with these undivided interests is approximately $206.4 million at December 31, 2013. We serve as operator of these facilities and incur the costs of operating the facilities (recorded as operating expenses in the consolidated statements of operations) and charge the other owners for their proportionate share of the costs (recorded as other revenue in the consolidated statements of operations).
Equity method investments
We own a 51% interest in White Cliffs. The other owners have substantive rights to participate in the management of White Cliffs. Because of this, we account for it under the equity method. In 2013, we sold two-thirds of our interest in SemCrude Pipeline, which holds the 51% interest in White Cliffs, to our consolidated subsidiary Rose Rock. We will continue to account for our interest under the equity method. No gain was recorded on the transaction as it was between entities under common control.
On November 1, 2011, we contributed the long-lived assets and certain working capital of our SemStream segment to NGL Energy in return for limited partner interests in NGL Energy, an interest in the general partner of NGL Energy, and cash for working capital (Note 7). We hold two seats on the board of directors of the general partner of NGL Energy, and we account for our investment in NGL Energy and its general partner under the equity method.
In April 2012, we formed a joint venture, Glass Mountain, to construct, maintain and operate a 210-mile crude oil pipeline system originating in Alva and Arnett, Oklahoma and terminating at Cushing, Oklahoma. Construction was completed in January 2014. The Glass Mountain Pipeline is accounted for under the equity method. Our joint venture partner is Gavilon, LLC ("Gavilon"), a subsidiary of NGL Energy.
Discontinued operations
During 2012, we completed the disposition of SemStream's residential propane supply business in Arizona, which is accounted for as a discontinued operation (Note 8).
Summary of Significant Accounting Policies
Summary of Signifcant Accounting Policies
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES—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. Our significant estimates include, but are not limited to: (1) allowances for doubtful accounts receivable; (2) estimated useful lives of assets, which impact depreciation; (3) estimated fair values of long-lived assets used in impairment tests; (4) fair values of derivative instruments; and (5) accrual and disclosure of contingent losses. Although management believes these estimates are reasonable, actual results could differ materially from these estimates.
CASH AND CASH EQUIVALENTS—Cash includes currency on hand and demand and time deposits with banks or other financial institutions. Cash equivalents include highly liquid investments with maturities of three months or less at the date of purchase. Balances at financial institutions may exceed federally insured limits.
RESTRICTED CASH—Our Plan of Reorganization specified the total amount of consideration we would provide to all pre-petition creditors in settlement of their claims. At December 31, 2013, we had not yet completed the process of disbursing funds to settle pre-petition claims, as we had not yet completed the process of resolving all of the claims. The restricted cash balance of $5.1 million at December 31, 2013 is primarily restricted for this purpose.
ACCOUNTS RECEIVABLE—Accounts receivable are reported net of the allowance for doubtful accounts. Our assessment of the allowance for doubtful accounts is based on several factors, including the overall creditworthiness of our customers, existing economic conditions, and the amount and age of past due accounts. We enter into netting arrangements with certain counterparties to help mitigate credit risk. Receivables subject to netting are presented as gross receivables (with the related accounts payable also presented gross) until such time as the balances are settled. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are written off against the allowance for doubtful accounts only after all collection attempts have been exhausted.
INVENTORIES—Inventories primarily consist of natural gas and natural gas liquids, crude oil, and asphalt. Inventories are valued at the lower of cost or market, with cost generally determined using the weighted-average method. The cost of inventory includes applicable transportation costs.
We enter into exchanges with third parties whereby we acquire products that differ in location, grade, or delivery date from products we have available for sale. These exchanges are valued at cost, and although a transportation, location or product differential may be recorded, generally no gain or loss is recognized.
PROPERTY, PLANT AND EQUIPMENT—Property, plant and equipment is recorded at cost. We capitalize costs that extend or increase the future economic benefits of property, plant and equipment, and expense maintenance costs that do not. When assets are disposed of, their cost and related accumulated depreciation are removed from the balance sheet, and any resulting gain or loss is recorded as a gain or loss on disposal or impairment of long-lived assets in the consolidated statements of operations.
Our SemCAMS segment operates plants which periodically undergo planned major maintenance activities, typically occurring every four to five years.  Planned major maintenance projects that do not increase the overall life or capacity of the related assets are recorded in operating expense as incurred, whereas major maintenance activity costs that materially increase the life or capacity of the underlying assets are capitalized. When maintenance expenses are recoverable from the producers who use the plants, they are recorded as revenue, and typically include a 10% overhead fee. 
Depreciation is calculated primarily on the straight-line method over the following estimated useful lives:
Pipelines and related facilities
10 – 31 years
Storage and terminal facilities
10 – 25 years
Natural gas gathering and processing facilities
10 – 31 years
Office and other property and equipment
3 – 31 years


