SEMG 6.30.2014 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 1-34736
____________________________________________________________
SEMGROUP CORPORATION
(Exact name of registrant as specified in its charter)
____________________________________________________________
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Delaware | 20-3533152 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
Two Warren Place
6120 S. Yale Avenue, Suite 700
Tulsa, OK 74136-4216
(Address of principal executive offices and zip code)
(918) 524-8100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court: Yes x No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
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| | | | | | |
Class | | | Outstanding at July 31, 2014 |
Class A | Common stock, $0.01 par | | 42,642,965 |
| | Shares |
Class B | Common stock, $0.01 par | | — |
| | Shares |
SemGroup Corporation
TABLE OF CONTENTS
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| PART I – FINANCIAL INFORMATION | |
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Item 1 | | |
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Item 2 | | |
Item 3 | | |
Item 4 | | |
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| PART II – OTHER INFORMATION | |
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Item 1 | | |
Item 1A | | |
Item 2 | | |
Item 3 | | |
Item 4 | | |
Item 5 | | |
Item 6 | | |
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Cautionary Note Regarding Forward-Looking Statements
Certain matters contained in this Quarterly Report on Form 10-Q include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.
All statements, other than statements of historical fact, included in this Form 10-Q regarding the prospects of our industry, our anticipated financial performance, the anticipated performance of NGL Energy Partners LP, management’s plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions and other matters, may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “may,” “will,” “expect,” “intend,” “estimate,” “foresee,” “project,” “anticipate,” “believe,” “plans,” “forecasts,” “continue” or “could” or the negative of these terms or variations of them or similar terms. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks, and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause actual results to differ include, but are not limited to, those discussed in Item 1A of our most recent Annual Report on Form 10-K, entitled “Risk Factors,” risk factors discussed in other reports that we file with the Securities and Exchange Commission (the "SEC") and the following:
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• | Our ability to generate sufficient cash flow from operations to enable us to pay our debt obligations or to fund our other liquidity needs, including the payment of dividends; |
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• | Our ability to comply with the covenants contained in our credit agreements and the indenture governing our 7.5% senior notes, including requirements under our credit agreements to maintain certain financial ratios; |
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• | The effect of our debt level on our future financial and operating flexibility, including our ability to obtain additional capital on terms that are favorable to us; |
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• | The ability of our subsidiary, Rose Rock Midstream, L.P., to make minimum quarterly distributions to its unitholders, including us; |
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• | The operations of NGL Energy Partners LP, which we do not control; |
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• | Any sustained reduction in demand for the petroleum products we gather, transport, process and store; |
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• | Our ability to obtain new sources of supply of petroleum products; |
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• | Our failure to comply with new or existing environmental laws or regulations or cross border laws or regulations; |
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• | The possibility that the construction or acquisition of new assets may not result in the corresponding anticipated revenue increases; |
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• | Changes in currency exchange rates; |
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• | The risks and uncertainties of doing business outside of the U.S., including political and economic instability and changes in local governmental laws, regulations and policies; and |
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• | The possibility that our hedging activities may result in losses or may have a negative impact on our financial results. |
New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for us to predict all such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement.
Readers are cautioned not to place undue reliance on any forward-looking statements contained in this Form 10-Q, which reflect management’s opinions only as of the date hereof. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements.
_________________________________________________________________________________________________
Investors and others should note that we announce material company information using our investor relations website (www.semgroupcorp.com), SEC filings, press releases, public conference calls and webcasts. We use these channels, as well as social media, to communicate with our investors and the public about our company, our businesses and our results of operations. The information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media and others interested in our company to review the information we post on the social media channels listed on our investor relations website.
As used in this Form 10-Q, and unless the context indicates otherwise, the terms “the Company,” “SemGroup,” “we,” “us,” “our,” “ours,” and similar terms refer to SemGroup Corporation, its consolidated subsidiaries, and its predecessors. We sometimes refer to crude oil, natural gas, natural gas liquids (natural gas liquids, or “NGLs,” include ethane, propane, normal butane, iso-butane, and natural gasoline), refined petroleum products and liquid asphalt cement, collectively, as “petroleum products” or “products.”
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SEMGROUP CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except par value)
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| | | | | | | |
| (Unaudited) | | |
| June 30, 2014 | | December 31, 2013 |
ASSETS | | | |
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 |
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Proceeds receivable from senior note issuance | 391,915 |
| | — |
|
Receivable from affiliates | 29,801 |
| | 67,273 |
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Inventories | 44,380 |
| | 44,295 |
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Other current assets | 20,765 |
| | 14,011 |
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Total current assets | 903,844 |
| | 534,014 |
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Property, plant and equipment (net of accumulated depreciation of $212,882 and $188,720, respectively) | 1,212,421 |
| | 1,105,728 |
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Equity method investments | 633,375 |
| | 565,124 |
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Goodwill | 69,019 |
| | 62,021 |
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Other intangible assets (net of accumulated amortization of $19,446 and $12,655, respectively) | 170,235 |
| | 174,838 |
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Other noncurrent assets, net | 33,550 |
| | 28,889 |
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Total assets | $ | 3,022,444 |
| | $ | 2,470,614 |
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LIABILITIES AND OWNERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 261,280 |
| | $ | 254,467 |
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Payable to affiliates | 22,711 |
| | 62,279 |
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Accrued liabilities | 70,350 |
| | 83,429 |
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Payables to pre-petition creditors | 3,136 |
| | 3,177 |
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Warrant liability | 76,084 |
| | 58,134 |
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Deferred revenue | 22,237 |
| | 25,538 |
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Other current liabilities | 575 |
| | 12,153 |
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Current portion of long-term debt | 4,357 |
| | 37 |
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Total current liabilities | 460,730 |
| | 499,214 |
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Long-term debt | 1,213,068 |
| | 615,088 |
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Deferred income taxes | 140,071 |
| | 100,945 |
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Other noncurrent liabilities | 43,672 |
| | 41,504 |
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Commitments and contingencies (Note 9) |
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SemGroup owners’ equity: | | | |
Common stock, $0.01 par value (authorized - 100,000 shares; issued - 43,125 and 42,914 shares, respectively) | 427 |
| | 425 |
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Additional paid-in capital | 1,193,441 |
| | 1,154,516 |
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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 |
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Noncontrolling interests in consolidated subsidiaries | 73,176 |
| | 159,961 |
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Total owners’ equity | 1,164,903 |
| | 1,213,863 |
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Total liabilities and owners’ equity | $ | 3,022,444 |
| | $ | 2,470,614 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SEMGROUP CORPORATION
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(Dollars in thousands, except per share amounts)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenues: | | | | | | | |
Product | $ | 402,986 |
| | $ | 241,253 |
| | $ | 830,016 |
| | $ | 476,882 |
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Service | 53,450 |
| | 31,678 |
| | 101,957 |
| | 59,335 |
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Other | 25,788 |
| | 51,313 |
| | 49,134 |
| | 75,723 |
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Total revenues | 482,224 |
| | 324,244 |
|
| 981,107 |
| | 611,940 |
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Expenses: | | | | | | | |
Costs of products sold, exclusive of depreciation and amortization shown below | 368,527 |
| | 212,709 |
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| 753,640 |
| | 425,078 |
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Operating | 59,424 |
| | 69,682 |
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| 110,202 |
| | 110,453 |
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General and administrative | 21,850 |
| | 16,898 |
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| 40,586 |
| | 33,935 |
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Depreciation and amortization | 22,062 |
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| 12,814 |
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| 45,699 |
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| 25,450 |
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Loss (gain) on disposal of long-lived assets, net | 19,315 |
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| (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 |
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Gain on issuance of common units by equity method investee | — |
| | — |
| | 8,127 |
| | — |
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Operating income | 10,233 |
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| 27,378 |
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| 53,999 |
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| 49,768 |
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Other expenses (income), net: | | | | | | | |
Interest expense | 10,360 |
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| 4,495 |
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| 19,587 |
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| 6,891 |
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Foreign currency transaction loss (gain) | 167 |
|
| (349 | ) |
| (516 | ) |
| (516 | ) |
Other expense, net | 18,962 |
|
| 6,467 |
|
| 17,915 |
|
| 32,100 |
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Total other expenses, net | 29,489 |
| | 10,613 |
| | 36,986 |
| | 38,475 |
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Income (loss) from continuing operations before income taxes | (19,256 | ) | | 16,765 |
| | 17,013 |
| | 11,293 |
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Income tax expense (benefit) | (6,672 | ) |
| 9,288 |
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| 9,854 |
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| (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 |
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Net income (loss) attributable to SemGroup | $ | (17,609 | ) | | $ | 3,569 |
| | $ | (4,096 | ) | | $ | 47,013 |
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Net income (loss) | $ | (12,584 | ) |
| $ | 7,512 |
|
| $ | 7,154 |
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| $ | 56,078 |
|
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 |
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Comprehensive income (loss) attributable to SemGroup | $ | (10,924 | ) | | $ | (1,785 | ) | | $ | (383 | ) | | $ | 36,601 |
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Net income (loss) per common share (Note 11): | | | | | | | |
Basic | $ | (0.41 | ) | | $ | 0.08 |
| | $ | (0.10 | ) | | $ | 1.12 |
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Diluted | $ | (0.41 | ) | | $ | 0.08 |
| | $ | (0.10 | ) | | $ | 1.11 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SEMGROUP CORPORATION
Unaudited Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2014 | | 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 equity-based awards | (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 |
|
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 common stock under employee stock purchase plan | 88 |
| | — |
|
Excess tax benefit from equity-based awards | 1,650 |
| | — |
|
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 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
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:
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• | 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; |
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• | loss of a controlling financial interest in an investment in a foreign entity (i.e., the foreign entity is deconsolidated); or |
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• | 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.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
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.
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2. | 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):
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
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2. | ROSE ROCK MIDSTREAM, L.P., Continued |
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| | | | | | | | | | | | | | | | | | | | | | |
| 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.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
2. | ROSE ROCK MIDSTREAM, L.P., Continued |
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 |
|
| |
3. | 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):
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
3. | INVESTMENTS IN NON-CONSOLIDATED SUBSIDIARIES, Continued |
|
| | | | | | | | | | | | | | | |
| 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
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
3. | INVESTMENTS IN NON-CONSOLIDATED SUBSIDIARIES, Continued |
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 |
|
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.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
4. SEGMENTS, Continued
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 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
4. SEGMENTS, Continued
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
4. SEGMENTS, Continued
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
4. SEGMENTS, Continued
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 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 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
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:
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
6. | FINANCIAL INSTRUMENTS, Continued |
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.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
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.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
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.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
8. | LONG-TERM DEBT, Continued |
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).
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
8. | LONG-TERM DEBT, Continued |
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.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
9. | 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.
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.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
9. | COMMITMENTS AND CONTINGENCIES, Continued |
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.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
9. | COMMITMENTS AND CONTINGENCIES, Continued |
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):
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
9. | COMMITMENTS AND CONTINGENCIES, Continued |
|
| | | | | | |
| 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.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
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 | ) | | (13,209 | ) |
Dividends paid | — |
| | (19,628 | ) |
| — |
| | — |
| | — |
| | — |
| | (19,628 | ) |
Unvested dividend equivalent rights | — |
| | (57 | ) | | — |
| | — |
| | — |
| | (43 | ) | | (100 | ) |
Non-cash equity compensation | — |
| | 3,367 |
| | — |
| | — |
| | — |
| | 390 |
| | 3,757 |
|
Issuance of common stock under compensation plans | 2 |
| | 1,873 |
| | — |
| | — |
| | — |
| | — |
| | 1,875 |
|
Repurchase of common stock | — |
| | — |
| | (719 | ) | | — |
| | — |
| | — |
| | (719 | ) |
Transfer of SemCrude Pipeline interest to Rose Rock | — |
| | 53,370 |
| | — |
| | — |
| | — |
| | (85,173 | ) | | (31,803 | ) |
Balance at June 30, 2014 | $ | 427 |
| | $ | 1,193,441 |
| | $ | (1,332 | ) | | $ | (101,668 | ) | | $ | 859 |
| | $ | 73,176 |
| | $ | 1,164,903 |
|
Accumulated other comprehensive income (loss)
The following table presents the changes in the components of accumulated other comprehensive income (loss) from December 31, 2013 to June 30, 2014 (in thousands):
|
| | | | | | | | | | | |
| Currency Translation | | Employee Benefit Plans | | Total |
Balance at December 31, 2013 | $ | (4,508 | ) | | $ | 1,654 |
| | $ | (2,854 | ) |
Currency translation adjustment, net of income tax expense of $2,342 | 3,716 |
| | — |
| | 3,716 |
|
Changes related to benefit plans, net of income tax benefit | — |
| | (3 | ) | | (3 | ) |
Balance at June 30, 2014 | $ | (792 | ) | | $ | 1,651 |
| | $ | 859 |
|
There were no significant items reclassified out of accumulated other comprehensive loss to net income for the three months and six months ended June 30, 2014.
Common stock
During the six months ended June 30, 2014, we issued 3,440 shares under the Employee Stock Purchase Plan and 168,871 shares related to our equity based compensation awards. Of these vested shares related to compensation awards, recipients sold back to the Company 11,120 shares to satisfy tax withholding obligations which are being recognized at cost as treasury stock on the condensed consolidated balance sheet.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
Equity-based compensation
At June 30, 2014, there were approximately 474,000 unvested shares that have been granted under our director and employee compensation programs. The par value of these shares is not reflected in common stock on the condensed consolidated balance sheet, as these shares have not yet vested. For certain of the awards, the number of shares that will vest is contingent upon our achievement of certain specified targets. If we meet the specified maximum targets, approximately 138,000 additional shares could vest.
The holders of certain restricted stock awards granted prior to 2013 are entitled to equivalent dividends (“UDs”) to be received upon vesting of the restricted stock awards. At June 30, 2014, the value of the UDs to be settled in stock related to unvested restricted stock awards was approximately $104 thousand. This is equivalent to 1,325 Class A shares based on the quarter end close of business market price of our Class A shares of $78.85 per share. Dividends related to the restricted stock awards issued subsequent to 2012 will be settled in cash upon vesting. At June 30, 2014, the value of the UDs to be settled in cash related to unvested restricted stock awards was approximately $128,000.
During the six months ended June 30, 2014, we granted 207,786 restricted stock awards with a weighted average grant date fair value of $77.14 per award.
Warrants
Upon emergence from bankruptcy, we issued 1,634,210 warrants. The Plan of Reorganization specified that we were to issue an additional 544,737 warrants in settlement of the pre-petition claims. As of June 30, 2014, we have issued 242,850 of the warrants and will issue the remainder as the process of resolving the claims progresses. At June 30, 2014, we had 1,360,823 warrants outstanding including warrants required to be issued in settlement of pre-petition claims. At June 30, 2014, the fair value of these warrants included in the condensed consolidated balance sheet was $76.1 million based on the June 30, 2014 closing price of $55.91 per warrant. The warrants are traded on the New York Stock Exchange under the ticker symbol SEMGWS. We classify the warrant fair value as a Level 1 measurement. There were no warrants exercised during the six months ended June 30, 2014. The warrants expire on November 30, 2014.