Construction in process is reclassified to the fixed asset categories above and depreciation commences once the asset has been placed in-service.
LINEFILL—Pipelines and storage facilities generally require a minimum volume of product in the system to enable the system to operate. Such product, known as linefill, is generally not available to be withdrawn from the system. Linefill owned by us in facilities operated by us is recorded at historical cost, is included in property, plant and equipment in the consolidated balance sheets, and is not depreciated. We also own linefill in third-party facilities, which is included in inventory on the consolidated balance sheets.
IMPAIRMENT OF LONG-LIVED ASSETS—We test long-lived asset groups for impairment when events or circumstances indicate that the net book value of the asset group may not be recoverable. We test an asset group for impairment by estimating the undiscounted cash flows expected to result from its use and eventual disposition. If the estimated undiscounted cash flows are lower than the net book value of the asset group, we then estimate the fair value of the asset group and record a reduction to the net book value of the assets and a corresponding impairment loss.
GOODWILL—We test goodwill for impairment on an annual basis, or more often if circumstances warrant, by estimating the fair value of the asset group to which the goodwill relates and comparing this fair value to the net book value of the asset group. If fair value is less than net book value, we estimate the implied fair value of goodwill, reduce the book value of the goodwill to the implied fair value, and record a corresponding impairment loss. Our policy is to test goodwill for impairment on October 1 of each year. See Note 7 for discussion of goodwill impairment.
During September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-08, “Testing Goodwill for Impairment”. This ASU is designed to simplify how entities test goodwill for impairment. Under the new standard, an entity may first assess qualitative factors to determine whether it is more likely than not that the fair value of an asset group is less than the carrying amount, for the purpose of determining whether it is necessary to estimate the fair value of the asset group to which the goodwill relates. We adopted this guidance on January 1, 2012. We tested goodwill for impairment on October 1st in accordance with our policy. However, we did not elect to perform the qualitative assessment for impairment testing.
INTANGIBLE ASSETS—Intangible assets are stated at cost, net of accumulated amortization, which is recorded on a straight-line or accelerated basis over the life of the asset. We review amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If such a review should indicate that the carrying amount of amortizable intangible assets is not recoverable, we reduce the carrying amount of such assets to fair value.
EQUITY METHOD INVESTMENTS—We account for an investment under the equity method when we have significant influence over, but not control of, the significant operating decisions of the investee. Under the equity method, we record in the consolidated statements of operations our share of the earnings or losses of the investee, with a corresponding adjustment to the investment balance on our consolidated balance sheet. When we receive a distribution from an equity method investee, we record a corresponding reduction to the investment balance. When an equity method investee issues additional ownership interests which dilute our ownership interest, we recognize a gain or loss in our consolidated statements of operations.
For equity method investments for which we do not expect financial information to be consistently available on a timely basis to apply the equity method currently, our policy is to apply the equity method consistently on a one-quarter lag.
DEBT ISSUANCE COSTS—Costs incurred in connection with the issuance of long-term debt are reported as other noncurrent assets and are amortized to interest expense using the straight-line method over the term of the related debt. Use of the straight-line method of amortization does not differ materially from the “effective interest” method.
COMMODITY DERIVATIVE INSTRUMENTS—We generally record the fair value of commodity derivative instruments on the consolidated balance sheets and the change in fair value as an increase or decrease to product revenue.
As shown in Note 14, the fair value of commodity derivatives at December 31, 2013 and 2012 are recorded to other current assets or other current liabilities on the consolidated balance sheets. Related margin deposits are recorded to other current assets or other current liabilities on the consolidated balance sheets. Margin deposits are not generally netted against derivative assets or liabilities.
The fair value of a derivative contract is determined based on the nature of the transaction and the market in which the transaction was executed. Quoted market prices, when available, are used to value derivative transactions. In situations where quoted market prices are not readily available, we estimate the fair value using other valuation techniques that reflect the best information available under the circumstances. Fair value measurements of derivative assets include consideration of counterparty credit risk. Fair value measurements of derivative liabilities include consideration of our creditworthiness.
We have elected “normal purchase” and “normal sale” treatment for certain commitments to purchase or sell petroleum products at future dates. This election is only available when a transaction that would ordinarily meet the definition of a derivative but instead is expected to result in physical delivery of product over a reasonable period in the normal course of business and is not expected to be net settled. Agreements accounted for under this election are not recorded at fair value; instead, the transaction is recorded when the product is delivered.
On January 31, 2013, the FASB issued ASU 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," which clarifies the scope of the offsetting disclosure requirements in ASU 2011-11, "Disclosures About Offsetting Assets and Liabilities." Under ASU 2013-01, the disclosure requirements apply to derivative instruments accounted for in accordance with Accounting Standards Codification ("ASC") 815, "Derivatives and Hedging," including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those years. Retrospective application is required for all comparative periods presented. We adopted this guidance in the first quarter of 2013. The impact of adoption was not material.
PAYABLES TO PRE-PETITION CREDITORS—Our Plan of Reorganization specified the total amount of consideration we would provide to all pre-petition creditors in settlement of their claims. At December 31, 2013, we had not yet completed the process of disbursing funds to settle pre-petition claims, as we had not yet completed the process of resolving all of the claims. We recorded a liability of $3.2 million at December 31, 2013 associated with these obligations and a liability of $0.7 million which is associated with discontinued operations and is reported within other current liabilities. Restricted cash of $5.1 million primarily relates to payables to pre-petition creditors and is held in accounts restricted for this purpose.
CONTINGENT LOSSES—We record a liability for a contingent loss when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We record attorneys’ fees incurred in connection with a contingent loss at the time the fees are incurred. We do not record liabilities for attorneys’ fees that are expected to be incurred in the future.
ASSET RETIREMENT OBLIGATIONS—Asset retirement obligations include legal or contractual obligations associated with the retirement of long-lived assets, such as requirements to incur costs to dispose of equipment or to remediate the environmental impacts of the normal operation of the assets. We record liabilities for asset retirement obligations when a known obligation exists under current law or contract and when a reasonable estimate of the value of the liability can be made.
DISCONTINUED OPERATIONS—We classify a component of our business as a discontinued operation when we commit to a plan to sell the component and believe it is probable that a sale will be completed within one year. A component that is disposed of in a manner other than by sale is classified as discontinued when the component is actually disposed. Investments accounted for under the equity method, or the cost method, do not qualify for treatment as discontinued operations. A component that is disposed of may not qualify for treatment as a discontinued operation if we have significant continuing involvement in the operations of the component after the disposal.
Once a component meets the requirements to be classified as a discontinued operation, previous financial statements are retrospectively adjusted to reflect the component as a discontinued operation for all periods presented. Income and losses of discontinued operations (excluding corporate general and administrative expense allocations) are combined into one line on the consolidated statements of operations. The cash flows from discontinued operations are not separately identified in the consolidated statements of cash flows.
REVENUE RECOGNITION—Sales of product, as well as gathering and marketing revenues, are recognized at the time title to the product transfers to the purchaser, which typically occurs upon receipt of the product by the purchaser. Terminal and storage revenues are recognized at the time the service is performed. Revenue for the transportation of product is recognized upon delivery of the product to its destination. Certain revenue transactions are reported on a net basis, including derivative instruments considered held for trading purposes and certain buy/sell transactions (see “Purchases and Sales of Inventory with the Same Counterparty”). Other revenue primarily represents operating cost recovery from working interest owners in certain processing plants and is recorded when earned in accordance with the terms of related agreements. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis (excluded from revenue).