Dividends
The following table sets forth the quarterly dividends per share declared and/or paid to shareholders for the periods indicated:
|
| | | | | | | | | | |
Quarter Ending | | Dividend Per Share | | Date Declared | | Date of Record | | Date Paid |
June 30, 2013 | | $ | 0.19 |
| | May 8, 2013 | | May 20, 2013 | | May 30, 2013 |
September 30, 2013 | | $ | 0.20 |
| | August 8, 2013 | | August 19, 2013 | | August 30, 2013 |
December 31, 2013 | | $ | 0.21 |
| | November 11, 2013 | | November 22, 2013 | | December 3, 2013 |
March 31, 2014 | | $ | 0.22 |
| | February 25, 2014 | | March 10, 2014 | | March 20, 2014 |
June 30, 2014 | | $ | 0.24 |
| | May 8, 2014 | | May 19, 2014 | | May 29, 2014 |
September 30, 2014 | | $ | 0.27 |
| | August 6, 2014 | | August 18, 2014 | | August 28, 2014 |
Earnings per share is calculated based on income from continuing and discontinued operations less any income attributable to noncontrolling interests. Income attributable to noncontrolling interests represents third-party limited partner unitholders' interests in the earnings of our consolidated subsidiary, Rose Rock. Rose Rock allocates net income to its limited partners based on the distributions pertaining to the current period's available cash as defined by Rose Rock's partnership agreement. After adjusting for the appropriate period's distributions, the remaining undistributed earnings or excess distributions over earnings, if any, are allocated to Rose Rock's general partner, limited partners and participating securities in accordance with the contractual terms of Rose Rock's partnership agreement and as further prescribed under the two-class method. Incentive distribution rights do not participate in undistributed earnings.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
11. | EARNINGS PER SHARE, Continued |
Basic earnings (loss) per share is calculated based on the weighted average shares outstanding during the period. Diluted earnings (loss) per share includes the dilutive effect of warrants and unvested equity compensation awards.
The following summarizes the calculation of basic earnings (loss) per share for the three months and six months ended June 30, 2014 and 2013 (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2014 | | Three Months Ended June 30, 2013 |
| Continuing Operations | | Discontinued Operations | | Net | | Continuing Operations | | Discontinued Operations | | Net |
Income (loss) | $ | (12,584 | ) | | $ | — |
| | $ | (12,584 | ) | | $ | 7,477 |
| | $ | 35 |
| | $ | 7,512 |
|
less: Income attributable to noncontrolling interests | 5,025 |
| | — |
| | 5,025 |
| | 3,943 |
| | — |
| | 3,943 |
|
Numerator | $ | (17,609 | ) | | $ | — |
| | $ | (17,609 | ) | | $ | 3,534 |
| | $ | 35 |
| | $ | 3,569 |
|
Common stock issued and to be issued pursuant to Plan of Reorganization | 41,400 |
| | 41,400 |
| | 41,400 |
| | 41,400 |
| | 41,400 |
| | 41,400 |
|
Weighted average common stock outstanding issued under compensation plans and warrant exercises | 1,282 |
| | 1,282 |
| | 1,282 |
| | 811 |
| | 811 |
| | 811 |
|
Denominator | 42,682 |
| | 42,682 |
| | 42,682 |
| | 42,211 |
| | 42,211 |
| | 42,211 |
|
Basic earnings (loss) per share | $ | (0.41 | ) | | $ | — |
| | $ | (0.41 | ) | | $ | 0.08 |
| | $ | — |
| | $ | 0.08 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2014 | | Six Months Ended June 30, 2013 |
| Continuing Operations | | Discontinued Operations | | Net | | Continuing Operations | | Discontinued Operations | | Net |
Income (loss) | $ | 7,159 |
| | $ | (5 | ) | | $ | 7,154 |
| | $ | 56,011 |
| | $ | 67 |
| | $ | 56,078 |
|
less: Income attributable to noncontrolling interests | 11,250 |
| | — |
| | 11,250 |
| | 9,065 |
| | — |
| | 9,065 |
|
Numerator | $ | (4,091 | ) | | $ | (5 | ) | | $ | (4,096 | ) | | $ | 46,946 |
| | $ | 67 |
| | $ | 47,013 |
|
Common stock issued and to be issued pursuant to Plan of Reorganization | 41,400 |
| | 41,400 |
| | 41,400 |
| | 41,400 |
| | 41,400 |
| | 41,400 |
|
Weighted average common stock outstanding issued under compensation plans and warrant exercises | 1,257 |
| | 1,257 |
| | 1,257 |
| | 745 |
| | 745 |
| | 745 |
|
Denominator | 42,657 |
| | 42,657 |
| | 42,657 |
| | 42,145 |
| | 42,145 |
| | 42,145 |
|
Basic earnings (loss) per share | $ | (0.10 | ) | | $ | — |
| | $ | (0.10 | ) | | $ | 1.11 |
| | $ | — |
| | $ | 1.12 |
|
The following summarizes the calculation of diluted earnings (loss) per share for the three months and six months ended June 30, 2014 and 2013 (in thousands, except per share amounts):
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
11. | EARNINGS PER SHARE, Continued |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2014 | | Three Months Ended June 30, 2013 |
| Continuing Operations | | Discontinued Operations | | Net | | Continuing Operations | | Discontinued Operations | | Net |
Income (loss) | $ | (12,584 | ) | | $ | — |
| | $ | (12,584 | ) | | $ | 7,477 |
| | $ | 35 |
| | $ | 7,512 |
|
less: Income attributable to noncontrolling interests | 5,025 |
| | — |
| | 5,025 |
| | 3,943 |
| | — |
| | 3,943 |
|
Numerator | $ | (17,609 | ) | | $ | — |
| | $ | (17,609 | ) | | $ | 3,534 |
| | $ | 35 |
| | $ | 3,569 |
|
Common stock issued and to be issued pursuant to Plan of Reorganization | 41,400 |
| | 41,400 |
| | 41,400 |
| | 41,400 |
| | 41,400 |
| | 41,400 |
|
Weighted average common stock outstanding issued under compensation plans and warrant exercises | 1,282 |
| | 1,282 |
| | 1,282 |
| | 811 |
| | 811 |
| | 811 |
|
Effect of dilutive securities | — |
| | — |
| | — |
| | 315 |
| | 315 |
| | 315 |
|
Denominator | 42,682 |
| | 42,682 |
| | 42,682 |
| | 42,526 |
| | 42,526 |
| | 42,526 |
|
Diluted earnings (loss) per share | $ | (0.41 | ) | | $ | — |
| | $ | (0.41 | ) | | $ | 0.08 |
| | $ | — |
| | $ | 0.08 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2014 | | Six Months Ended June 30, 2013 |
| Continuing Operations | | Discontinued Operations | | Net | | Continuing Operations | | Discontinued Operations | | Net |
Income (loss) | $ | 7,159 |
| | $ | (5 | ) | | $ | 7,154 |
| | $ | 56,011 |
| | $ | 67 |
| | $ | 56,078 |
|
less: Income attributable to noncontrolling interests | 11,250 |
| | — |
| | 11,250 |
| | 9,065 |
| | — |
| | 9,065 |
|
Numerator | $ | (4,091 | ) | | $ | (5 | ) | | $ | (4,096 | ) | | $ | 46,946 |
| | $ | 67 |
| | $ | 47,013 |
|
Common stock issued and to be issued pursuant to Plan of Reorganization | 41,400 |
| | 41,400 |
| | 41,400 |
| | 41,400 |
| | 41,400 |
| | 41,400 |
|
Weighted average common stock outstanding issued under compensation plans and warrant exercises | 1,257 |
| | 1,257 |
| | 1,257 |
| | 745 |
| | 745 |
| | 745 |
|
Effect of dilutive securities | — |
| | — |
| | — |
| | 279 |
| | 279 |
| | 279 |
|
Denominator | 42,657 |
| | 42,657 |
| | 42,657 |
| | 42,424 |
| | 42,424 |
| | 42,424 |
|
Diluted earnings (loss) per share | $ | (0.10 | ) | | $ | — |
| | $ | (0.10 | ) | | $ | 1.11 |
| | $ | — |
| | $ | 1.11 |
|
During the three months and six months ended June 30, 2014, we recorded expenses of $18.9 million and $17.9 million, respectively, related to the change in fair value of the warrants. During the three months and six months ended June 30, 2013, we recorded expenses of $6.4 million and $32.2 million, respectively, related to the change in fair value of the warrants. Because the mark to market valuation of the warrants resulted in losses, the warrants would have been antidilutive and, therefore, were not included in the computation of diluted earnings per share.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
12. | SUPPLEMENTAL CASH FLOW INFORMATION |
The following table summarizes the changes in the components of operating assets and liabilities, net of the effects of acquisitions, shown on our condensed consolidated statements of cash flows (in thousands):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2014 | | 2013 |
Decrease (increase) in restricted cash | $ | (2,193 | ) | | $ | 275 |
|
Decrease (increase) in accounts receivable | (13,741 | ) | | (12,512 | ) |
Decrease (increase) in receivable from affiliates | 37,472 |
| | (2,416 | ) |
Decrease (increase) in inventories | (6,037 | ) | | (237 | ) |
Decrease (increase) in derivatives and margin deposits | (240 | ) | | 972 |
|
Decrease (increase) in other current assets | (2,631 | ) | | 839 |
|
Decrease (increase) in other assets | 4 |
| | 266 |
|
Increase (decrease) in accounts payable and accrued liabilities | (14,224 | ) | | 7,229 |
|
Increase (decrease) in payable to affiliates | (39,567 | ) | | 2 |
|
Increase (decrease) in payables to pre-petition creditors | (46 | ) | | (424 | ) |
Increase (decrease) in other noncurrent liabilities | 1,284 |
| | (3,323 | ) |
| $ | (39,919 | ) | | $ | (9,329 | ) |
Rose Rock senior unsecured note issuance
On June 27, 2014, Rose Rock agreed to sell $400 million of 5.625% senior unsecured notes due 2022 (Note 8). The net proceeds from the offering of $391.9 million, after underwriters' fees and offering expenses, were received on July 2, 2014 and were used to pay down Rose Rock's revolving credit facility balance. At June 30, 2014, we recorded a receivable for the proceeds and $8.7 million of debt issuance costs. These non-cash transactions have not been reflected in the cash flow statement for the six months ended June 30, 2014.
Other supplemental disclosures
In the second quarter of 2014, we recorded a $85.2 million reduction to noncontrolling interests in consolidated subsidiaries and an offsetting increase to additional paid-in capital of $53.4 million (net of tax impact of $31.8 million). This non-cash entry represents the portion of the proceeds in excess of historical cost which were attributed to Rose Rock's third-party unitholders related to Rose Rock's purchase of the remaining 33% interest in SemCrude Pipeline, L.L.C. from SemGroup.
In the first quarter of 2013, we recorded a $90.5 million reduction to noncontrolling interests in consolidated subsidiaries and an offsetting increase to additional paid-in capital of $56.8 million (net of tax impact of $33.7 million). This non-cash entry represents the portion of the proceeds in excess of historical cost which were attributed to Rose Rock's third-party unitholders related to Rose Rock's purchase of a 33% interest in SemCrude Pipeline, L.L.C. from SemGroup.
We paid cash interest of $20.2 million and $4.1 million for the six months ended June 30, 2014 and 2013, respectively.
We paid cash for income taxes (net of refunds received) of $15.9 million and $2.0 million for the six months ended June 30, 2014 and 2013, respectively.
We incurred liabilities for construction work in process that had not been paid of $3.1 million and $3.7 million as of June 30, 2014 and 2013, respectively. Such amounts are not included in capital expenditures on the consolidated statements of cash flows.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
13. | RELATED PARTY TRANSACTIONS |
NGL Energy Partners LP and subsidiaries (Gavilon, LLC and High Sierra Crude Oil and Marketing, LLC)
As described in Note 3, we own interests in NGL Energy, which we account for under the equity method.
During the three months and six months ended June 30, 2014 and 2013, we generated the following transactions with NGL Energy and its subsidiaries (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2014 | | 2013 | | 2014 | | 2013 |
Revenues | $ | 108,456 |
| | $ | 183,617 |
| | $ | 280,894 |
| | $ | 362,331 |
|
Purchases | $ | 113,154 |
| | $ | 145,469 |
| | $ | 270,845 |
| | $ | 285,392 |
|
Reimbursements from NGL Energy for transition services | $ | 42 |
| | $ | 48 |
| | $ | 84 |
| | $ | 96 |
|
Transactions with NGL Energy and its subsidiaries primarily relate to marketing, leased storage and transportation services of crude oil, including buy/sell transactions. In accordance with ASC 845-10-15, these transactions were reported as revenue on a net basis in our condensed consolidated statements of operations and comprehensive income (loss) because the purchases of inventory and subsequent sales of the inventory were with the same counterparty. For comparability, prior year amounts above have been recast to include transactions with Gavilon, LLC, which was not a related party until December 2013.
White Cliffs
As described in Note 3, we account for our ownership interest in White Cliffs under the equity method. During the three months ended June 30, 2014 and 2013, we generated storage revenue from White Cliffs of approximately $0.7 million and $0.8 million, respectively. During the six months ended June 30, 2014 and 2013, we generated storage revenue from White Cliffs of approximately $1.5 million and $1.3 million, respectively. We incurred $0.8 million and $1.7 million of cost for the three and six months ended June 30, 2014, respectively, related to transportation fees for shipments on White Cliffs.
Glass Mountain
We incurred $0.1 million of cost for the three months and six months ended June 30, 2014 related to transportation fees for shipments on the Glass Mountain Pipeline. We received $0.2 million and $0.4 million in fees from Glass Mountain for the three months and six months ended June 30, 2014, respectively, related to support and administrative services associated with pipeline operations.
Legal services
The law firm of Conner & Winters, LLP, of which Mark D. Berman is a partner, performs legal services for us. Mr. Berman is the spouse of Candice L. Cheeseman, General Counsel and Secretary. Mr. Berman does not perform any legal services for us. SemGroup paid $0.3 million and $0.8 million in legal fees and related expenses to this law firm during the three months ended June 30, 2014 and 2013, respectively (of which $27.0 thousand and $11.5 thousand was paid by White Cliffs during the three months ended June 30, 2014 and 2013, respectively). SemGroup paid $0.6 million and $1.3 million in legal fees and related expenses to this law firm during the six months ended June 30, 2014 and 2013, respectively (of which $81.0 thousand and $47.5 thousand was paid by White Cliffs during the six months ended June 30, 2014 and 2013, respectively).
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
14. | CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS |
Our Notes are guaranteed by certain of our subsidiaries as follows: SemGas, L.P., SemCanada, L.P., SemCanada II, L.P., SemMaterials, L.P., SemGroup Europe Holding, L.L.C., SemOperating G.P., L.L.C., SemMexico, L.L.C., SemDevelopment, L.L.C., Rose Rock Midstream Holdings, LLC, Wattenberg Holding, LLC, Glass Mountain Holding, LLC and Mid-America Midstream Gas Services, L.L.C. (collectively, the "Guarantors").
Each of the Guarantors is 100% owned by SemGroup Corporation (the "Parent"). Such guarantees of the Notes are full and unconditional and constitute the joint and several obligations of the Guarantors. There are no significant restrictions upon the ability of the Parent or any of the Guarantors to obtain funds from its respective subsidiaries by dividend or loan. None of the assets of the Guarantors represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act.
Unaudited condensed consolidating financial statements for the Parent, the Guarantors and non-guarantors as of June 30, 2014 and December 31, 2013 and for the three and six months ended June 30, 2014 and 2013 are presented on an equity method basis in the tables below (in thousands).
Intercompany receivable and payable balances, including notes receivable and payable, are capital transactions primarily to facilitate the capital needs of our subsidiaries. As such, subsidiary intercompany balances have been reported as a reduction to equity on the condensed consolidating Guarantor balance sheets. The Parent's net intercompany balance, including note receivable, and investments in subsidiaries have been reported in equity method investments on the condensed consolidating Guarantor balance sheets. Intercompany transactions, such as daily cash management activities, have been reported as financing activities within the condensed consolidating Guarantor statements of cash flows. The Parent's investing activities with subsidiaries, such as the drop down of a 33% interest in SemCrude Pipeline, L.L.C. to Rose Rock in the first quarter of 2013, have been reflected as cash flows from investing activities. Quarterly cash distributions from Rose Rock representing a return on capital have been included in the Parent's cash flows from operations. These balances are eliminated through consolidating adjustments below.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
14. | CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued |
Condensed Consolidating Guarantor Balance Sheets
|
| | | | | | | | | | | | | | | | | | | | |
| | June 30, 2014 |
| | Parent | | Guarantors | | Non-guarantors | | Consolidating Adjustments | | Consolidated |
ASSETS | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 6,825 |
| | $ | — |
| | $ | 71,652 |
| | $ | (3,139 | ) | | $ | 75,338 |
|
Restricted cash | | 3,856 |
| | — |
| | 3,560 |
| | — |
| | 7,416 |
|
Accounts receivable, net | | 632 |
| | 32,181 |
| | 301,416 |
| | — |
| | 334,229 |
|
Proceeds receivable from senior note issuance | | — |
| | — |
| | 391,915 |
| | — |
| | 391,915 |
|
Receivable from affiliates | | 1,856 |
| | 7,700 |
| | 26,884 |
| | (6,639 | ) | | 29,801 |
|
Inventories | | — |
| | (540 | ) | | 44,920 |
| | — |
| | 44,380 |
|
Other current assets | | 12,803 |
| | 736 |
| | 7,226 |
| | — |
| | 20,765 |
|
Total current assets | | 25,972 |
| | 40,077 |
|
| 847,573 |
|
| (9,778 | ) |
| 903,844 |
|
Property, plant and equipment, net | | 3,998 |
| | 429,428 |
| | 778,995 |
| | — |
| | 1,212,421 |
|
Equity method investments | | 1,591,000 |
| | 600,077 |
| | 271,187 |
| | (1,828,889 | ) | | 633,375 |
|
Goodwill | | — |
| | 13,052 |
| | 55,967 |
| | — |
| | 69,019 |
|
Other intangible assets, net | | 28 |
| | 156,483 |
| | 13,724 |
| | — |
| | 170,235 |
|
Other noncurrent assets, net | | 11,956 |
| | 1,241 |
| | 20,353 |
| | — |
| | 33,550 |
|
Total assets | | $ | 1,632,954 |
| | $ | 1,240,358 |
|
| $ | 1,987,799 |
|
| $ | (1,838,667 | ) |
| $ | 3,022,444 |
|
LIABILITIES AND OWNERS’ EQUITY | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accounts payable | | $ | 723 |
| | $ | 26,800 |
| | $ | 233,757 |
| | $ | — |
| | $ | 261,280 |
|
Payable to affiliates | | 41 |
| | 71 |
| | 27,583 |
| | (4,984 | ) | | 22,711 |
|
Accrued liabilities | | 9,745 |
| | 13,931 |
| | 46,670 |
| | 4 |
| | 70,350 |
|
Payables to pre-petition creditors | | 3,128 |
| | — |
| | 8 |
| | — |
| | 3,136 |
|
Deferred revenue | | — |
| | — |
| | 22,238 |
| | (1 | ) | | 22,237 |
|
Warrant liability | | 76,084 |
| | — |
| | — |
| | — |
| | 76,084 |
|
Other current liabilities | | 415 |
| | 708 |
| | 1,110 |
| | (1,658 | ) | | 575 |
|
Current portion of long-term debt | | — |
| | — |
| | 4,357 |
| | — |
| | 4,357 |
|
Total current liabilities | | 90,136 |
| | 41,510 |
| | 335,723 |
| | (6,639 | ) | | 460,730 |
|
Long-term debt | | 365,500 |
| | — |
| | 847,568 |
| | — |
| | 1,213,068 |
|
Deferred income taxes | | 85,583 |
| | — |
| | 54,488 |
| | — |
| | 140,071 |
|
Other noncurrent liabilities | | 8 |
| | — |
| | 43,664 |
| | — |
| | 43,672 |
|
Commitments and contingencies | |
|
| |
|
| |
|
| |
|
| |
|
|
Owners’ equity excluding noncontrolling interests in consolidated subsidiaries | | 1,091,727 |
| | 1,198,848 |
| | 633,180 |
| | (1,832,028 | ) | | 1,091,727 |
|
Noncontrolling interests in consolidated subsidiaries | | — |
| | — |
| | 73,176 |
| | — |
| | 73,176 |
|
Total owners’ equity | | 1,091,727 |
| | 1,198,848 |
|
| 706,356 |
|
| (1,832,028 | ) |
| 1,164,903 |
|
Total liabilities and owners’ equity | | $ | 1,632,954 |
|
| $ | 1,240,358 |
| | $ | 1,987,799 |
| | $ | (1,838,667 | ) | | $ | 3,022,444 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
14. | CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued |
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2013 |
| | Parent | | Guarantors | | Non-guarantors | | Consolidating Adjustments | | Consolidated |
ASSETS | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 2,545 |
| | $ | — |
| | $ | 78,364 |
| | $ | (1,558 | ) | | $ | 79,351 |
|
Restricted cash | | 3,851 |
| | — |
| | 1,268 |
| | — |
| | 5,119 |
|
Accounts receivable, net | | 649 |
| | 14,642 |
| | 308,674 |
| | — |
| | 323,965 |
|
Receivable from affiliates | | 1,519 |
| | 14,063 |
| | 56,040 |
| | (4,349 | ) | | 67,273 |
|
Inventories | | — |
| | 1,046 |
| | 43,249 |
| | — |
| | 44,295 |
|
Other current assets | | 8,712 |
| | 193 |
| | 5,106 |
| | — |
| | 14,011 |
|
Total current assets | | 17,276 |
| | 29,944 |
|
| 492,701 |
|
| (5,907 | ) |
| 534,014 |
|
Property, plant and equipment, net | | 4,114 |
| | 366,067 |
| | 735,547 |
| | — |
| | 1,105,728 |
|
Equity method investments | | 1,511,922 |
| | 461,056 |
| | 159,321 |
| | (1,567,175 | ) | | 565,124 |
|
Goodwill | | — |
| | 23,839 |
| | 38,182 |
| | — |
| | 62,021 |
|
Other intangible assets, net | | 31 |
| | 163,144 |
| | 11,663 |
| | — |
| | 174,838 |
|
Other noncurrent assets, net | | 15,263 |
| | 1,302 |
| | 12,324 |
| | — |
| | 28,889 |
|
Total assets | | $ | 1,548,606 |
| | $ | 1,045,352 |
|
| $ | 1,449,738 |
|
| $ | (1,573,082 | ) |
| $ | 2,470,614 |
|
LIABILITIES AND OWNERS’ EQUITY | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accounts payable | | $ | 1,172 |
| | $ | 24,234 |
| | $ | 229,061 |
| | $ | — |
| | $ | 254,467 |
|
Payable to affiliates | | 17 |
| | 115 |
| | 67,062 |
| | (4,915 | ) | | 62,279 |
|
Accrued liabilities | | 10,072 |
| | 17,341 |
| | 56,011 |
| | 5 |
| | 83,429 |
|
Payables to pre-petition creditors | | 3,124 |
| | — |
| | 53 |
| | — |
| | 3,177 |
|
Deferred revenue | | — |
| | — |
| | 25,538 |
| | — |
| | 25,538 |
|
Warrant liability | | 58,134 |
| | — |
| | — |
| | — |
| | 58,134 |
|
Other current liabilities | | 3,741 |
| | 715 |
| | 7,697 |
| | — |
| | 12,153 |
|
Current portion of long-term debt | | — |
| | — |
| | 37 |
| | — |
| | 37 |
|
Total current liabilities | | 76,260 |
| | 42,405 |
| | 385,459 |
| | (4,910 | ) | | 499,214 |
|
Long-term debt | | 370,000 |
| | — |
| | 245,088 |
| | — |
| | 615,088 |
|
Deferred income taxes | | 48,436 |
| | — |
| | 52,509 |
| | — |
| | 100,945 |
|
Other noncurrent liabilities | | 8 |
| | — |
| | 41,496 |
| | — |
| | 41,504 |
|
Commitments and contingencies | |
|
| |
|
| |
|
| |
|
| |
|
|
Owners’ equity excluding noncontrolling interests in consolidated subsidiaries | | 1,053,902 |
| | 1,002,947 |
| | 565,225 |
| | (1,568,172 | ) | | 1,053,902 |
|
Noncontrolling interests in consolidated subsidiaries | | — |
| | — |
| | 159,961 |
| | — |
| | 159,961 |
|
Total owners’ equity | | 1,053,902 |
| | 1,002,947 |
|
| 725,186 |
|
| (1,568,172 | ) |
| 1,213,863 |
|
Total liabilities and owners’ equity | | $ | 1,548,606 |
| | $ | 1,045,352 |
|
| $ | 1,449,738 |
|
| $ | (1,573,082 | ) |
| $ | 2,470,614 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
14. | CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued |
Condensed Consolidating Guarantor Statements of Operations
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2014 |
| | Parent | | Guarantors | | Non-guarantors | | Consolidating Adjustments | | Consolidated |
Revenues: | | | | | | | | | | |
Product | | $ | — |
| | $ | 82,212 |
| | $ | 330,549 |
| | $ | (9,775 | ) | | $ | 402,986 |
|
Service | | — |
| | 11,317 |
| | 42,133 |
| | — |
| | 53,450 |
|
Other | | — |
| | — |
| | 25,788 |
| | — |
| | 25,788 |
|
Total revenues | | — |
| | 93,529 |
|
| 398,470 |
|
| (9,775 | ) |
| 482,224 |
|
Expenses: | | | | | | | | | |
|
Costs of products sold, exclusive of depreciation and amortization shown below | | — |
| | 67,306 |
| | 310,996 |
| | (9,775 | ) | | 368,527 |
|
Operating | | — |
| | 8,411 |
| | 51,013 |
| | — |
| | 59,424 |
|
General and administrative | | 4,985 |
| | 2,678 |
| | 14,187 |
| | — |
| | 21,850 |
|
Depreciation and amortization | | 417 |
| | 8,123 |
| | 13,522 |
| | — |
| | 22,062 |
|
Loss (gain) on disposal of long-lived assets, net | | 5,945 |
| | 54,695 |
| | (41,325 | ) | | — |
| | 19,315 |
|
Total expenses | | 11,347 |
| | 141,213 |
|
| 348,393 |
|
| (9,775 | ) | | 491,178 |
|
Earnings from equity method investments | | 10,493 |
| | 57,955 |
| | 8,209 |
| | (57,470 | ) | | 19,187 |
|
Operating income (loss) | | (854 | ) | | 10,271 |
|
| 58,286 |
|
| (57,470 | ) |
| 10,233 |
|
Other expenses, net: | | | | | | | | | |
|
Interest expense | | 3,093 |
| | 4,619 |
| | 3,480 |
| | (832 | ) | | 10,360 |
|
Foreign currency transaction loss | | — |
| | — |
| | 167 |
| | — |
| | 167 |
|
Other expense, net | | 18,099 |
| | — |
| | 32 |
| | 831 |
| | 18,962 |
|
Total other expenses, net | | 21,192 |
| | 4,619 |
|
| 3,679 |
|
| (1 | ) |
| 29,489 |
|
Income (loss) from continuing operations before income taxes | | (22,046 | ) | | 5,652 |
|
| 54,607 |
|
| (57,469 | ) |
| (19,256 | ) |
Income tax benefit | | (4,437 | ) | | — |
| | (2,235 | ) | | — |
| | (6,672 | ) |
Income (loss) from continuing operations | | (17,609 | ) | | 5,652 |
|
| 56,842 |
|
| (57,469 | ) |
| (12,584 | ) |
Net income (loss) | | (17,609 | ) | | 5,652 |
|
| 56,842 |
|
| (57,469 | ) |
| (12,584 | ) |
Less: net income attributable to noncontrolling interests | | — |
| | — |
| | 5,025 |
| | — |
| | 5,025 |
|
Net income (loss) attributable to SemGroup | | $ | (17,609 | ) | | $ | 5,652 |
|
| $ | 51,817 |
|
| $ | (57,469 | ) |
| $ | (17,609 | ) |
Net income (loss) | | $ | (17,609 | ) | | $ | 5,652 |
|
| $ | 56,842 |
|
| $ | (57,469 | ) |
| $ | (12,584 | ) |
Other comprehensive income (loss), net of income taxes | | (1,680 | ) | | — |
| | 8,365 |
| | — |
| | 6,685 |
|
Comprehensive income (loss) | | (19,289 | ) | | 5,652 |
|
| 65,207 |
|
| (57,469 | ) |
| (5,899 | ) |
Less: comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | 5,025 |
| | — |
| | 5,025 |
|
Comprehensive income (loss) attributable to SemGroup | | $ | (19,289 | ) | | $ | 5,652 |
|
| $ | 60,182 |
|
| $ | (57,469 | ) |
| $ | (10,924 | ) |
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
14. | CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2013 |
| | Parent | | Guarantors | | Non-guarantors | | Consolidating Adjustments | | Consolidated |
Revenues: | | | | | | | | | | |
Product | | $ | — |
| | $ | 45,623 |
| | $ | 200,649 |
| | $ | (5,019 | ) | | $ | 241,253 |
|
Service | | — |
| | 223 |
| | 31,455 |
| | — |
| | 31,678 |
|
Other | | — |
| | — |
| | 51,313 |
| | — |
| | 51,313 |
|
Total revenues | | — |
| | 45,846 |
|
| 283,417 |
|
| (5,019 | ) |
| 324,244 |
|
Expenses: | | | | | | | | | | |
Costs of products sold, exclusive of depreciation and amortization shown below | | — |
| | 32,682 |
| | 185,046 |
| | (5,019 | ) | | 212,709 |
|
Operating | | — |
| | 4,001 |
| | 65,681 |
| | — |
| | 69,682 |
|
General and administrative | | 4,210 |
| | 2,069 |
| | 10,619 |
| | — |
| | 16,898 |
|
Depreciation and amortization | | 482 |
| | 2,082 |
| | 10,250 |
| | — |
| | 12,814 |
|
Gain on disposal of long-lived assets, net | | — |
| | (5 | ) | | (371 | ) | | — |
| | (376 | ) |
Total expenses | | 4,692 |
| | 40,829 |
|
| 271,225 |
|
| (5,019 | ) |
| 311,727 |
|
Earnings from equity method investments | | 20,358 |
| | 19,796 |
| | 10,661 |
| | (35,954 | ) | | 14,861 |
|
Operating income | | 15,666 |
| | 24,813 |
|
| 22,853 |
|
| (35,954 | ) |
| 27,378 |
|
Other expenses (income): | | | | | | | | | | |
Interest expense (income) | | (901 | ) | | 1,024 |
| | 4,372 |
| | — |
| | 4,495 |
|
Foreign currency transaction gain | | — |
| | — |
| | (349 | ) | | — |
| | (349 | ) |
Other expense, net | | 5,009 |
| | — |
| | 1,458 |
| | — |
| | 6,467 |
|
Total other expenses, net | | 4,108 |
| | 1,024 |
|
| 5,481 |
|
| — |
|
| 10,613 |
|
Income from continuing operations before income taxes | | 11,558 |
| | 23,789 |
|
| 17,372 |
|
| (35,954 | ) |
| 16,765 |
|
Income tax expense | | 7,989 |
| | — |
| | 1,299 |
| | — |
| | 9,288 |
|
Income from continuing operations | | 3,569 |
| | 23,789 |
|
| 16,073 |
|
| (35,954 | ) |
| 7,477 |
|
Income (loss) from discontinued operations, net of income taxes | | — |
| | 36 |
| | (1 | ) | | — |
| | 35 |
|
Net income | | 3,569 |
| | 23,825 |
|
| 16,072 |
|
| (35,954 | ) |
| 7,512 |
|
Less: net income attributable to noncontrolling interests | | — |
| | — |
| | 3,943 |
| | — |
| | 3,943 |
|
Net income attributable to SemGroup | | $ | 3,569 |
| | $ | 23,825 |
|
| $ | 12,129 |
|
| $ | (35,954 | ) |
| $ | 3,569 |
|
Net income | | $ | 3,569 |
| | $ | 23,825 |
|
| $ | 16,072 |
|
| $ | (35,954 | ) |
| $ | 7,512 |
|
Other comprehensive income (loss), net of income taxes | | 936 |
| | — |
| | (6,290 | ) | | — |
| | (5,354 | ) |
Comprehensive income | | 4,505 |
| | 23,825 |
|
| 9,782 |
|
| (35,954 | ) |