COSTS OF PRODUCTS SOLD—Costs of products sold consists of the cost to purchase the product, the cost to transport the product to the point of sale, and the cost to store the product until it is sold.
PURCHASES AND SALES OF INVENTORY WITH THE SAME COUNTERPARTY—We routinely enter into transactions to purchase inventory from, and sell inventory to, the same counterparty. Such transactions that are entered into in contemplation of one another are recorded on a net basis.
CURRENCY TRANSLATION—The consolidated financial statements are presented in U.S. dollars. Our segments operate in four countries, and each segment has identified a “functional currency,” which is the primary currency in the environment in which the segment operates. The functional currencies include the U.S. dollar, the Canadian dollar, the British pound sterling, and the Mexican peso.
At the end of each reporting period, the assets and liabilities of each segment are translated from its functional currency to U.S. dollars using the exchange rate at the end of the month. The monthly results of operations of each segment are generally translated from its functional currency to U.S. dollars using the average exchange rate during the month. Changes in exchange rates result in currency translation gains and losses, which are recorded within other comprehensive income (loss).
Certain segments also enter into transactions in currencies other than their functional currencies. At the end of each reporting period, each segment re-measures the related receivables, payables, and cash to its functional currency using the exchange rate at the end of the period. Changes in exchange rates between the time the transactions were entered into and the end of the reporting period result in currency transaction gains or losses, which are recorded in the consolidated statements of operations.
INCOME TAXES—Deferred income taxes are accounted for under the liability method, which takes into account the differences between the basis of the assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. We record valuation allowances on deferred tax assets when, in the opinion of management, it is more likely than not that the asset will not be recovered.
We monitor uncertain tax positions and we recognize tax benefits only when management believes the relevant tax positions would more likely than not be sustained upon examination. We record any interest and any penalties related to income taxes within income tax expense in the consolidated statements of operations.
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 will adopt this guidance in the first quarter of 2014. The impact is not expected to be material.
RECLASSIFICATIONS—Certain reclassifications have been made to conform prior year balances to the current year presentation.
PENSION BENEFITS—Pension cost and obligations are actuarially determined and are affected by assumptions including expected return on plan assets, discount rates, compensation increases, and employee turnover rates. We evaluate our assumptions periodically and make adjustments to these assumptions and the recorded liability as necessary. Actuarial gains or losses are amortized on a straight-line basis over the expected remaining service life of employees in the pension plan.
EQUITY-BASED COMPENSATION—We grant certain of our employees equity-based compensation awards which vest contingent on continued service of the recipient and, in some cases, on their achievement of specific performance targets. We record compensation expense for these outstanding awards over applicable service or performance periods based on their grant date fair value with a corresponding increase to additional paid-in capital. The expense to be recorded over the life of the awards is discounted for expected forfeitures during the vesting period.
NONCONTROLLING INTERESTS IN CONSOLIDATED SUBSIDIARIES—Noncontrolling interests represents third-party limited partner unitholders' interests in our consolidated subsidiary, Rose Rock. Rose Rock allocates net income to its limited partners based on the distributions pertaining to the current period's available cash as defined by Rose Rock's partnership agreement. After adjusting for the appropriate period's distributions, the remaining undistributed earnings or excess distributions over earnings, if any, are allocated to Rose Rock's general partner, limited partners and participating securities in accordance with the contractual terms of Rose Rock's partnership agreement and as further prescribed under the two-class method. Incentive distribution rights do not participate in undistributed earnings.
COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)—Comprehensive income (loss) is defined as a change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Our comprehensive income (loss) consists of currency translation adjustments, changes in the funded status of pension benefit plans and changes in the fair value of interest rate swaps.
On February 5, 2013, the FASB issued ASU 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income". This ASU adds new disclosure requirements for items reclassified out of AOCI. The ASU is intended to help entities improve the transparency of changes in other comprehensive income ("OCI") and items reclassified out of AOCI in their financial statements. It does not amend any existing requirements for reporting net income or OCI in the financial statements. We adopted this guidance in the first quarter of 2013. The impact of adoption was not material.
On March 4, 2013, the FASB issued 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 will adopt this guidance in the first quarter of 2014. The impact is not expected to be material.
Rose Rock Midstream, L.P.
Rose Rock Midstream, L.P.
ROSE ROCK MIDSTREAM, L.P.
On December 14, 2011, our subsidiary Rose Rock completed an initial public offering ("IPO") in which it sold 7.0 million common units representing limited partner interests. We received proceeds of $127.1 million from this offering, net of underwriter discounts and other fees associated with the offering. We used these proceeds to make principal payments on long-term debt.
On January 11, 2013, we contributed a 33% interest in SemCrude Pipeline, L.L.C. ("SCPL") to Rose Rock in exchange for (i) cash of approximately $189.5 million, (ii) the issuance of 1.5 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 of Rose Rock and a related issuance of general partner interest, to allow the general partner of Rose Rock to maintain its 2% general partner interest. SCPL owns a 51% membership interest in 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.
In connection with this transaction, Rose Rock issued and sold 2.0 million common units to third-party purchasers in a private placement for aggregate consideration of approximately $59.3 million. In addition, Rose Rock exercised the accordion feature of its revolving credit facility and increased the total borrowing capacity under the credit facility from $150 million to $385 million and made a borrowing of $133.5 million under the credit facility. The proceeds from the private placement and the borrowing were used by Rose Rock to fund the cash consideration in the transaction with us and to pay certain related transaction costs and expenses.
On December 16, 2013, we contributed an additional 33% interest in SCPL to Rose Rock in exchange for (i) cash of approximately $173.1 million, (ii) the issuance of 1.5 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 of Rose Rock and a related issuance of general partner interest, to allow the general partner of Rose Rock to maintain its 2% general partner interest. The cash consideration was funded through a borrowing under Rose Rock's credit facility.
As these transactions were between parties under common control, Rose Rock recorded its interest in SCPL at SemGroup's historical value and as such no gain on the sales was recognized by SemGroup. Proceeds in excess of the historical value were accounted for as a dividend from Rose Rock to SemGroup and resulted in a $180.2 million reduction to noncontrolling interests in consolidated subsidiaries and an offsetting increase to additional paid-in capital of $112.9 million (net of tax impact of $67.3 million). This non-cash entry represents the portion of the proceeds in excess of historical cost which were attributed to Rose Rock's third-party unitholders. SemGroup used the proceeds from these transactions to pay amounts owed under its revolving credit facility.
SemGroup incurred approximately $2.2 million of expense associated with these transactions, including expenses of Rose Rock. Rose Rock incurred approximately $4.1 million of cost, of which approximately $1.6 million of equity issuance costs were offset against proceeds, $1.6 million were related to the January 2013 borrowing and were deferred, and $0.9 million were expensed.
In August 2013, Rose Rock sold 4.75 million common limited partner units to third-party purchasers for $152.5 million, net of underwriting discounts and commissions. Proceeds were used to repay borrowings on the Rose Rock credit facility.
At December 31, 2013, we owned the 2% general partner interest and a 51.6% limited partner interest that included 4,389,709 common units, 8,389,709 subordinated units and 2,500,000 Class A units of Rose Rock. We also own certain incentive distribution rights, which are described below. We control the operations of Rose Rock through our ownership of the general partner interest, and we continue to consolidate Rose Rock. The outside ownership interests in Rose Rock are reflected in “noncontrolling interests in consolidated subsidiaries” on our consolidated balance sheets. The portion of the net income of Rose Rock subsequent to the initial public offering that is attributable to outside owners is reflected within “net income attributable to noncontrolling interests” in our consolidated statements of operations.
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. Rose Rock’s partnership agreement requires Rose Rock to distribute all of its available cash each quarter in the following manner:
 