| 2,158 |
|
Less: comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | 3,943 |
| | — |
| | 3,943 |
|
Comprehensive income (loss) attributable to SemGroup | | $ | 4,505 |
| | $ | 23,825 |
|
| $ | 5,839 |
|
| $ | (35,954 | ) |
| $ | (1,785 | ) |
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
14. | CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued |
|
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2014 |
| | Parent | | Guarantors | | Non-guarantors | | Consolidating Adjustments | | Consolidated |
Revenues: | | | | | | | | | | |
Product | | $ | — |
| | $ | 180,337 |
| | $ | 669,346 |
| | $ | (19,667 | ) | | $ | 830,016 |
|
Service | | — |
| | 14,127 |
| | 87,830 |
| | — |
| | 101,957 |
|
Other | | — |
| | — |
| | 49,134 |
| | — |
| | 49,134 |
|
Total revenues | | — |
| | 194,464 |
|
| 806,310 |
|
| (19,667 | ) |
| 981,107 |
|
Expenses: | | | | | | | | | |
|
Costs of products sold, exclusive of depreciation and amortization shown below | | — |
| | 144,840 |
| | 628,467 |
| | (19,667 | ) | | 753,640 |
|
Operating | | — |
| | 15,761 |
| | 94,441 |
| | — |
| | 110,202 |
|
General and administrative | | 9,518 |
| | 4,968 |
| | 26,100 |
| | — |
| | 40,586 |
|
Depreciation and amortization | | 852 |
| | 13,887 |
| | 30,960 |
| | — |
| | 45,699 |
|
Loss (gain) on disposal of long-lived assets, net | | 5,945 |
| | 54,705 |
| | (41,393 | ) | | — |
| | 19,257 |
|
Total expenses | | 16,315 |
| | 234,161 |
|
| 738,575 |
|
| (19,667 | ) |
| 969,384 |
|
Earnings from equity method investments | | 31,319 |
| | 74,582 |
| | 15,613 |
| | (87,365 | ) | | 34,149 |
|
Gain on issuance of common units by equity method investee | | 8,127 |
| | — |
| | — |
| | — |
| | 8,127 |
|
Operating income | | 23,131 |
| | 34,885 |
|
| 83,348 |
|
| (87,365 | ) |
| 53,999 |
|
Other expenses (income): | | | | | | | | | |
|
Interest expense | | 5,583 |
| | 8,698 |
| | 6,955 |
| | (1,649 | ) | | 19,587 |
|
Foreign currency transaction gain | | — |
| | — |
| | (516 | ) | | — |
| | (516 | ) |
Other expense (income), net | | 16,301 |
| | — |
| | (35 | ) | | 1,649 |
| | 17,915 |
|
Total other expenses, net | | 21,884 |
| | 8,698 |
|
| 6,404 |
|
| — |
|
| 36,986 |
|
Income from continuing operations before income taxes | | 1,247 |
| | 26,187 |
|
| 76,944 |
|
| (87,365 | ) |
| 17,013 |
|
Income tax expense | | 5,343 |
| | — |
| | 4,511 |
| | — |
| | 9,854 |
|
Income (loss) from continuing operations | | (4,096 | ) | | 26,187 |
|
| 72,433 |
|
| (87,365 | ) |
| 7,159 |
|
Loss from discontinued operations, net of income taxes | | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Net income (loss) | | (4,096 | ) | | 26,187 |
|
| 72,428 |
|
| (87,365 | ) |
| 7,154 |
|
Less: net income attributable to noncontrolling interests | | — |
| | — |
| | 11,250 |
| | — |
| | 11,250 |
|
Net income (loss) attributable to SemGroup | | $ | (4,096 | ) | | $ | 26,187 |
|
| $ | 61,178 |
|
| $ | (87,365 | ) |
| $ | (4,096 | ) |
Net income (loss) | | $ | (4,096 | ) | | $ | 26,187 |
|
| $ | 72,428 |
|
| $ | (87,365 | ) |
| $ | 7,154 |
|
Other comprehensive income (loss), net of income taxes | | (2,426 | ) | | — |
| | 6,139 |
| | — |
| | 3,713 |
|
Comprehensive income (loss) | | (6,522 | ) | | 26,187 |
|
| 78,567 |
|
| (87,365 | ) |
| 10,867 |
|
Less: comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | 11,250 |
| | — |
| | 11,250 |
|
Comprehensive income (loss) attributable to SemGroup | | $ | (6,522 | ) | | $ | 26,187 |
|
| $ | 67,317 |
|
| $ | (87,365 | ) |
| $ | (383 | ) |
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
14. | CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued |
|
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2013 |
| | Parent | | Guarantors | | Non-guarantors | | Consolidating Adjustments | | Consolidated |
Revenues: | | | | | | | | | | |
Product | | $ | — |
| | $ | 83,257 |
| | $ | 402,713 |
| | $ | (9,088 | ) | | $ | 476,882 |
|
Service | | — |
| | 471 |
| | 58,864 |
| | — |
| | 59,335 |
|
Other | | — |
| | — |
| | 75,723 |
| | — |
| | 75,723 |
|
Total revenues | | — |
| | 83,728 |
| | 537,300 |
| | (9,088 | ) | | 611,940 |
|
Expenses: | | | | | | | | | |
|
Costs of products sold, exclusive of depreciation and amortization shown below | | — |
| | 61,156 |
| | 373,010 |
| | (9,088 | ) | | 425,078 |
|
Operating | | — |
| | 7,972 |
| | 102,481 |
| | — |
| | 110,453 |
|
General and administrative | | 8,128 |
| | 4,105 |
| | 21,702 |
| | — |
| | 33,935 |
|
Depreciation and amortization | | 1,007 |
| | 4,060 |
| | 20,383 |
| | — |
| | 25,450 |
|
Loss (gain) on disposal of long-lived assets, net | | — |
| | 3 |
| | (541 | ) | | — |
| | (538 | ) |
Total expenses | | 9,135 |
| | 77,296 |
| | 517,035 |
| | (9,088 | ) | | 594,378 |
|
Earnings from equity method investments | | 37,245 |
| | 38,343 |
| | 21,100 |
| | (64,482 | ) | | 32,206 |
|
Operating income | | 28,110 |
| | 44,775 |
| | 41,365 |
| | (64,482 | ) | | 49,768 |
|
Other expenses (income): | | | | | | | | | |
|
Interest expense (income) | | (2,917 | ) | | 1,827 |
| | 7,981 |
| | — |
| | 6,891 |
|
Foreign currency transaction loss | | — |
| | — |
| | (516 | ) | | — |
| | (516 | ) |
Other expense, net | | 29,443 |
| | 158 |
| | 2,499 |
| | — |
| | 32,100 |
|
Total other expenses, net | | 26,526 |
| | 1,985 |
| | 9,964 |
| | — |
| | 38,475 |
|
Income from continuing operations before income taxes | | 1,584 |
| | 42,790 |
| | 31,401 |
| | (64,482 | ) | | 11,293 |
|
Income tax (benefit) expense | | (45,429 | ) | | — |
| | 711 |
| | — |
| | (44,718 | ) |
Income from continuing operations | | 47,013 |
| | 42,790 |
| | 30,690 |
| | (64,482 | ) | | 56,011 |
|
Income from discontinued operations, net of income taxes | | — |
| | 66 |
| | 1 |
| | — |
| | 67 |
|
Net income | | 47,013 |
| | 42,856 |
| | 30,691 |
| | (64,482 | ) | | 56,078 |
|
Less: net income attributable to noncontrolling interests | | — |
| | — |
| | 9,065 |
| | — |
| | 9,065 |
|
Net income attributable to SemGroup | | $ | 47,013 |
| | $ | 42,856 |
| | $ | 21,626 |
| | $ | (64,482 | ) | | $ | 47,013 |
|
Net income | | $ | 47,013 |
| | $ | 42,856 |
| | $ | 30,691 |
| | $ | (64,482 | ) | | $ | 56,078 |
|
Other comprehensive income (loss), net of income taxes | | 2,352 |
| | — |
| | (12,764 | ) | | — |
| | (10,412 | ) |
Comprehensive income | | 49,365 |
| | 42,856 |
| | 17,927 |
| | (64,482 | ) | | 45,666 |
|
Less: comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | 9,065 |
| | — |
| | 9,065 |
|
Comprehensive income attributable to SemGroup | | $ | 49,365 |
| | $ | 42,856 |
| | $ | 8,862 |
| | $ | (64,482 | ) | | $ | 36,601 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
14. | CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued |
Condensed Consolidating Guarantor Statements of Cash Flows |
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2014 |
| | Parent | | Guarantors | | Non-guarantors | | Consolidating Adjustments | | Consolidated |
Net cash provided by operating activities | | $ | 5,730 |
| | $ | 28,836 |
| | $ | 32,701 |
| | $ | (11,718 | ) | | $ | 55,549 |
|
Cash flows from investing activities: | | | | | | | | | |
|
Capital expenditures | | (734 | ) | | (88,459 | ) | | (38,475 | ) | | — |
| | (127,668 | ) |
Proceeds from sale of long-lived assets | | — |
| | 2,361 |
| | 1,659 |
| | — |
| | 4,020 |
|
Proceeds from the sale of interest in SemCrude Pipeline, L.L.C. to Rose Rock Midstream L.P. | | 114,412 |
| | — |
| | — |
| | (114,412 | ) | | — |
|
Investments in non-consolidated subsidiaries | | — |
| | (16,203 | ) | | (51,774 | ) | | — |
| | (67,977 | ) |
Payments to acquire businesses | | — |
| | (514 | ) | | (43,994 | ) | | — |
| | (44,508 | ) |
Distributions in excess of equity in earnings of affiliates | | 1,254 |
| | 719 |
| | 4,681 |
| | (1,254 | ) | | 5,400 |
|
Net cash used in investing activities | | 114,932 |
|
| (102,096 | ) |
| (127,903 | ) |
| (115,666 | ) | | (230,733 | ) |
Cash flows from financing activities: | | | | | | | | | |
|
Debt issuance costs | | (93 | ) | | — |
| | (62 | ) | | — |
| | (155 | ) |
Borrowings on credit facilities | | 233,500 |
| | — |
| | 300,330 |
| | — |
| | 533,830 |
|
Principal payments on credit facilities and other obligations | | (238,000 | ) | | — |
| | (93,518 | ) | | — |
| | (331,518 | ) |
Distributions to noncontrolling interests | | — |
| | — |
| | (13,209 | ) | | — |
| | (13,209 | ) |
Repurchase of common stock for payment of statutory taxes due on equity-based compensation | | (719 | ) | | — |
| | — |
| | — |
| | (719 | ) |
Dividends paid | | (19,628 | ) | | — |
| | — |
| | — |
| | (19,628 | ) |
Proceeds from issuance of common stock under employee stock purchase plan | | 88 |
| | — |
| | — |
| | — |
| | 88 |
|
Excess tax benefit from equity-based awards | | 1,650 |
| | — |
| | — |
| | — |
| | 1,650 |
|
Intercompany borrowings (advances), net | | (93,180 | ) | | 73,260 |
| | (105,883 | ) | | 125,803 |
| | — |
|
Net cash provided by (used in) financing activities | | (116,382 | ) | | 73,260 |
|
| 87,658 |
|
| 125,803 |
| | 170,339 |
|
Effect of exchange rate changes on cash and cash equivalents | | — |
| | — |
| | 832 |
| | — |
| | 832 |
|
Change in cash and cash equivalents | | 4,280 |
| | — |
|
| (6,712 | ) |
| (1,581 | ) | | (4,013 | ) |
Cash and cash equivalents at beginning of period | | 2,545 |
| | — |
| | 78,364 |
| | (1,558 | ) | | 79,351 |
|
Cash and cash equivalents at end of period | | $ | 6,825 |
| | $ | — |
|
| $ | 71,652 |
|
| $ | (3,139 | ) | | $ | 75,338 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
14. | CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued |
|
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2013 |
| | Parent | | Guarantors | | Non-guarantors | | Consolidating Adjustments | | Consolidated |
Net cash provided by (used in) operating activities | | $ | 14,394 |
| | $ | (1,839 | ) | | $ | 39,478 |
| | $ | 3,403 |
| | $ | 55,436 |
|
Cash flows from investing activities: | | | | | | | | | | |
Capital expenditures | | (442 | ) | | (36,531 | ) | | (22,904 | ) | | — |
| | (59,877 | ) |
Proceeds from sale of long-lived assets | | — |
| | 3 |
| | 541 |
| | — |
| | 544 |
|
Investments in non-consolidated subsidiaries | | — |
| | (21,290 | ) | | (60,321 | ) | | — |
| | (81,611 | ) |
Proceeds from the sale of interest in SemCrude Pipeline, L.L.C. to Rose Rock Midstream L.P. | | 189,500 |
| | — |
| | — |
| | (189,500 | ) | | — |
|
Distributions in excess of equity in earnings of affiliates | | — |
| | — |
| | 5,582 |
| | — |
| | 5,582 |
|
Net cash provided by (used in) investing activities | | 189,058 |
| | (57,818 | ) |
| (77,102 | ) |
| (189,500 | ) | | (135,362 | ) |
Cash flows from financing activities: | | | | | | | | | |
|
Debt issuance costs | | (8,651 | ) | | — |
| | (1,612 | ) | | — |
| | (10,263 | ) |
Borrowings on credit facilities | | 394,500 |
| | — |
| | 255,474 |
| | — |
| | 649,974 |
|
Principal payments on credit facilities and other obligations | | (296,000 | ) | | — |
| | (89,012 | ) | | — |
| | (385,012 | ) |
Proceeds from issuance of Rose Rock Midstream, L.P. common units, net of offering costs | | — |
| | — |
| | 57,751 |
| | — |
| | 57,751 |
|
Distributions to noncontrolling interests | | — |
| | — |
| | (7,496 | ) | | — |
| | (7,496 | ) |
Proceeds from warrant exercises | | 224 |
| | — |
| | — |
| | — |
| | 224 |
|
Repurchase of common stock for payment of statutory taxes due on equity-based compensation | | (371 | ) | | — |
| | — |
| | — |
| | (371 | ) |
Dividends paid | | (7,939 | ) | | — |
| | — |
| | — |
| | (7,939 | ) |
Intercompany borrowing (advances), net | | (69,606 | ) | | 59,657 |
| | (174,866 | ) | | 184,815 |
| | — |
|
Net cash provided by financing activities | | 12,157 |
| | 59,657 |
|
| 40,239 |
|
| 184,815 |
| | 296,868 |
|
Effect of exchange rate changes on cash and cash equivalents | | — |
| | — |
| | 1,795 |
| | — |
| | 1,795 |
|
Change in cash and cash equivalents | | 215,609 |
| | — |
|
| 4,410 |
|
| (1,282 | ) | | 218,737 |
|
Cash and cash equivalents at beginning of period | | 19,123 |
| | — |
| | 63,844 |
| | (2,938 | ) | | 80,029 |
|
Cash and cash equivalents at end of period | | $ | 234,732 |
| | $ | — |
|
| $ | 68,254 |
|
| $ | (4,220 | ) | | $ | 298,766 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
During the six months ended June 30, 2014, we completed the following acquisitions:
| |
• | On June 24, 2014, our consolidated subsidiary, Rose Rock, acquired crude oil trucking assets from a subsidiary of Chesapeake Energy Corporation ("Chesapeake") (NYSE: CHK) for $44.0 million in cash. Highlights of the transaction include: |
| |
◦ | 124 trucks, 122 trailers and miscellaneous equipment; and |
| |
◦ | a long-term transportation agreement with Chesapeake Energy Marketing, Inc. |
The results of operations of these assets from June 24, 2014 through June 30, 2014 have been included in our Crude segment in our condensed consolidated statements of operations and comprehensive income (loss) and balance sheet as of June 30, 2014. During the three months and six months ended June 30, 2014, our condensed consolidated statements of operations and comprehensive income (loss) did not include material amounts of revenue or operating income related to these assets. The proforma impact to comparative prior year periods, had the acquisition occurred at the beginning of the comparative prior year period, is not significant.