Total Quarterly Distributions
Per Unit Target Amount
 
Marginal Percentage
Interest in Distributions
 
Unitholders
 
General
Partner
 
Incentive
Distribution
Rights
Minimum Quarterly Distributions
 
 
 
 
 
 
$
0.362500

 
98.0
%
 
2.0
%
 

First Target Distribution
above
 
$
0.362500

 
up to
 
$
0.416875

 
98.0
%
 
2.0
%
 

Second Target Distribution
above
 
$
0.416875

 
up to
 
$
0.453125

 
85.0
%
 
2.0
%
 
13.0
%
Third Target Distribution
above
 
$
0.453125

 
up to
 
$
0.543750

 
75.0
%
 
2.0
%
 
23.0
%
Thereafter
 
 
 
 
above
 
$
0.543750

 
50.0
%
 
2.0
%
 
48.0
%
 
The following table shows the distributions paid (in thousands, except for per unit amounts):
 
 
Record Date
 
Payment Date
 
Distribution
Per Unit
 
Distributions Paid
Quarter Ended
 
SemGroup
Noncontrolling
Interest
Common Units
Total
Distributions
 
General
Partner
Incentive
Distributions
Common
Units
Subordinated
Units
December 31, 2011
*
February 3, 2012
 
February 13, 2012
 
$
0.0670

$
23

$

$
93

$
561

$
470

$
1,147

March 31, 2012
 
May 7, 2012
 
May 15, 2012
 
$
0.3725

  
$
128

$

$
517

$
3,125

$
2,607

$
6,377

June 30, 2012
 
August 6, 2012
 
August 14, 2012
 
$
0.3825

 
$
131

$

$
532

$
3,209

$
2,678

$
6,550

September 30, 2012
 
November 5, 2012
 
November 14, 2012
 
$
0.3925

 
$
134

$

$
545

$
3,294

$
2,748

$
6,721

December 31, 2012
 
February 4, 2013
 
February 14, 2013
 
$
0.4025

 
$
167

$

$
1,163

$
3,377

$
3,624

$
8,331

March 31, 2013
 
May 6, 2013
 
May 15, 2013
 
$
0.4300

 
$
179

$
41

$
1,242

$
3,607

$
3,872

$
8,941

June 30, 2013
 
August 5, 2013
 
August 14, 2013
 
$
0.4400

 
$
183

$
72

$
1,271

$
3,692

$
3,962

$
9,180

September 30, 2013
 
November 5, 2013
 
November 14, 2013
 
$
0.4500

 
$
232

$
127

$
1,301

$
3,775

$
6,189

$
11,624

December 31, 2013
 
February 4, 2014
 
February 14, 2014
 
$
0.4650

 
$
257

$
244

$
2,041

$
3,901

$
6,398

$
12,841


*Minimum quarterly distribution for quarter ended December 31, 2011 was prorated for the period beginning immediately after the closing of Rose Rock’s IPO, December 14, 2011 through December 31, 2011.


Certain summarized balance sheet information of Rose Rock is shown below (in thousands):
 
December 31, 2013
 
December 31, 2012
Cash
$
15,459

 
$
108

Other current assets
306,128

 
250,509

Property, plant and equipment
311,616

 
291,530

Equity method investment
224,095

 

Goodwill
28,322

 

Other noncurrent assets
11,627

 
2,579

Total assets
$
897,247

 
$
544,726

Current liabilities
$
293,031

 
$
231,843

Long-term debt
245,088

 
4,562

Partners’ capital attributable to SemGroup
120,610

 
179,187

Partners’ capital attributable to noncontrolling interests
159,961

 
129,134

Noncontrolling interest in consolidated subsidiaries retained by SemGroup
78,557

 

Total liabilities and partners’ capital
$
897,247

 
$
544,726


Certain summarized income statement information of Rose Rock for the years ended December 31, 2013, 2012, and 2011 is shown below (in thousands):
 
Year Ended December 31, 2013
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
Revenue
$
766,526

 
$
620,417

 
$
431,321

Costs of products sold
$
663,759

 
$
546,966

 
$
366,265

Operating, general and administrative expenses
$
51,082

 
$
35,385

 
$
28,816

Depreciation and amortization expense
$
23,165

 
$
12,131

 
$
11,379

Earnings from equity method investment
$
17,571

 
$

 
$

Net income
$
38,005

 
$
23,954

 
$
23,235

Noncontrolling interest in consolidated subsidiaries retained by SemGroup
$
1,256

 
$

 
$

Net income attributable to Rose Rock Midstream, L.P.
$
36,749

 
$
23,954

 
$
23,235

The results of Rose Rock included in the table above for the year ended December 31, 2011 include the activity of its predecessor prior to November 29, 2011. The predecessor included SemCrude, L.P., a wholly-owned subsidiary of SemGroup Corporation (exclusive of SemCrude’s ownership interests in SemCrude Pipeline, L.L.C., which holds a 51% ownership interest in White Cliffs, and Eaglwing, L.P. (“Eaglwing”), which is also a wholly-owned subsidiary of SemGroup Corporation).
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 consolidated balance sheets. Instead, our ownership interest is reflected in one line as a noncurrent asset on our consolidated balance sheets. Our equity method investments consist of the following (in thousands):
 
December 31, 2013
 
December 31, 2012
White Cliffs
$
224,095

 
$
138,970

NGL Energy
208,848

 
174,398

Glass Mountain
132,181

 
74,434

Total equity method investments
$
565,124

 
$
387,802

    
Under the equity method, we do not report the individual revenues and expenses of our investees in our consolidated statements of operations. Instead, our interest in the earnings of our investees is reflected in one line item on our consolidated statements of operations. Our earnings from equity method investments consist of the following (in thousands):
 
Year Ended December 31, 2013
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
White Cliffs
$
45,459

 
$
36,439

 
$
15,004

NGL Energy*
7,123

 
(403
)
 

Glass Mountain
(105
)
 

 

Total earnings from equity method investments
$
52,477

 
$
36,036

 
$
15,004

* Excluding gain on issuance of common units of $26.9 million.
Cash distributions received from equity method investments consist of the following (in thousands):
 
Year Ended December 31, 2013
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
White Cliffs
$
57,576

 
$
44,514

 
$
27,459

NGL Energy
18,321

 
9,217

 

Glass Mountain

 

 

Total cash distributions received from equity method investments
$
75,897

 
$
53,731

 
$
27,459


White Cliffs
We account for our 51% ownership of White Cliffs under the equity method, as the other members have substantive rights to participate in its management.
In August 2012, the members of White Cliffs approved an expansion project to construct a 12" pipeline from Platteville, Colorado to Cushing, Oklahoma.  The project is expected to cost approximately $300 million which will be funded by capital calls to members. Our funding requirement will be 51% of the total cost.  For the years ended December 31, 2013 and 2012, we contributed approximately $95.5 million and $2.3 million, respectively, for project funding and estimate our expected remaining contributions to be $53.3 million, which will be made in 2014.
Certain summarized balance sheet information of White Cliffs is shown below (in thousands):
 
December 31,
2013
 
December 31,
2012
Current assets
$
98,457

 
$
21,508

Property, plant and equipment, net
312,831

 
210,710

Goodwill
17,000

 
17,000

Other intangible assets, net
20,802

 
26,369

Total assets
$
449,090

 
$
275,587

Current liabilities
$
9,648

 
$
3,412

Members’ equity
439,442

 
272,175

Total liabilities and members’ equity
$
449,090

 
$
275,587


Certain summarized income statement information of White Cliffs for the years ended December 31, 2013, 2012 and 2011 is shown below (in thousands):
 
Year Ended December 31, 2013
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
Revenue
$
133,310

 
$
108,125

 
$
66,097

Operating, general and administrative expenses
$
23,825

 
$
14,821

 
$
12,746

Depreciation and amortization expense
$
18,668

 
$
19,963

 
$
20,842

Net income
$
90,817

 
$
73,341

 
$
32,509


The equity in earnings of White Cliffs for the years ended December 31, 2013, 2012 and 2011 reported in our consolidated statements of operations is less than 51% of the net income of White Cliffs for the same period. This is due to certain general and administrative expenses we incur in managing the operations of White Cliffs that the other members are not obligated to share. Such expenses are recorded by White Cliffs, and are allocated to our membership interests. White Cliffs recorded $1.8 million, $2.0 million and $3.2 million of such general and administrative expense for the years ended December 31, 2013, 2012 and 2011, respectively.
Our membership interest in White Cliffs is significant as defined by Securities and Exchange Commission’s Regulation S-X Rule 1-02(w). Accordingly, as required by Regulation S-X Rule 3-09, we have included the audited financial statements of White Cliffs as of December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013 as an exhibit to this Form 10-K.
NGL Energy
We own 9,133,409 common units representing limited partner interests in NGL Energy, which represents approximately 12.8% of the total 71,216,230 limited partner units of NGL Energy outstanding at September 30, 2013, and a 11.78% interest in the general partner of NGL Energy.
At December 31, 2013, the fair value of our 9,133,409 common units in NGL Energy was $315 million, based on a December 31, 2013 closing price of $34.50 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.
The excess of the recorded amount of our investment over the book value of our share of the underlying net assets primarily represents equity method goodwill.
Certain unaudited summarized balance sheet information of NGL Energy is shown below (in thousands):
 
(unaudited)
 
(unaudited)
 
September 30,
2013
 
September 30,
2012
Current assets
$
1,013,859

 
$
736,297

Property plant and equipment, net
631,663

 
425,641

Goodwill
840,287

 
515,881

Intangible and other assets, net
540,684

 
351,600

Total assets
$
3,026,493

 
$
2,029,419

Current liabilities
$
800,658

 
$
653,101

Long-term debt
906,066

 
569,903

Other noncurrent liabilities
2,673

 
2,599

Partners’ equity
1,317,096

 
803,816

Total liabilities and partners’ equity
$
3,026,493

 
$
2,029,419


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 consolidated statements of operations and comprehensive income for the years ended December 31, 2013 and 2012, relates to the earnings of NGL Energy for the twelve months ended September 30, 2013 and 2012, prorated for the period of time we held our ownership interest in NGL Energy.
Our limited partnership interest was diluted primarily in connection with an NGL public equity offering completed on July 5, 2013, an NGL acquisition completed August 2, 2013 and an NGL public equity offering completed on September 25, 2013. Accordingly, we recorded a non-cash gain of $26.9 million in the fourth quarter of 2013 related to these transactions, which is included in "gain on issuance of common units by equity method investee" in our consolidated statements of operations. On December 2, 2013, NGL Energy announced it completed the issuance of common units in a private placement in connection with the completion of an acquisition. As a result of this transaction, we expect to record an estimated non-cash gain of $8.1 million in the first quarter 2014.
Certain unaudited summarized income statement information of NGL Energy for the twelve months ended September 30, 2013 and 2012 is shown below (in thousands):
 