We are in the process of obtaining an independent appraisal of the fair value of the assets acquired from Chesapeake. The estimates of fair value reflected as of June 30, 2014, are subject to change and such changes could be material. We currently expect to complete the valuation process prior to filing our Form 10-K for the year ending December 31, 2014. We have preliminarily estimated the fair value of the assets acquired as follows (in thousands):
|
| | | |
Property, plant and equipment | $ | 21,700 |
|
Customer contract intangible | 4,459 |
|
Goodwill | 17,835 |
|
Total assets acquired | $ | 43,994 |
|
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. We estimate that all of the goodwill will be deductible for federal income tax purposes.
The acquisition above accounted for the majority of change in our goodwill during the six months ended June 30, 2014, as follows (in thousands):
|
| | | |
Balance at December 31, 2013 | $ | 62,021 |
|
Acquisition | 17,835 |
|
Mid-America Midstream Gas Services, LLC purchase price allocation adjustment | (10,787 | ) |
Barcas Field Services, LLC purchase price allocation adjustment | (98 | ) |
Currency translation adjustments | 48 |
|
Balance at June 30, 2014 | $ | 69,019 |
|
During the year ended December 31, 2013, we completed the following acquisitions:
| |
• | On August 1, 2013, we acquired the equity interest of Mid-America Midstream Gas Services, L.L.C., a wholly owned subsidiary of Chesapeake, which is the owner of gas gathering and processing assets in the Mississippi Lime play for approximately $313.5 million in cash. In June 2014, the independent appraisal of the fair value of these assets was finalized. Based on this appraisal, we recorded a non-cash adjustment to the purchase price allocation which decreased goodwill and customer contract intangible by $10.8 million and $2.3 million, respectively, with a corresponding increase to property, plant and equipment. In addition, we recorded $0.5 million of incremental payments for property, plant and equipment, which related to the period prior to close of the transaction. |
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
| |
15. | ACQUISITIONS, Continued |
| |
• | On September 1, 2013, our consolidated subsidiary, Rose Rock, acquired the assets of Barcas Field Services, LLC, which owned and operated a crude oil trucking fleet, for $49.0 million in cash. During the three months ended March 31, 2014, we recorded a non-cash adjustment to the purchase price allocation which decreased goodwill and other intangible assets and increased property, plant and equipment by $0.1 million. |
| |
• | 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%. |
| |
16. | DISPOSAL OF LONG-LIVED ASSETS |
On June 1, 2014, our SemGas segment sold certain natural gas gathering assets in Eastern Oklahoma resulting in a $20.1 million loss on a cash sales price of $2.4 million. The assets sold were made up of property, plant and equipment with a net book value of $22.5 million. The loss on the sale was reported in loss (gain) on disposal of long-lived assets, net in the condensed consolidated statement of operations and comprehensive income (loss). The operations of the gas gathering assets were not material to SemGroup.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated interim financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC.
Overview of Business
Our business is to provide gathering, transportation, storage, distribution, marketing and other midstream services primarily to independent producers, refiners of petroleum products and other market participants located in the Midwest and Rocky Mountain regions of the United States of America (the “U.S.”) and Canada. We, or our significant equity method investees, have an asset base consisting of pipelines, gathering systems, storage facilities, terminals, processing plants and other distribution assets located between North American production and supply areas, including the Gulf Coast, Midwest, Rocky Mountain and Western Canadian regions. We also maintain and operate storage, terminal and marine facilities at Milford Haven in the United Kingdom (the "U.K.") that enable customers to supply petroleum products to markets in the Atlantic Basin. We also operate a network of liquid asphalt cement terminals throughout Mexico. Our operations are conducted directly and indirectly through our six primary business segments – Crude, SemStream®, SemCAMS, SemLogistics, SemMexico, and SemGas®.
Our Property, Plant and Equipment
Our assets at June 30, 2014 included:
| |
• | the 2% general partner interest and a 56.8% limited partner interest in Rose Rock Midstream, L.P. ("Rose Rock"), a publicly traded master limited partnership, which owns an approximately 570-mile crude oil pipeline network in Kansas and Oklahoma and a crude oil storage facility in Cushing, Oklahoma with a capacity of 7.6 million barrels, of which 6.5 million barrels of storage are leased to customers and 1.1 million barrels are for used for crude oil operations and marketing activities; |
| |
• | a 51% ownership indirect interest (through our interest in Rose Rock) in White Cliffs Pipeline, L.L.C. ("White Cliffs"), which owns a 527-mile crude oil pipeline running from Platteville, Colorado to Cushing, Oklahoma (the "White Cliffs Pipeline"), that Rose Rock operates; |
| |
• | a 50% interest in Glass Mountain Pipeline, LLC ("Glass Mountain"), which owns a 215-mile crude oil pipeline in western and north central Oklahoma. The pipeline is operated by Rose Rock; |
| |
• | 9.1 million common units of NGL Energy Partners LP (“NGL Energy”) and an 11.78% interest in NGL Energy Holdings LLC, the general partner of NGL Energy; |
| |
• | approximately 1,975 miles of natural gas and NGL transportation, gathering and distribution pipelines in Kansas, Oklahoma, Texas and Alberta, Canada; |
| |
• | 8.7 million barrels of owned multi-product storage capacity located in the U.K.; |
| |
• | 14 facilities in Mexico engaged in storage, modification and distribution of asphalt-based products; |
| |
• | majority interest in four natural gas processing plants in Alberta, Canada, with combined operating capacity of 695 million cubic feet per day; |
| |
• | four natural gas processing plants in the U.S., with 388 million cubic feet per day of capacity; |
| |
• | a modern, sixteen-lane crude oil truck unloading facility with 230,000 barrels of associated storage capacity in Platteville, Colorado which connects to the origination point of the White Cliffs Pipeline; |
| |
• | a 37-mile crude oil gathering system with 210,000 barrels of operational storage connected to our Platteville, Colorado crude oil terminal and the origination point of the White Cliffs Pipeline. An additional 38 miles of pipeline is currently under construction; |
| |
• | a 12-mile crude oil pipeline (with an additional 5 miles currently under construction) that connects our Platteville, Colorado crude oil terminal to the Tampa, Colorado crude oil market; and |
| |
• | a crude oil trucking fleet of over 255 transport trucks and 270 trailers. |
Recent Developments
Eastern Oklahoma gas assets
On June 1, 2014, we sold certain natural gas gathering assets in Eastern Oklahoma for approximately $2.4 million, resulting in a book loss of approximately $20.1 million.
White Cliffs
On June 23, 2014, Rose Rock acquired our remaining one-third interest in SemCrude Pipeline, L.L.C. ("SCPL") for cash and equity valued at approximately $297 million, resulting in Rose Rock owning a 51% interest in White Cliffs.
Trucking assets acquisition
On June 23, 2014, Rose Rock acquired certain crude oil trucking assets from a subsidiary of Chesapeake Energy Corporation, including 124 trucks, 122 trailers and other miscellaneous equipment operating in Texas, Oklahoma and Ohio for approximately $44 million.
Senior unsecured notes
On June 27, 2014, Rose Rock agreed to sell $400 million of 5.625% senior unsecured notes due 2022 in a private placement to eligible purchasers which was settled on July 2, 2014.
NGL Energy LP units
On July 17, 2014, we filed a Form 144 with the SEC evidencing our intention to sell up to 3.47 million of the common units of NGL Energy Partners LP that we own. As of August 7, 2014, we have sold 1.48 million units.
Non-GAAP Financial Measures
We define Adjusted gross margin as total revenues minus cost of products sold and unrealized gain (loss) on derivatives. Adjusted gross margin is not a financial measure presented in accordance with GAAP. We believe that the presentation of this non-GAAP financial measure provides useful information to investors in assessing our financial condition and results of operations. Operating income is the GAAP measure most directly comparable to Adjusted gross margin. Our non-GAAP financial measure should not be considered as an alternative to the most directly comparable GAAP financial measure. This non-GAAP financial measure has important limitations as an analytical tool because it excludes some, but not all, items that affect the most directly comparable GAAP financial measure. You should not consider Adjusted gross margin as a substitute for analysis of our results as reported under GAAP. Because Adjusted gross margin may be defined differently by other companies in our industry, our definition of this non-GAAP financial measure may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.
Management compensates for the limitation of Adjusted gross margin as an analytical tool by reviewing the comparable GAAP measure, understanding the difference between Adjusted gross margin on the one hand, and operating income on the other hand, and incorporating this knowledge into its decision-making processes. We believe that investors benefit from having access to the same financial measure that our management uses in evaluating our operating results.
Results of Operations
Consolidated Results of Operations
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 | | 2014 | | 2013 |
Revenue | $ | 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 |
|
Other expense (income), net | 19,129 |
| | 6,118 |
| | 17,399 |
| | 31,584 |
|
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 |
|
Revenue and Expenses
Revenue and expenses are analyzed by operating segment below.
General and administrative expense
A portion of general and administrative expenses of each corporate department is allocated to the segments based on criteria such as actual usage, headcount and estimates of effort or benefit. The method for allocating cost is based on the type of service being provided. For example, internal audit costs are based on an estimate of effort attributable to a segment. In contrast, accounting department costs are allocated based on the number of transactions processed for a given segment compared to the total number processed.
Interest expense
Interest expense increased in the three months ended June 30, 2014 to $10.4 million from $4.5 million in the three months ended June 30, 2013. Interest expense increased in the six months ended June 30, 2014 to $19.6 million from $6.9 million in the six months ended June 30, 2013. The increase in interest expense is due to the increase in the outstanding debt balance which is primarily attributable to the issuance of $300 million of 7.50% senior notes in the second quarter of 2013.
Other expense, net
Other expense was $19.1 million for the three months ended June 30, 2014, compared to other expense of $6.1 million for the same period in 2013. Other expense was $17.4 million for the six months ended June 30, 2014, compared to other expense of $31.6 million for the same period in 2013. Other expense for all periods presented was comprised primarily of gains or losses due to the change in the fair value or number of our outstanding warrants.
Income tax expense (benefit)
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.
Results of Operations by Reporting Segment
Crude
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 | | 2014 | | 2013 |
Revenue | $ | 292,156 |
| | $ | 161,422 |
| | $ | 584,670 |
| | $ | 332,654 |
|
Expenses |
| |
| | | | |
Costs of products sold, exclusive of depreciation and amortization shown below | 255,745 |
| | 140,506 |
| | 510,282 |
| | 288,957 |
|
Operating | 17,689 |
| | 5,691 |
| | 32,828 |
| | 11,429 |
|
General and administrative | 6,438 |
| | 3,568 |
| | 10,380 |
| | 7,418 |
|
Depreciation and amortization | 7,276 |
| | 3,690 |
| | 18,758 |
| | 7,197 |
|
Gain on disposal of long-lived assets, net | (27 | ) | | (25 | ) | | (61 | ) | | (25 | ) |
Total expenses | 287,121 |
| | 153,430 |
| | 572,187 |
| | 314,976 |
|
Earnings from equity method investments | 14,219 |
| | 10,661 |
| | 25,590 |
| | 21,090 |
|
Operating income | $ | 19,254 |
|
| $ | 18,653 |
|
| $ | 38,073 |
|
| $ | 38,768 |
|
Three months ended June 30, 2014 versus three months ended June 30, 2013
Adjusted gross margin
We view Adjusted gross margin as an important performance measure of the core profitability of our operations, as well as our operating performance as compared to that of other companies in our industry, without regard to financing methods, historical costs basis, capital structure or the impact of fluctuating commodity prices. We define Adjusted gross margin as total revenues minus cost of products sold and unrealized gain (loss) on derivatives. Adjusted gross margin allows us to make a meaningful comparison of the operating results between our fee-based activities, which do not involve the purchase or sale of petroleum products, and our fixed-margin and marketing operations, which do. In addition, Adjusted gross margin allows us to make a meaningful comparison of the results of our fixed-margin and marketing operations across different commodity price environments because it measures the spread between the product sales price and costs of products sold.
Because Adjusted gross margin may be defined differently by other companies in our industry, our definition may not be comparable to similarly titled measures of other companies.
The following table presents a reconciliation of operating income to Adjusted gross margin, the most directly comparable GAAP financial measure for each of the periods indicated.
|
| | | | | | | |
| Three Months Ended June 30, |
(in thousands) | 2014 | | 2013 |
Reconciliation of operating income to Adjusted gross margin: | | | |
Operating income | $ | 19,254 |
| | $ | 18,653 |
|
Add: | | | |
Operating expense | 17,689 |
| | 5,691 |
|
General and administrative expense | 6,438 |
| | 3,568 |
|
Depreciation and amortization expense | 7,276 |
| | 3,690 |
|
Gain on disposal of long-lived assets, net | (27 | ) | | (25 | ) |
Less: | | | |
Unrealized gain on derivatives | 851 |
| | 827 |
|
Earnings from equity method investment | 14,219 |
| | 10,661 |
|
Adjusted gross margin | $ | 35,560 |
| | $ | 20,089 |
|
The following table shows the Adjusted gross margin generated by our fee-based services, our fixed-margin transactions and our marketing activities for the three months ended June 30, 2014 and 2013 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2014 | | Storage | | Transportation (1) | | Marketing Activities | | Other (2) | | Total |
Revenues | | $ | 7,756 |
| | $ | 20,118 |
| | $ | 261,425 |
| | $ | 2,857 |
| | $ | 292,156 |
|
Less: Costs of products sold, exclusive of depreciation and amortization | | — |
| | — |
| | 255,745 |
| | — |
| | 255,745 |
|
Less: Unrealized gain on derivatives | | — |
| | — |
| | 851 |
| | — |
| | 851 |
|
Adjusted gross margin | | $ | 7,756 |
| | $ | 20,118 |
| | $ | 4,829 |
| | $ | 2,857 |
| | $ | 35,560 |
|
| |
(1) | Transportation Adjusted gross margin is comprised of $3.0 million, $13.7 million and $3.4 million, related to pipeline transportation (fixed-fee), trucking (fixed-fee) and buy/sells (fixed margin), respectively. |
| |
(2) | This category includes fee-based services such as unloading and ancillary storage terminal services. |
|
| | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2013 | | Storage | | Transportation (1) | | Marketing Activities | | Other (2) | | Total |
Revenues | | $ | 8,629 |
| | $ | 5,648 |
| | $ | 144,056 |
| | $ | 3,089 |
| | $ | 161,422 |
|
Less: Costs of products sold, exclusive of depreciation and amortization | | — |
| | — |
| | 140,506 |
| | — |
| | 140,506 |
|
Less: Unrealized gain on derivatives | | — |
| | — |
| | 827 |
| | — |
| | 827 |
|
Adjusted gross margin | | $ | 8,629 |
| | $ | 5,648 |
| | $ | 2,723 |
| | $ | 3,089 |
| | $ | 20,089 |
|
| |
(1) | Transportation Adjusted gross margin is comprised of $0.9 million and $4.7 million, related to pipeline transportation (fixed-fee) and buy/sells (fixed margin), respectively. |
| |
(2) | This category includes fee-based services such as unloading and ancillary storage terminal services. |
Adjusted gross margin increased in the three months ended June 30, 2014, to $35.6 million from $20.1 million in the three months ended June 30, 2013, due to:
| |
• | truck transportation volumes of 4.2 million barrels generating an additional $13.7 million in Adjusted gross margin, reflecting the acquisition of trucking operations in September 2013 and June 2014. Related trucking costs are included in operating expense described below; |
| |
• | an increase in marketing volume of approximately 1.6 million barrels in the three months ended June 30, 2014, over the same period in 2013, combined with a relatively unchanged spread between the acquisition and sale price for volumes of crude oil sold, as the excess of our average sales price per barrel over our average acquisition cost per barrel decreased to approximately $1.35 for the three months ended June 30, 2014, from approximately $1.36 for the three months ended June 30, 2013. This resulted in a $2.1 million increase in Adjusted gross margin during the three months ended June 30, 2014, compared to the same period in 2013; |
| |
• | an increase in pipeline transportation volumes of approximately 3.3 million barrels, resulting in an $0.8 million increase in Adjusted gross margin during the three months ended June 30, 2014, compared to the same period in 2013, due to a higher concentration of short-haul activity; |
| |
• | relatively unchanged unloading volumes from our Platteville operations contributed an additional $0.1 million Adjusted gross margin, during the three months ended June 30, 2014, compared to the same period in 2013; |
| |
• | although the average Cushing storage capacity increased to 7.6 million barrels for the three months ended June 30, 2014, from 7.25 million barrels for the three months ended June 30, 2013, the average storage capacity used for crude oil operations and marketing activities increased to 0.9 million barrels from 0.25 million barrels. The net decrease in the average leased storage capacity from 7.0 million barrels to 6.7 million barrels, combined with a $0.02 decrease in the weighted average lease rate per barrel, resulted in a $0.9 million decrease to Adjusted gross margin; and |
| |
• | a decrease in pumpover activity at Cushing, resulting in a $0.3 million decrease in Adjusted gross margin during the three months ended June 30, 2014, compared to the same period in 2013. |
Operating expense
Operating expense increased to $17.7 million in the three months ended June 30, 2014, from $5.7 million for the three months ended June 30, 2013. Approximately $11.1 million of the increase is attributable to the newly acquired trucking fleet, along with increases in employment expense, field expenses, outside services, insurance and taxes and other expenses of approximately $0.5 million, $0.1 million, $0.1 million, $0.1 million and $0.1 million, respectively, exclusive of amounts related to trucking.
General and administrative
General and administrative expense increased to $6.4 million in the three months ended June 30, 2014, from $3.6 million in the three months ended June 30, 2013. This increase is due to additional employee expense, outside services relating to rating agencies and additional one-third drop down of SCPL, overhead allocation and other expenses of $0.5 million, $1.1 million, $1.1 million and $0.1 million, respectively.
Depreciation and amortization expense
Depreciation and amortization expense increased to $7.3 million in the three months ended June 30, 2014, from $3.7 million in the three months ended June 30, 2013. Approximately $1.3 million of the depreciation expense increase is due to a revision of the estimated useful life relating to a 19-mile section of the Kansas and Oklahoma pipeline system. An additional $1.4 million in depreciation expense is due to project completions and the acquisition of the crude oil trucking fleet. Amortization expense increased $0.9 million due to a contract acquired as part of the crude oil trucking fleet acquisition in 2013.
Earnings from equity method investment
Crude’s equity method investments are in White Cliffs and Glass Mountain. Earnings from White Cliffs increased in the three months ended June 30, 2014, to $12.3 million from $10.7 million in the three months ended June 30, 2013. This increase is due to increased volume transported by White Cliffs. As a result of the January 2014 start-up, earnings from Glass Mountain Pipeline increased in the three months ended June 30, 2014 to $1.9 million from zero in the three months ended June 30, 2013.
Six Months Ended June 30, 2014 versus six months ended June 30, 2013
Adjusted gross margin
The following table presents a reconciliation of operating income to Adjusted gross margin, the most directly comparable GAAP financial measure for each of the periods indicated.
|
| | | | | | | |
| Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 |
Reconciliation of operating income to Adjusted gross margin: | | | |
Operating income | $ | 38,073 |
| | $ | 38,768 |
|
Add: | | | |
Operating expense | 32,828 |
| | 11,429 |
|
General and administrative expense | 10,380 |
| | 7,418 |
|
Depreciation and amortization expense | 18,758 |
| | 7,197 |
|
Gain on disposal of long-lived assets, net | (61 | ) | | (25 | ) |
Less: | | | |
Unrealized gain on derivatives | 245 |
| | 1,295 |
|
Earnings from equity method investment | 25,590 |
| | 21,090 |
|
Adjusted gross margin | $ | 74,143 |
| | $ | 42,402 |
|
The following table shows the Adjusted gross margin generated by our fee-based services, our fixed-margin transactions and our marketing activities for the six months ended June 30, 2014 and 2013 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2014 | | Storage | | Transportation (1) | | Marketing Activities | | Other (2) | | Total |
Revenues | | $ | 16,236 |
| | $ | 40,429 |
| | $ | 521,879 |
| | $ | 6,126 |
| | $ | 584,670 |
|
Less: Costs of products sold, exclusive of depreciation and amortization | | — |
| | — |
| | 510,282 |
| | — |
| | 510,282 |
|
Less: Unrealized gain on derivatives | | — |
| | — |
| | 245 |
| | — |
| | 245 |
|
Adjusted gross margin | | $ | 16,236 |
| | $ | 40,429 |
| | $ | 11,352 |
| | $ | 6,126 |
| | 74,143 |
|
| |
(1) | Transportation Adjusted gross margin is comprised of $6.0 million, $27.2 million and $7.2 million, related to pipeline transportation (fixed-fee), trucking (fixed-fee) and buy/sells (fixed margin), respectively. |
| |
(2) | This category includes fee-based services such as unloading and ancillary storage terminal services. |
|
| | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2013 | | Storage | | Transportation (1) | | Marketing Activities | | Other (2) | | Total |
Revenues | | $ | 16,997 |
| | $ | 11,424 |
| | $ | 297,870 |
| | $ | 6,363 |
| | $ | 332,654 |
|
Less: Costs of products sold, exclusive of depreciation and amortization | | — |
| | — |
| | 288,957 |
| | — |
| | 288,957 |
|
Less: Unrealized gain on derivatives | | — |
| | — |
| | 1,295 |
| | — |
| | 1,295 |
|
Adjusted gross margin | | $ | 16,997 |
| | $ | 11,424 |
| | $ | 7,618 |
| | $ | 6,363 |
| | $ | 42,402 |
|
| |
(1) | Transportation Adjusted gross margin is comprised of $1.8 million and $9.6 million, related to pipeline transportation (fixed-fee) and buy/sells (fixed margin), respectively. |
| |
(2) | This category includes fee-based services such as unloading and ancillary storage terminal services. |
Adjusted gross margin increased in the six months ended June 30, 2014, to $74.1 million from $42.4 million in the six months ended June 30, 2013, due to:
| |
• | truck transportation volumes of 8.0 million barrels generating an additional $27.2 million in Adjusted gross margin, reflecting the acquisition of trucking operations in September 2013 and June 2014. Related trucking costs are included in operating expense described below; |
| |
• | an increase in marketing volume of approximately 3.9 million barrels in the six months ended June 30, 2014, over the same period in 2013, offset by a lower spread between the acquisition and sale price for volumes of crude oil sold, as the excess of our average sales price per barrel over our average acquisition cost per barrel decreased to approximately $1.41 for the six months ended June 30, 2014, from approximately $1.82 for the six months ended June 30, 2014. This resulted in a $3.7 million increase in Adjusted gross margin during the six months ended June 30, 2014, compared to the same period in 2013; |
| |
• | an increase in pipeline transportation volumes of approximately 6.7 million barrels, resulting in a $1.8 million increase in Adjusted gross margin during the six months ended June 30, 2014, compared to the same period in 2013 due to a higher concentration of short-haul activity; |
| |
• | an increase in unloading volumes from our Platteville operations of approximately 0.1 million barrels, contributing an additional $0.3 million Adjusted gross margin, during the six months ended June 30, 2014, compared to the same period in 2013; |
| |
• | although the average Cushing storage capacity increased to 7.6 million barrels for the six months ended June 30, 2014, from 7.25 million barrels for the six months ended June 30, 2013, the average storage capacity used for crude oil operations and marketing activities increased to 0.7 million barrels from 0.25 million barrels. This shift from leased storage capacity to operational storage capacity, combined with a $0.2 decrease in the average lease rate per barrel, resulted in a $0.8 million decrease to Adjusted gross margin; and |
| |
• | a decrease in pumpover activity at Cushing, resulting in a $0.5 million decrease in Adjusted gross margin during the six months ended June 30, 2014, compared to the same period in 2013. |
Operating expense
Operating expense increased to $32.8 million in the six months ended June 30, 2014, from $11.4 million for the six months ended June 30, 2013. Approximately $21.0 million of the increase is attributable to the newly acquired trucking fleet, offset with a reduction in outside services of approximately $0.2 million and increases in employment expenses, field expenses, insurance and taxes and other expenses of approximately $0.1 million, $0.2 million, $0.2 million and $0.1 million, respectively, exclusive of amounts related to trucking.
General and administrative
General and administrative expense increased to $10.4 million in the six months ended June 30, 2014, from $7.4 million for the six months ended June 30, 2013. This increase is due to additional overhead allocation, employee expense and other expenses of $1.7 million, $1.1 million and $0.2 million, respectively.
Depreciation and amortization expense
Depreciation and amortization expense increased to $18.8 million in the six months ended June 30, 2014, from $7.2 million in the six months ended June 30, 2013. Approximately $7.2 million of the depreciation expense increase is due to a revision of the estimated useful life relating to a 62-mile section of the Kansas and Oklahoma pipeline system. An additional $2.7 million in depreciation expense is due to project completions and the acquisition of the crude oil trucking fleet. Amortization expense increased $1.7 million due to a contract acquired as part of the crude oil trucking fleet acquisition in 2013.
Earnings from equity method investment
Crude’s equity method investments are in White Cliffs and Glass Mountain. Earnings from White Cliffs increased in the six months ended June 30, 2014, to $23.4 million from $21.1 million in the six months ended June 30, 2013. This increase is due to increased volume transported by White Cliffs. As a result of the January 2014 start-up, earnings from Glass Mountain Pipeline increased in the six months ended June 30, 2014 to $2.2 million from zero in the six months ended June 30, 2013.
SemStream
On November 1, 2011, we contributed the primary operating assets of our SemStream segment to NGL Energy in exchange for a limited partnership interest and a general partnership interest in NGL Energy and cash. The results of operations shown below reflect corporate overhead allocations, minor adjustments and the earnings from our equity method investment in NGL Energy. We include our share of NGL Energy's earnings on a one quarter lag because we do not receive their financial statements in sufficient time to apply the equity method to the current period. In addition, our limited partnership interest was diluted as a result of NGL Energy's public equity offering and acquisition during the fourth quarter of 2013. Accordingly, we recorded a non-cash gain of $8.1 million in the first quarter of 2014.
For additional information about NGL Energy's results, see the NGL Energy periodic reports filed with the SEC.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 | | 2014 | | 2013 |
Revenue | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Expenses | | | | | | | |
Costs of products sold, exclusive of depreciation and amortization shown below | — |
| | — |
| | — |
| | — |
|
Operating | — |
| | — |
| | — |
| | 1 |
|
General and administrative | (52 | ) | | 160 |
| | 61 |
| | 316 |
|
Depreciation and amortization | — |
| | — |
| | — |
| | — |
|
Loss on disposal of long-lived assets, net | — |
| | — |
| | — |
| | 6 |
|
Total expenses | (52 | ) | | 160 |
| | 61 |
| | 323 |
|
Earnings from equity method investments | 4,968 |
| | 4,200 |
| | 8,559 |
| | 11,116 |
|
Gain on issuance of common units by equity method investee | — |
| | — |
| | 8,127 |
| | — |
|
Operating income | $ | 5,020 |
|
| $ | 4,040 |
|
| $ | 16,625 |
|
| $ | 10,793 |
|
SemLogistics
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 | | 2014 | | 2013 |
Revenue | $ | 3,981 |
|
| $ | 2,623 |
|
| $ | 8,771 |
|
| $ | 5,658 |
|
Expenses | | | | | | | |
Costs of products sold, exclusive of depreciation and amortization shown below | 265 |
|
| — |
|
| 615 |
|
| — |
|
Operating | 1,940 |
|
| 1,848 |
|
| 4,020 |
|
| 3,687 |
|
General and administrative | 1,529 |
|
| 1,486 |
|
| 2,951 |
|
| 2,606 |
|
Depreciation and amortization | 2,555 |
|
| 2,313 |
|
| 5,050 |
|
| 4,653 |
|
Gain on disposal of long-lived assets, net | (3,634 | ) | | — |
| | (3,634 | ) | | — |
|
Total expenses | 2,655 |
|
| 5,647 |
|
| 9,002 |
|
| 10,946 |
|
Operating income (loss) | $ | 1,326 |
|
| $ | (3,024 | ) |
| $ | (231 | ) |
| $ | (5,288 | ) |
Three months ended June 30, 2014 versus three months ended June 30, 2013
Revenue
Revenue in the three months ended June 30, 2014, increased to $4.0 million from $2.6 million for the three months ended June 30, 2013. The increase is due primarily to increased storage revenue of $0.7 million as a result of improvement in both volume stored and rates. In addition, throughput revenue increased $0.4 million.
High crude oil prices and backwardated market conditions (i.e., prices for future deliveries are lower than current prices) exist today and are forecast to continue throughout 2014. These factors have a negative effect on storage economics. As a result, the demand for storage is depressed and we continue to experience difficulty securing contract renewals and replacement of long-term contracts.
We are uncertain when market conditions will improve. However, we believe that geographical imbalances between the production and consumption of crude oil and related refined products will require physical transportation and, as a result, bulk liquid storage must play a key role in the supply chain. This creates a demand for storage which is independent of current crude oil prices, forward price curves and the entire speculative trading environment.
Storage economics have been unfavorable for some time. We will continue to monitor this situation and recognize the possibility that an impairment of the long-lived assets may be required in the near term.
General
In most every category of expense, the amounts for the second quarter of 2014 are roughly equivalent to those of the second quarter of 2013.
Gain on disposal of long-lived assets
In the three months ended June 30, 2014, we recorded a gain of $3.6 million on the disposal of long-lived assets. This gain is a result of the write off of intercompany indebtedness.
Six months ended June 30, 2014 versus six months ended June 30, 2013
Revenue
Revenue in the six months ended June 30, 2014, increased to $8.8 million from $5.7 million for the six months ended June 30, 2013. The increase is due primarily to increased storage revenue of $2.3 million, as a result of improvement in both volume stored and rates. In addition, 2014 includes $0.7 million in product sales. There were no such sales in this period during 2013.
High crude oil prices and backwardated market conditions (i.e., prices for future deliveries are lower than current prices) exist today and are forecast to continue throughout 2014. These factors have a negative effect on storage economics. As a result, the demand for storage is depressed and we continue to experience difficulty securing contract renewals and replacement of long-term contracts.
We are uncertain when market conditions will improve. However, we believe that geographical imbalances between the production and consumption of crude oil and related refined products will require physical transportation and, as a result, bulk liquid storage must play a key role in the supply chain. This creates a demand for storage which is independent of current crude oil prices, forward price curves and the entire speculative trading environment.
Storage economics have been unfavorable for some time. We will continue to monitor this situation and recognize the possibility that an impairment of the long-lived assets may be required in the near term.