(unaudited)
Twelve Months
Ended
September 30,
2013
 
(unaudited)
Twelve Months
Ended
September 30,
2012
Revenue
$
5,935,715

 
$
2,371,524

Costs of products sold
$
5,478,361

 
$
2,182,263

Operating, general and administrative expenses
$
276,905

 
$
125,889

Depreciation and amortization expense
$
94,050

 
$
34,621

Net income
$
44,378

 
$
5,405


Our ownership interest in NGL Energy is significant as defined by Securities and Exchange Commission’s Regulation S-X Rule 1-02(w). Accordingly, as required by Regulation S-X Rule 3-09, we will amend this Form 10-K to include the audited financial statements of NGL Energy as of March 31, 2014 and 2013 and for each of the three years in the period ended March 31, 2014 as an exhibit, when available.
Glass Mountain
In April 2012, we formed a joint venture, GMP, to construct, maintain and operate a 210-mile crude oil pipeline system originating in Alva and Arnett, Oklahoma and terminating at Cushing, Oklahoma. Construction was completed in January 2014. The pipeline is operated by a subsidiary of Rose Rock. We hold a 50% interest in Glass Mountain. The owner of the remaining 50% is a related party (Note 25). As of December 31, 2013, we have invested $132.2 million in GMP, including our capital contributions, amounts paid to acquire the additional ownership percentage, and capitalized interest. We invested $57.8 million and $74.4 million in GMP for the years ended December 31, 2013 and 2012, respectively.
The excess of the recorded amount of our investment over the book value of our share of the underlying net assets represents equity method goodwill and capitalized interest of $31.0 million and $3.7 million, respectively, at December 31, 2013.
As of December 31, 2013, we expect to make additional contributions of approximately $9.5 million in 2014. We account for our investment in GMP using the equity method.
Our ownership interest in GMP is not significant as defined by Securities and Exchange Commission's Regulation S-X Rule 1-02(w). Accordingly, no audited financial statements of GMP pursuant to Regulation S-X 3-09 have been included as an exhibit to this Form 10-K.
Acquisitions
Business Combination Disclosure [Text Block]
.
ACQUISITIONS
Mid-America Midstream Gas Services, L.L.C.
On August 1, 2013, we acquired the equity interest of Mid-America Midstream Gas Services, L.L.C. ("MMGS"), a wholly owned subsidiary of Chesapeake Energy Corporation (NYSE: CHK)("Chesapeake"), which is the owner of gas gathering and processing assets in the Mississippi Lime play for approximately $313.5 million in cash. We incurred approximately $3.6 million in transaction related general and administrative expenses. The transaction was funded through the combination of a portion of the net proceeds from the sale of $300 million of 7.50% senior unsecured notes (Note 16) and a borrowing under the revolving credit facility under SemGroup's corporate credit agreement. Highlights of the acquisition include the following:
200 miles of gathering pipeline;
Rose Valley I plant - A 200 mmcf/d (million cubic feet per day) cryogenic processing plant, expected to be in operation in the first quarter of 2014;
Rose Valley II plant - A 200 mmcf/d cryogenic processing plant, expected to be in operation in the first quarter of 2016;
Approximately 540,000 net acre dedication in the core of the Mississippi Lime play, supported by a recently announced joint venture between Chesapeake and Sinopec International Petroleum Exploration and Production Corporation ("Sinopec"); and
A 20-year, 100% fee based, gas gathering and processing agreement with certain affiliates of Chesapeake and Sinopec.
Rose Valley plants I and II will require approximately $125 million of post-acquisition capital expenditures for completion as well as additional capital related to future well connections.
We have included MMGS in our consolidated financial statements as of August 1, 2013 in our SemGas segment. During the year ended December 31, 2013, our consolidated statements of operations and comprehensive income (loss) did not include material amounts of revenue or operating income related to MMGS. The proforma impact to comparative prior year periods, had the acquisition occurred at the beginning of the comparative prior year period, is not significant as the business is in the development stage.
We have received a preliminary independent appraisal of the fair value of the assets acquired in the MMGS acquisition. The estimates of fair value reflected as of December 31, 2013 are subject to change and such changes could be material. We expect to finalize the purchase price allocation in early 2014. During 2013, the estimated acquisition cost was adjusted related to payment of invoices for the period between the acquisition agreement and closing of the acquisition. We have preliminarily estimated the fair value of the assets acquired as follows (in thousands):
Property, plant and equipment
$
123,316

Customer contract intangible
166,332

Goodwill
23,839

Total assets acquired
$
313,487


Goodwill represents the excess of the estimated consideration paid for the acquired business over the fair value of the individual assets acquired. Goodwill primarily represents the value of synergies between the acquired entity and the Company and the opportunity to use the acquired business as a platform for growth.
Barcas Field Services, LLC
On August 1, 2013, our consolidated subsidiary, Rose Rock, executed a definitive agreement to acquire the assets of Barcas Field Services, LLC ("Barcas"), which owns and operates a crude oil trucking fleet, for $49.0 million in cash. The transaction closed on September 1, 2013. Highlights of the acquisition include the following:
114 trucks, 120 trailers and miscellaneous equipment; and
a long-term take-or-pay customer transportation agreement.
We have included Barcas in our consolidated financial statements as of September 1, 2013 in our Crude segment. During the year ended December 31, 2013, our consolidated statements of operations and comprehensive income (loss) did not include material amounts of revenue or operating income related to Barcas. The proforma impact to comparative prior year periods, had the acquisition occurred at the beginning of the comparative prior year period, is not significant. During 2013, the acquisition price was reduced by approximately $1.0 million due to a computer system which was ultimately not purchased.
We have received an independent appraisal of the fair value of the assets acquired in the Barcas acquisition and have recorded the following acquisition date fair values for the assets acquired (in thousands):
Property, plant and equipment
$
13,717

Customer contract intangible
6,930

Goodwill
28,322

Total assets acquired
$
48,969


Goodwill represents the excess of the estimated consideration paid for the acquired business over the fair value of the individual assets acquired. Goodwill primarily represents the value of synergies between the acquired entity and the Company, the opportunity to use the acquired business as a platform for growth, and the acquired assembled workforce.
NGL Energy
On November 1, 2011, we acquired 8,932,031 common units representing limited partner interests in NGL Energy and a 7.5% interest in the general partner of NGL Energy. As part of this transaction, we agreed to waive our distribution rights on certain of the common units for a specified period of time. We recorded our investment in NGL Energy at the acquisition date fair value, estimated to be $184.0 million. We derived our estimate of the fair value of our limited partner interests in NGL Energy using the closing price of limited partner units on October 31, 2011, adjusted to reflect the waiver of certain distribution rights. The waiver on these distribution rights expired in September 2012.
In conjunction with a June 2012 transaction, we received 201,378 additional common units bringing our total ownership to 9,133,409 common units representing limited partner interests in exchange for a percentage of our general partner interest. Subsequent to the transaction, we held a 6.42% interest in the general partner of NGL.
On August 6, 2013, we completed the acquisition of approximately 5.36% of the general partner of NGL Energy, which increased our ownership of NGL Energy's general partner to 11.78%.
Our equity method investment in NGL Energy is included in our SemStream segment. See Note 5 for additional information related to our equity method investment in NGL Energy.
Glass Mountain
In September 2012, we acquired an additional 25% ownership interest in GMP, bringing our total ownership percentage in GMP to 50%. See Note 5 for additional information related to our equity method investment in GMP.
Disposals And Impairments of Long-Lived Assets
Disposals and Impairments of Long-Lived Assets
DISPOSALS AND IMPAIRMENTS OF LONG-LIVED ASSETS
Year Ended December 31, 2013
There were no significant gains (losses) recorded during the year ended December 31, 2013 related to the disposal or impairment of long-lived assets.
Year Ended December 31, 2012
Gains (losses) recorded during the year ended December 31, 2012 related to the disposal or impairment of long-lived assets included the following (in thousands):
Event
Segment
 