General
In most every category of expense, the amounts for the six months ended June 30, 2014 are roughly equivalent to those of the six months ended June 30, 2013.
Gain on disposal of long-lived assets
In the six months ended June 30, 2014, we recorded a gain of $3.6 million on the disposal of long-lived assets. This gain is a result of the write off of intercompany indebtedness.
SemCAMS
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 | | 2014 | | 2013 |
Revenue | $ | 39,954 |
|
| $ | 66,459 |
|
| $ | 79,237 |
|
| $ | 102,240 |
|
Expenses | | | | | | | |
Costs of products sold, exclusive of depreciation and amortization shown below | 71 |
|
| 1 |
|
| 138 |
|
| 184 |
|
Operating | 28,836 |
|
| 55,508 |
|
| 52,502 |
|
| 82,392 |
|
General and administrative | 3,574 |
|
| 3,342 |
|
| 7,554 |
|
| 7,487 |
|
Depreciation and amortization | 3,079 |
|
| 2,638 |
|
| 5,908 |
|
| 5,294 |
|
Gain on disposal of long-lived assets, net | (915 | ) | | — |
| | (915 | ) | | — |
|
Total expenses | 34,645 |
|
| 61,489 |
|
| 65,187 |
|
| 95,357 |
|
Operating income | $ | 5,309 |
|
| $ | 4,970 |
|
| $ | 14,050 |
|
| $ | 6,883 |
|
Three months ended June 30, 2014 versus three months ended June 30, 2013
Revenue
Revenue in the three months ended June 30, 2014, decreased to $40.0 million from $66.5 million for the three months ended June 30, 2013. This decrease is primarily due to turnaround and outage operating costs flow through expense recoveries in the second quarter of 2013 of approximately $22.3 million and $2.2 million, respectively, which did not occur in the second quarter of 2014 and foreign exchange loss of $2.8 million.
Operating expense
Operating expense in the three months ended June 30, 2014, decreased to $28.8 million from $55.5 million for the three months ended June 30, 2013. This decrease is primarily due to the 2013 turnaround and outage repair costs of $22.3 million and $2.2 million, respectively, which did not reoccur in the second quarter of 2014 and lower power costs of $3.9 million. This decrease was offset, in part, by higher contract service costs of $2.4 million.
Six months ended June 30, 2014 versus six months ended June 30,
Revenue
Revenue in the six months ended June 30, 2014, decreased to $79.2 million from $102.2 million for the six months ended June 30, 2013. This decrease is primarily due to turnaround and outage operating costs flow through expense recoveries of approximately $24.5 million and $2.2 million, respectively, in 2013 which did not occur in 2014 and foreign exchange loss of $6.5 million. These decreases were offset, in part, by higher capital fees and maintenance capital recovery fees of $5.7 million and $2.6 million, respectively.
Operating expense
Operating expense in the six months ended June 30, 2014, decreased to $52.5 million from $82.4 million for the six months ended June 30, 2013. This decrease is primarily due to 2013 turnaround and outage repair costs of $24.5 million and $2.2 million, respectively, which did not reoccur in 2014, lower power costs of $3.6 million and foreign exchange loss of $4.2 million. These decreases were offset, in part, by higher project labor and material costs of $4.5 million.
SemMexico
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 | | 2014 | | 2013 |
Revenue | $ | 62,971 |
| | $ | 51,832 |
| | $ | 134,581 |
| | $ | 94,826 |
|
Expenses |
| |
| | | | |
Costs of products sold, exclusive of depreciation and amortization shown below | 54,007 |
| | 43,653 |
| | 115,476 |
| | 82,302 |
|
Operating | 2,947 |
| | 2,346 |
| | 5,396 |
| | 4,511 |
|
General and administrative | 3,112 |
| | 2,443 |
| | 5,863 |
| | 4,665 |
|
Depreciation and amortization | 1,456 |
| | 1,458 |
| | 2,883 |
| | 2,938 |
|
Gain on disposal of long-lived assets, net | — |
| | (347 | ) | | (28 | ) | | (513 | ) |
Total expenses | 61,522 |
| | 49,553 |
| | 129,590 |
| | 93,903 |
|
Operating income | $ | 1,449 |
|
| $ | 2,279 |
|
| $ | 4,991 |
|
| $ | 923 |
|
Three months ended June 30, 2014 versus three months ended June 30, 2013
Revenue
Revenue increased in the three months ended June 30, 2014, to $63.0 million from $51.8 million in the three months ended June 30, 2013. This increase was primarily the result of an increase in sales volumes to 86,515 metric tons for the three months ended June 30, 2014, from 71,325 metric tons for the same period in 2013. The increase in volume in 2014 is due to the release of funding by the federal government for infrastructure projects. In addition, the average sale price in 2014 increased to $717 per metric ton from $711 per metric ton in the three months ended June 30, 2013.
Costs of products sold
Costs of products sold increased in the three months ended June 30, 2014 to $54.0 million from $43.7 million in the three months ended June 30, 2013. On a per unit basis, the cost of products sold increased to $624 per metric ton in the three months ended June 30, 2014, from $612 per metric ton for the same period in 2013.
General and administrative
General and administrative expense increased in the three months ended June 30, 2014, to $3.1 million from $2.4 million in the three months ended June 30, 2013. The increase is primarily due to higher employee compensation expense in the three months ended June 30, 2014 compared to the prior period.
Six months ended June 30, 2014 versus six months ended June 30, 2013
Revenue
Revenue increased in the six months ended June 30, 2014, to $134.6 million from $94.8 million in the six months ended June 30, 2013. This increase was primarily the result of an increase in sales volumes to 189,603 metric tons for the six months ended June 30, 2014, from 133,186 metric tons for the same period in 2013. The increase in volume in 2014 is due to the release of funding by the federal government for infrastructure projects.
Costs of products sold
Costs of products sold increased in the six months ended June 30, 2014 to $115.5 million from $82.3 million in the six months ended June 30, 2013. On a per unit basis, the cost of products sold decreased to $609 per metric ton in the six months ended June 30, 2014, from $618 per metric ton for the same period in 2013.
General and administrative
General and administrative expense increased in the six months ended June 30, 2014, to $5.9 million from $4.7 million in the six months ended June 30, 2013. The variance is primarily due to higher employee compensation expense in the six months ended June 30, 2014 compared to the prior period.
SemGas
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 | | 2014 | | 2013 |
Revenue | $ | 92,954 |
|
| $ | 46,926 |
|
| $ | 193,532 |
|
| $ | 85,665 |
|
Expenses |
|
|
|
|
|
| |
Costs of products sold, exclusive of depreciation and amortization shown below | 68,231 |
|
| 33,567 |
|
| 146,813 |
|
| 62,738 |
|
Operating | 8,012 |
|
| 4,289 |
|
| 15,456 |
|
| 8,433 |
|
General and administrative | 2,240 |
|
| 1,598 |
|
| 4,212 |
|
| 3,189 |
|
Depreciation and amortization | 7,279 |
|
| 2,233 |
|
| 12,248 |
|
| 4,361 |
|
Loss (gain) on disposal of long-lived assets, net | 20,100 |
|
| (4 | ) |
| 20,104 |
|
| (6 | ) |
Total expenses | 105,862 |
|
| 41,683 |
|
| 198,833 |
|
| 78,715 |
|
Operating income (loss) | $ | (12,908 | ) |
| $ | 5,243 |
|
| $ | (5,301 | ) |
| $ | 6,950 |
|
Three months ended June 30, 2014 versus three months ended June 30, 2013
Revenue
Revenue increased in the three months ended June 30, 2014, to $93.0 million from $46.9 million for the three months ended June 30, 2013. This increase is the result of higher sales volume (26,139 MMcf versus 11,099 MMcf), higher prices and increased fees ($9.6 million versus $0.2 million). The increase in revenue was affected by a higher average natural gas NYMEX price of $4.58/mmbtu versus $4.02/mmbtu and an increase in the average NGL basket price to $0.93/gallon versus $0.85/gallon for the same period in 2013. The increase in volume is primarily a result of increased drilling and production in
the area served by our gas plants in Northern Oklahoma, the commissioning of a 125 MMcf/day processing plant in June 2013, the start-up of the Rose Valley 1 processing plant in March 2014 and increased service contracts in the Chesapeake acquisition.
Costs of products sold
Costs of products sold increased in the three months ended June 30, 2014, to $68.2 million from $33.6 million in the three months ended June 30, 2013. This increase is primarily related to higher volume and prices as described above.
Adjusted gross margin
We view Adjusted gross margin as an important performance measure of the core profitability of our operations, as well as our operating performance as compared to that of other companies in our industry, without regard to financing methods, historical costs basis, capital structure or the impact of fluctuating commodity prices. We define Adjusted gross margin as total revenues minus cost of products sold and unrealized gain (loss) on derivatives. Adjusted gross margin allows us to make a meaningful comparison of the operating results between our fee-based activities, which do not involve the purchase or sale of petroleum products, and our fixed-margin and marketing operations, which do. In addition, Adjusted gross margin allows us to make a meaningful comparison of the results of our fixed-margin and marketing operations across different commodity price environments because it measures the spread between the product sales price and costs of products sold.
Because Adjusted gross margin may be defined differently by other companies in our industry, our definition may not be comparable to similarly titled measures of other companies.
The following table shows the Adjusted gross margin generated in the three months ended June 30, 2014 and 2013.
|
| | | | | | | |
| Three Months Ended June 30, |
(in thousands) | 2014 | | 2013 |
Revenue | $ | 92,954 |
| | $ | 46,926 |
|
Less: Cost of products sold, exclusive of depreciation | 68,231 |
| | 33,567 |
|
Less: Unrealized gain (loss) on derivatives | — |
| | — |
|
Adjusted gross margin | $ | 24,723 |
| | $ | 13,359 |
|
The following table presents a reconciliation of operating income (loss) to Adjusted gross margin, the most directly comparable GAAP financial measure for each of the periods indicated.
|
| | | | | | | |
| Three Months Ended June 30, |
(in thousands) | 2014 | | 2013 |
Reconciliation of operating income (loss) to Adjusted gross margin: | | | |
Operating income (loss) | $ | (12,908 | ) | | $ | 5,243 |
|
Add: | | | |
Operating expense | 8,012 |
| | 4,289 |
|
General and administrative expense | 2,240 |
| | 1,598 |
|
Depreciation and amortization expense | 7,279 |
| | 2,233 |
|
Loss (gain) on disposal of long-lived assets | 20,100 |
| | (4 | ) |
Adjusted gross margin | $ | 24,723 |
| | $ | 13,359 |
|
Operating expense
Operating expense increased in the three months ended June 30, 2014, to $8.0 million from $4.3 million for the three months ended June 30, 2013. This increase is due primarily to higher equipment leases, employment expenses, outside services, field expenses (which includes materials and supplies, lubricants, water disposal, electricity and fuel) and insurance of approximately $1.2 million, $0.8 million, $0.6 million, $0.5 million and $0.4 million, respectively.
General and administrative
General and administrative expense increased in the three months ended June 30, 2014, to $2.2 million from $1.6 million in the three months ended June 30, 2013. This increase is due primarily to higher employee compensation expense of approximately $0.5 million.
Depreciation and amortization
Depreciation and amortization expense increased in the three months ended June 30, 2014, to $7.3 million from $2.2 million in the three months ended June 30, 2013. The increase of approximately $2.5 million in depreciation expense is due to the 2013 Chesapeake acquisition and expansion in Northern Oklahoma. The increase of approximately $2.6 million in amortization expense is related to the amortization of the value of a contract with Chesapeake.
Loss (gain) on disposal of long-lived assets
On June 1, 2014, we sold certain natural gas gathering assets in Eastern Oklahoma for approximately $2.4 million, resulting in a loss of approximately $20.1 million. These assets were subject to contract renewal risk at the end of 2014 and were viewed as non-core due to their limited growth potential.
Six months ended June 30, 2014 versus six months ended June 30, 2013
Revenue
Revenue increased in the six months ended June 30, 2014, to $193.5 million from $85.7 million for the six months ended June 30, 2013. This increase is the result of higher sales volume (44,034 MMcf versus 19,802 MMcf), higher prices and increased fees ($10.8 million versus $0.5 million). The increase was also affected by a higher average natural gas NYMEX price of $4.65/mmbtu versus $3.75/mmbtu and a higher average NGL basket price of $0.98/gallon versus $0.88/gallon. The increase in volume is primarily a result of increased drilling and production in the area served by our gas plants in Northern Oklahoma, the commissioning of a 125 MMcf/day processing plant in June 2013, the start-up of the Rose Valley 1 processing plant in March 2014 and increased service contracts received in the Chesapeake acquisition.
Costs of products sold
Costs of products sold increased in the six months ended June 30, 2014, to $146.8 million from $62.7 million in the six months ended June 30, 2013. This increase is primarily related to higher volume and prices as described above.
Adjusted gross margin
We view Adjusted gross margin as an important performance measure of the core profitability of our operations, as well as our operating performance as compared to that of other companies in our industry, without regard to financing methods, historical costs basis, capital structure or the impact of fluctuating commodity prices. We define Adjusted gross margin as total revenues minus cost of products sold and unrealized gain (loss) on derivatives. Adjusted gross margin allows us to make a meaningful comparison of the operating results between our fee-based activities, which do not involve the purchase or sale of petroleum products, and our fixed-margin and marketing operations, which do. In addition, Adjusted gross margin allows us to make a meaningful comparison of the results of our fixed-margin and marketing operations across different commodity price environments because it measures the spread between the product sales price and costs of products sold.
Because Adjusted gross margin may be defined differently by other companies in our industry, our definition may not be comparable to similarly titled measures of other companies.
The following table shows the Adjusted gross margin generated in the six months ended June 30, 2014 and 2013.
|
| | | | | | | |
| Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 |
Revenue | $ | 193,532 |
| | $ | 85,665 |
|
Less: Cost of products sold, exclusive of depreciation | 146,813 |
| | 62,738 |
|
Less: Unrealized gain (loss) on derivatives | — |
| | — |
|
Adjusted gross margin | $ | 46,719 |
| | $ | 22,927 |
|
The following table presents a reconciliation of operating income (loss) to Adjusted gross margin, the most directly comparable GAAP financial measure for each of the periods indicated.
|
| | | | | | | |
| Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 |
Reconciliation of operating income (loss) to Adjusted gross margin: | | | |
Operating income (loss) | $ | (5,301 | ) | | $ | 6,950 |
|
Add: | | | |
Operating expense | 15,456 |
| | 8,433 |
|
General and administrative expense | 4,212 |
| | 3,189 |
|
Depreciation and amortization expense | 12,248 |
| | 4,361 |
|
Loss (gain) on disposal of long-lived assets | 20,104 |
| | (6 | ) |
Adjusted gross margin | $ | 46,719 |
| | $ | 22,927 |
|
Operating expense
Operating expense increased in the six months ended June 30, 2014, to $15.5 million from $8.4 million for the six months ended June 30, 2013. This increase is due primarily to higher equipment leases, employment expenses, field expenses (which includes materials and supplies, lubricants, water disposal, electricity and fuel), outside services, insurance and repairs and maintenance expense of approximately $2.7 million, $1.3 million, $1.1 million, $0.9 million, $0.7 million and $0.2 million, respectively.
General and administrative
General and administrative expense increased in the six months ended June 30, 2014, to $4.2 million from $3.2 million in the six months ended June 30, 2013. This increase is due primarily to employment costs and higher corporate allocations of approximately $0.7 million and $0.4 million, respectively, offset by a decrease of $0.2 million in outside services.