Pre-Tax Gain
White Cliffs settlement (a)
Crude
 
$
3,500

Sale of SemStream residential division assets and liabilities (b)
SemStream
 
$
3,090

(a)
We sold a portion of our ownership interest in White Cliffs during September 2010. At the time, we recorded a loss of $6.8 million on disposal of that asset. In September 2012, we reached a settlement in a dispute concerning the selling price of that ownership interest and reduced the loss by $3.5 million. This $3.5 million gain is reported in "gain on disposal or impairment of long-lived assets, net" in the consolidated statements of operations and comprehensive income (loss).
(b)
On September 12, 2012, we entered into a definitive agreement to sell the assets and liabilities of SemStream’s Arizona residential business which was subject to regulatory approval by the Arizona Corporation Commission (the "ACC"). In early December 2012, the ACC granted SemStream regulatory approval to proceed with the sale. The sale closed on December 31, 2012 and resulted in a gain of $3.1 million on a cash sales price of $12.3 million. The $3.1 million gain is reported in "income from discontinued operations, net of income taxes" in the consolidated statement of operations and comprehensive income (loss). Property, plant, and equipment with a carrying value of $9.4 million represented the majority of assets included in the sale.
Year Ended December 31, 2011
Gains (losses) recorded during the year ended December 31, 2011 related to the disposal or impairment of long-lived assets included the following (in thousands):
Event
Segment
 
Pre-Tax Gain
(Loss)
Contribution of SemStream assets to NGL Energy (a)
SemStream
 
$
44,266

SemStream residential division impairment (b)
SemStream
 
$
(8,684
)
SemLogistics goodwill impairment (c)
SemLogistics
 
$
(44,663
)
(a)
On November 1, 2011, we contributed certain assets and liabilities of our SemStream segment to NGL Energy. On that date these assets and liabilities had the net book values (in thousands) below. However, these values were subject to post closing adjustments, which have since been completed, and resulted in a $2.1 million working capital adjustment.
Inventory
$
107,858

Other current assets
11,263

Property plant and equipment
47,756

Goodwill
50,071

Other intangible assets
12,408

Other noncurrent assets
2,818

Other current liabilities
(2,947
)
Other noncurrent liabilities
(172
)
Net assets contributed
$
229,055

In return for this contribution, we received $93.0 million of cash and ownership interests in NGL Energy and its general partner with an estimated fair value of $184.0 million. We recorded a gain of $44.3 million on this transaction, which includes the impact of a $2.1 million working capital adjustment and the write-off of $1.6 million of software. Additionally, $2.2 million of capitalized loan fees were written-off as a result of long-term debt payments made from the proceeds of this transaction.
(b)
We test all of our goodwill for impairment as of October 1 of each year. Upon completing this impairment test for 2011, we concluded that the goodwill and other intangible assets attributable to the Arizona residential business of our SemStream segment (which was not contributed to NGL Energy) were impaired. To calculate the impairment loss, we estimated the fair value of this reporting unit using the present value of estimated future cash flows, discounted at a rate of 9.4%, and recorded a full impairment of the $3.6 million balance of goodwill and the $5.0 million balance of other intangible assets associated with customer relationships. No impairment was recorded related to the regulated assets of the Arizona residential business in accordance with ASC 980, "Regulated Operations".
(c)
High crude oil prices and backwardated market conditions in 2011 had a negative effect on SemLogistic’s storage economics. As a result, the demand for storage is depressed and SemLogistics has had difficulty securing contract renewals. SemLogistics successfully passed the initial 2011 goodwill impairment test. However, a review of the sensitivity of the test results indicated that a ten percent reduction in the estimated revenue in 2012 and 2013 would result in a test failure. In addition, we received notice in late January 2012 from two customers that their intentions were not to renew their storage contracts upon expiration. These notifications, coupled with the sensitivity of the test results to loss of revenue, led us to conclude that impairment of the goodwill of SemLogistics was required. Accordingly, we impaired the full amount of goodwill which was $44.7 million at October 1, 2011.
Discontinued Operations
Discontinued Operations
DISCONTINUED OPERATIONS
As described in Note 7, on November 1, 2011, we contributed the primary operating assets of our SemStream segment to NGL Energy; however, at that time we did not contribute any of the assets or liabilities of SemStream’s Arizona residential business to NGL Energy. On September 12, 2012, we entered into a definitive agreement to sell those assets and liabilities. This sale was subject to regulatory approval by the ACC and closed on December 31, 2012 after that approval was granted; therefore, the operations of SemStream's Arizona residential business are classified as discontinued. The sale resulted in a gain of $3.1 million. There continues to be an insignificant amount of activity related to ongoing bankruptcy matters which is reflected in the results below and is related to operations discontinued during bankruptcy.
Certain summarized information on the results of discontinued operations is shown below (in thousands): 
 
Year Ended December 31, 2013
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
External revenue
$

 
$
13,518

 
$
14,264

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

 
$
3,090

 
$
(9,196
)
Income (loss) from discontinued operations before income taxes
$
59

 
$
2,935

 
$
(9,652
)
Income tax expense (benefit)

 
(4
)
 
(104
)
Income (loss) from discontinued operations, net of income taxes
$
59

 
$
2,939

 
$
(9,548
)
Segments
Segments
SEGMENTS
As described in Note 1, 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 Rose Rock, White Cliffs and Glass Mountain, which have been included within the Crude segment and were aggregated based on similarity of operations, customer base and other considerations. Our investment in NGL Energy is represented by our 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 were allocated to the segments, based on our allocation policies in effect at the time.
 
Year Ended December 31, 2013
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and
Other
 
Consolidated
 
(in thousands)
Revenues:
 
External
$
767,202

 
$

 
$
198,450

 
$
207,134

 
$
11,671

 
$
242,559

 
$

 
$
1,427,016

Intersegment

 

 

 
23,985

 

 

 
(23,985
)
 

Total revenues
767,202

 

 
198,450

 
231,119

 
11,671

 
242,559

 
(23,985
)
 
1,427,016

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 

 

Costs of products sold, exclusive of depreciation and amortization shown below
663,759

 

 
305

 
169,800

 
380

 
209,841

 
(23,985
)
 
1,020,100

Operating
36,242

 
1

 
150,319

 
20,200

 
7,444

 
9,379

 

 
223,585

General and administrative
16,766

 
600

 
14,940

 
7,971

 
5,854

 
10,700

 
21,766

 
78,597

Depreciation and amortization
23,708

 

 
10,766

 
14,517

 
9,426

 
5,991

 
2,001

 
66,409

Loss (gain) on disposal or impairment of long-lived assets, net
(56
)
 
6

 

 
665

 

 
(854
)
 

 
(239
)
Total expenses
740,419

 
607

 
176,330

 
213,153

 
23,104

 
235,057

 
(218
)
 
1,388,452

Earnings from equity method investments
45,354

 
7,123

 

 

 

 

 

 
52,477

Gain on issuance of common units by equity method investee

 
26,873

 

 

 

 

 

 
26,873

Operating income (loss)
72,137

 
33,389

 
22,120

 
17,966

 
(11,433
)
 
7,502

 
(23,767
)
 
117,914

Other expenses (income), net
 
 
 
 
 
 
 
 
 
 
 
 

 

Interest expense (income)
14,923

 
(4,810
)
 
18,928

 
3,268

 
1,435

 
188

 
(8,790
)
 
25,142

Other expense (income), net
(14
)
 
128

 
(20
)
 
(3
)
 
(400
)
 
(652
)
 
45,234

 
44,273

Total other expenses (income)
14,909

 
(4,682
)
 
18,908

 
3,265

 
1,035

 
(464
)
 
36,444

 
69,415

Income (loss) from continuing operations before income taxes
$
57,228

 
$
38,071

 
$
3,212

 
$
14,701

 
$
(12,468
)
 
$
7,966

 
$
(60,211
)
 
$
48,499

Additions to long-lived assets
$
66,995

 
$

 
$
56,122

 
$
97,021

 
$
2,071

 
$
6,375

 
$
734

 
$
229,318

Total assets at December 31, 2013 (excluding intersegment receivables)
$
1,070,484

 
$
208,847

 
$
306,001

 
$
552,095

 
$
168,835

 
$
104,154

 
$
60,198

 
$
2,470,614

Equity investments at December 31, 2013
$
356,276

 
$
208,848

 
$

 
$

 
$

 
$

 
$

 
$
565,124



 
Year Ended December 31, 2012
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and
Other
 
Consolidated
 
(in thousands)
Revenues:
 
External
$
620,797

 
$
7

 
$
223,219

 
$
117,264

 
$
12,341

 
$
263,870

 
$
(1
)
 
$
1,237,497

Intersegment

 

 

 
10,606

 

 

 
(10,606
)
 

Total revenues
620,797

 
7

 
223,219

 
127,870

 
12,341

 
263,870

 
(10,607
)
 
1,237,497

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
546,966

 
33

 
768

 
100,677

 
196

 
236,851

 
(10,606
)
 
874,885

Operating
24,143

 
(37
)
 
174,284

 
12,712

 
5,921

 
7,677

 

 
224,700

General and administrative
13,321

 
930

 
14,020

 
6,195

 
5,652

 
9,433

 
22,367

 
71,918

Depreciation and amortization
12,131

 

 
10,589

 
7,043

 
9,780

 
6,171

 
2,496

 
48,210

Loss (gain) on disposal or impairment of long-lived assets, net
(3,501
)
 
214

 

 
46

 

 
(290
)
 

 
(3,531
)
Total expenses
593,060

 
1,140

 
199,661

 
126,673

 
21,549

 
259,842

 
14,257

 
1,216,182

Earnings from equity method investments
36,439

 
(403
)
 

 

 

 

 

 
36,036

Operating income (loss)
64,176

 
(1,536
)
 
23,558

 
1,197

 
(9,208
)
 
4,028

 
(24,864
)
 
57,351

Other expenses (income), net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense (income)
(409
)
 
(3,449
)
 
18,727

 
1,461

 
2,486

 
314

 
(10,228
)
 
8,902

Other expense (income), net
31

 
(21
)
 
14

 

 
(420
)
 
(38
)
 
22,003

 
21,569

Total other expenses (income)
(378
)
 
(3,470
)
 
18,741

 
1,461

 
2,066

 
276

 
11,775

 
30,471

Income (loss) from continuing operations before income taxes
$
64,554

 
$
1,934

 
$
4,817

 
$
(264
)
 
$
(11,274
)
 
$
3,752

 
$
(36,639
)
 
$
26,880

Additions to long-lived assets
$
41,364

 
$

 
$
13,340

 
$
47,140

 
$
1,188

 
$
3,396

 
$
14,827

 
$
121,255

Total assets at December 31, 2012 (excluding intersegment receivables)
$
771,140

 
$
175,028

 
$
302,143

 
$
133,864

 
$
174,218

 
$
94,594

 
$
97,192

 
$
1,748,179

Equity investments at December 31, 2012
$
213,404

 
$
174,398

 
$

 
$

 
$

 
$

 
$

 
$
387,802


 
Year Ended December 31, 2011
 
Crude
 
SemStream
 
SemCAMS
 
SemGas
 
SemLogistics
 
SemMexico
 
Corporate
and
Other
 
Consolidated
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
External
$
431,321

 
$
561,596

 
$
163,367

 
$
66,660

 
$
23,314

 
$
218,187

 
$
801

 
$
1,465,246

Intersegment

 
46,738

 

 
38,588

 

 

 
(85,326
)
 

Total revenues
431,321

 
608,334

 
163,367

 
105,248

 
23,314

 
218,187

 
(84,525
)
 
1,465,246

Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
366,265

 
595,434

 
218

 
75,066

 
152

 
192,068

 
(84,764
)
 
1,144,439

Operating
17,470

 
6,448

 
110,814

 
9,027

 
6,206

 
5,006

 
70

 
155,041

General and administrative
9,757

 
7,336

 
16,816

 
6,521

 
6,712

 
11,560

 
16,745

 
75,447

Depreciation and amortization
11,379

 
3,501

 
10,233

 
5,986

 
9,271

 
6,502

 
2,951

 
49,823

Loss (gain) on disposal or impairment of long-lived assets, net
64

 
(45,821
)
 
(8
)
 
4

 
44,663

 
(200
)
 
1,599

 
301

Total expenses
404,935

 
566,898

 
138,073

 
96,604

 
67,004

 
214,936

 
(63,399
)
 
1,425,051

Earnings from equity method investments
15,004

 

 

 

 

 

 

 
15,004

Operating income (loss)
41,390

 
41,436

 
25,294

 
8,644

 
(43,690
)
 
3,251

 
(21,126
)
 
55,199

Other expenses (income):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
3,749

 
17,152

 
24,685

 
2,346

 
1,005

 
365

 
10,836

 
60,138

Other expense (income), net
(1,600
)
 
(2,112
)
 
(2,811
)
 
(10
)
 
46

 
(173
)
 
(8,329
)
 
(14,989
)
Total other expenses
2,149

 
15,040