Depreciation and amortization
Depreciation and amortization expense increased in the six months ended June 30, 2014, to $12.2 million from $4.4 million in the six months ended June 30, 2013. The increase of approximately $3.6 million in depreciation expense is due to the 2013 Chesapeake acquisition and expansion in Northern Oklahoma. The increase of approximately $4.3 million in amortization expense is related to the amortization of the value of a contract with Chesapeake.
Loss (gain) on disposal of long-lived assets
On June 1, 2014, we sold certain natural gas gathering assets in Eastern Oklahoma for approximately $2.4 million, resulting in a loss of approximately $20.1 million. These assets were subject to contract renewal risk at the end of 2014 and were viewed as non-core due to their limited growth potential.
Other and Eliminations
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 | | 2014 | | 2013 |
Revenue | $ | (9,792 | ) | | $ | (5,018 | ) | | $ | (19,684 | ) | | $ | (9,103 | ) |
Expenses | | | | | | | |
Costs of products sold, exclusive of depreciation and amortization shown below | (9,792 | ) | | (5,018 | ) | | (19,684 | ) | | (9,103 | ) |
Operating | — |
| | — |
| | — |
| | — |
|
General and administrative | 5,009 |
| | 4,301 |
| | 9,565 |
| | 8,254 |
|
Depreciation and amortization | 417 |
| | 482 |
| | 852 |
| | 1,007 |
|
Loss on disposal of long-lived assets, net | 3,791 |
| | — |
| | 3,791 |
| | — |
|
Total expenses | (575 | ) | | (235 | ) | | (5,476 | ) | | 158 |
|
Operating loss | $ | (9,217 | ) |
| $ | (4,783 | ) |
| $ | (14,208 | ) |
| $ | (9,261 | ) |
Other and Eliminations is not an operating segment. This table is included to permit the reconciliation of segment information to that of the consolidated Company.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of short-term liquidity are cash generated from our operations and borrowings under our revolving credit facilities. The consolidated cash balance on June 30, 2014 (including restricted cash) was $82.8 million. Of this amount, $52.5 million was held in Canada and may be subject to tax if transferred to the U.S., and $3.1 million is restricted cash set aside for settlement of pre-petition claims. Potential sources of long-term liquidity include issuances of debt securities and equity securities and the sale of assets. Our primary cash requirements currently are operating expenses, capital expenditures, our quarterly dividends and quarterly distributions to unitholders of our subsidiary, Rose Rock. In general, we expect to fund:
| |
• | operating expenses, maintenance capital expenditures and cash dividends and distributions through existing cash and cash from operating activities; |
| |
• | expansion capital expenditures and any working capital deficits through cash on hand, borrowings under our credit facilities and the issuance of debt securities and equity securities; |
| |
• | acquisitions through cash on hand, borrowings under our credit facilities and the issuance of debt securities and equity securities; and |
| |
• | debt principal payments through cash from operating activities and refinancings when the credit facilities become due. |
Our ability to meet our financing requirements and fund our planned capital expenditures will depend on our future operating performance and distributions from our equity investments, which will be affected by prevailing economic conditions in our industry. In addition, we are subject to conditions in the debt and equity markets for any issuances of debt securities and equity securities including common units in Rose Rock. There can be no assurance we will be able or willing to access the public or private markets in the future. If we would be unable or unwilling to access those markets, we could be required to restrict future expansion capital expenditures and potential future acquisitions.
We believe our cash from operations and our remaining borrowing capacity allow us to manage our day-to-day cash requirements, distribute our quarterly dividends, distribute the minimum quarterly distribution on Rose Rock's outstanding common units and meet our capital expenditures commitments for the coming year.
Cash Flows
The following table summarizes our changes in unrestricted cash for the periods presented:
|
| | | | | | | |
| Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 |
Statement of cash flow data: | | | |
Cash flows provided by (used in): | | | |
Operating activities | $ | 55,549 |
| | $ | 55,436 |
|
Investing activities | (230,733 | ) | | (135,362 | ) |
Financing activities | 170,339 |
| | 296,868 |
|
Subtotal | (4,845 | ) | | 216,942 |
|
Effect of exchange rate 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 |
|
Operating Activities
The components of operating cash flows can be summarized as follows:
|
| | | | | | | |
| Six Months Ended June 30, |
(in thousands) | 2014 | | 2013 |
Net income | $ | 7,154 |
| | $ | 56,078 |
|
Non-cash expenses, net | 88,314 |
| | 8,687 |
|
Changes in operating assets and liabilities | (39,919 | ) | | (9,329 | ) |
Net cash flows provided by operating activities | $ | 55,549 |
| | $ | 55,436 |
|
Non-cash expenses increased $79.6 million to $88.3 million for the six months ended June 30, 2014 from $8.7 million income for the six months ended June 30, 2013. This increase is comprised primarily of a $56.9 million increase in deferred tax expense, which is due to the release of a valuation allowance on our net operating loss carryforward deferred tax assets in the prior year, a $14.2 million decrease in expense on the change in the fair value of warrants due to decreasing market prices compared to the same prior year period, a $20.2 million increase in depreciation and amortization expense primarily due to a reduction of the estimated useful life of certain Crude assets and additional assets placed in-service from acquisitions and capital projects, a $19.8 million increase in loss on disposal of long-lived assets, net, a $1.9 million increase in earnings from equity method investments including an $8.1 million gain in the current period related to an equity issuance by our investee, a $6.8 million increase in distributions from equity investments, a $1.7 million adjustment for excess tax benefit on vesting of non-cash equity compensation awards, a $0.5 million increase in non-cash equity compensation and a $1.1 million increase due to a reduced net unrealized gain related to our derivative instruments. All other non-cash expenses for the six months ended June 30, 2014 remained relatively comparable to the six months ended June 30, 2013.
Changes in operating assets and liabilities for the six months ended June 30, 2014 generated a net decrease in operating cash flows of $39.9 million, consisting primarily of a decrease of $39.6 million in payables to affiliates, a decrease of $14.2 million in accounts payable and accrued liabilities, an increase of $13.7 million in accounts receivable, an increase of $6.0 million in inventories, an increase of $2.6 million in other current assets and an increase of $2.2 million in restricted cash. These were offset by a decrease of $37.5 million in receivables from affiliates and an increase of $1.3 million in other noncurrent liabilities. These changes were primarily a result of our Crude and SemGas segments' operating activities.
Changes in operating assets and liabilities for the six months ended June 30, 2013 generated a net decrease in operating cash flows of $9.3 million, consisting primarily of an increase of $12.5 million in accounts receivable driven by SemCAMS segment operating activity, a decrease of $3.3 million in other noncurrent liabilities and an increase of $2.4 million in receivables from affiliates. These were offset by an increase of $7.2 million in accounts payable and accrued liabilities driven primarily by Crude segment operating activity, a decrease of $1.0 million in derivatives and margin deposits and a decrease of $0.8 million in other current assets due to the amortization of prepaid expenses.
Investing Activities
For the six months ended June 30, 2014, we had net cash outflows of $230.7 million from investing activities, due primarily to $127.7 million of capital expenditures, $68.0 million of investments in non-consolidated subsidiaries and $44.5 million of payments to acquire businesses, partially offset by investing cash inflows of $5.4 million of distributions in excess of equity in earnings of affiliates and $4.0 million of proceeds from sale of long-lived assets. Year to date capital expenditures primarily relate to SemGas' Northern Oklahoma expansion projects, Rose Rock transportation projects and SemCAMS pipeline related projects. Investments in non-consolidated subsidiaries represents investments in Glass Mountain Pipeline and the White Cliffs pipeline expansion project. Payments to acquire businesses primarily relates to the $44 million acquisition of crude oil trucking assets. Distributions in excess of equity earnings represent returns of investment from White Cliffs and Glass Mountain. Proceeds from sale of long-lived assets includes $2.4 million from the sale of natural gas gathering assets in Eastern Oklahoma by SemGas.
For the six months ended June 30, 2013, we had net cash outflows of $135.4 million from investing activities, due primarily to $59.9 million of capital expenditures and $81.6 million in investments in non-consolidated subsidiaries, partially offset by investing cash inflows of $5.6 million in distributions in excess of equity in earnings of affiliates. Capital expenditures primarily related to Rose Rock's Cushing expansion projects, SemGas' Northern Oklahoma expansion projects and well connects and the Wattenberg Oil Trunkline. Investments in non-consolidated subsidiaries represent investments in Glass Mountain Pipeline and White Cliffs pipeline expansion project. Distributions in excess of equity earnings represent returns of our investments in White Cliffs and NGL Energy.
Financing Activities
For the six months ended June 30, 2014, we had net cash inflows of $170.3 million from financing activities, which related to borrowings on long-term debt of $533.8 million, partially offset by principal payments of $331.5 million, dividends
paid of $19.6 million and distributions to non-controlling interests of $13.2 million. Net borrowings were used primarily for capital expenditures, investments in non-consolidated subsidiaries and acquisitions.
For the six months ended June 30, 2013, we had net cash inflows of $296.9 million from financing activities, which related to borrowings on long-term debt of $650.0 million and $57.8 million in proceeds from the issuance of Rose Rock limited partner units, partially offset by principal payments of $385.0 million, debt issuance costs of $10.3 million due to issuance of notes and increases to revolver capacity, dividends paid of $7.9 million and distributions to non-controlling interests of $7.5 million. Borrowings on long term debt include $300 million of notes issued related to the acquisition of Mid-America Midstream Gas Services, L.L.C.
Long-term Debt
SemGroup Senior Unsecured Notes
At June 30, 2014, we had $300 million of 7.5% senior unsecured notes due 2021 (the "Notes") outstanding. The Notes are governed by an indenture, as supplemented, between the Company and its subsidiary Guarantors and Wilmington Trust, National Association, as trustee (the "Indenture"). The Indenture includes customary covenants and events of default.
At June 30, 2014, we were in compliance with the terms of the Indenture.
SemGroup Revolving Credit Facility
At June 30, 2014, we had $65.5 million in cash borrowings outstanding under our $500 million revolving credit facility. In addition, we had $3.9 million in outstanding letters of credit on that date. The maximum letter of credit capacity under this facility is $250 million. The facility can be increased by an additional $100 million. The credit agreement expires on December 11, 2018.
The credit agreement includes customary affirmative and negative covenants. At June 30, 2014, we were in compliance with the terms of the credit agreement.
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 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. 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 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 Rose Rock 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 Revolving Credit Facility
At June 30, 2014, Rose Rock had $447.5 million in cash borrowings outstanding under its $585 million revolving credit facility. The proceeds from the Rose Rock Notes were used to pay down this balance in July 2014. There were $30.0 million in outstanding letters of credit. The maximum letter of credit capacity under this facility is $150 million. The facility can be increased by up to $200 million. The credit agreement expires on September 20, 2018.
The credit agreement includes customary affirmative and negative covenants and also restricts Rose Rock’s ability to make certain types of payments including cash distributions to unitholders, however, Rose Rock may make those distributions unless Rose Rock is in default under the credit agreement or the distribution could result in a default. At June 30, 2014, Rose Rock was in compliance with the terms of the credit agreement.
Subsequent to the issuance of the Rose Rock Notes, we elected to comply with the alternative covenants allowed under the Rose Rock revolving credit facility:
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• | a minimum ratio of our consolidated EBITDA to our consolidated cash interest expense at the end of any fiscal quarter, for the immediately preceding four quarter period, of 2.50 to 1.00; |
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• | a maximum ratio of our consolidated net debt to our consolidated EBITDA at the end of any fiscal quarter, for the immediately preceding four quarter period, of 5.50 to 1.00; and |
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• | and a maximum ratio of senior secured debt to our consolidated EBITDA of 3.50 to 1.00. |
SemMexico Credit Facilities
At June 30, 2014, we had borrowings of 56 million Mexican pesos ($4.3 million at the June 30, 2014 exchange rate) outstanding under a 56 million Mexican pesos (U.S. $4.3 million at the June 30, 2014 exchange rate) SemMexico credit facility, which matures in July 2014. The balance was repaid in July 2014. SemMexico had no outstanding borrowings under a 44 million Mexican pesos (U.S. $3.4 million at the June 30, 2014 exchange rate) credit facility which matures in June 2015. At
June 30, 2014, SemMexico had 331.7 million Mexican pesos (U.S. $25.6 million at the June 30, 2014 exchange rate) in outstanding letters of credit.
At June 30, 2014, we were in compliance with the terms of these facilities.
Shelf Registration Statements
We have access to a universal shelf registration statement which provides us with the ability to offer and sell an unlimited amount of debt and equity securities, subject to market conditions and our capital needs. This shelf registration statement expires in December 2015.
Rose Rock has an effective shelf registration statement with the SEC that, subject to market conditions and its capital needs, allows Rose Rock to issue up to an aggregate of $500 million of debt and equity securities. In August 2013, Rose Rock used this shelf registration to sell 4.750 million common units representing limited partner interests for proceeds of $152.5 million, net of underwriting discounts and commissions of $6.4 million. This shelf registration expires in May 2016.
Capital Requirements
The midstream energy business can be capital intensive, requiring significant investment for the maintenance of existing assets or acquisition or development of new systems and facilities. We categorize our capital expenditures as either:
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• | expansion capital expenditures, which are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating income or operating capacity over the long-term; or |
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• | maintenance capital expenditures, which are cash expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets or for the acquisition of existing, or the construction or development of new, capital assets) made to maintain our long-term operating income or operating capacity. |
Projected capital expenditures for 2014 are estimated at $423 million in expansion projects, including capital contributions to affiliates for funding growth projects and acquisitions, and $52 million in maintenance projects. These estimates may change as future events unfold. See "Cautionary Note Regarding Forward-Looking Statements." During the six months ended June 30, 2014, we spent $127.7 million (cash basis) on capital projects, $68.0 million in capital contributions to affiliates for funding growth projects and $44.5 million for acquisitions.
In addition to our budgeted capital program, we anticipate that we will continue to make significant expansion capital expenditures in the future. Consequently, our ability to develop and maintain sources of funds to meet our capital requirements is critical to our ability to meet our growth objectives. We expect that our future expansion capital expenditures will be funded by cash from operations, borrowings under our credit facilities and the issuance of debt and equity securities.
SemGroup Dividends
The table below shows dividends declared and/or paid by SemGroup during 2014 and 2013.
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Quarter Ended | | Record Date | | Payment Date | | Dividend Per Share |
June 30, 2013 | | May 20, 2013 | | May 30, 2013 | | $0.19 |
September 30, 2013 | | August 19, 2013 | | August 30, 2013 | | $0.20 |
December 31, 2013 | | November 22, 2013 | | December 3, 2013 | | $0.21 |
March 31, 2014 | | March 10, 2014 | | March 20, 2014 | | $0.22 |
June 30, 2014 | | May 19, 2014 | | May 29, 2014 | | $0.24 |
September 30, 2014 | | August 18, 2014 | | August 28, 2014 | | $0.27 |
Rose Rock Distributions
The table below shows cash distributions declared and/or paid by Rose Rock during 2014 and 2013.
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Quarter Ended | | Record Date | | Payment Date | | Distribution Per Unit |
December 31, 2012 | | February 4, 2013 | | February 14, 2013 | | $0.4025 |
March 31, 2013 | | May 6, 2013 | | May 15, 2013 | | $0.4300 |
June 30, 2013 | | August 5, 2013 | | August 14, 2013 | | $0.4400 |
September 30, 2013 | | November 5, 2013 | | November 14, 2013 | | $0.4500 |
December 31, 2013 | | February 4, 2014 | | February 14, 2014 | | $0.4650 |
March 31, 2014 | | May 5, 2014 | | May 15, 2014 | | $0.4950 |
June 30, 2014 | | August 4, 2014 | | August 14, 2014 | | $0.5350 |
Credit Risk
We are subject to risks of loss resulting from nonpayment or nonperformance by our customers. We examine the creditworthiness of third-party customers to whom we extend credit and manage our exposure to credit risk through credit analysis, credit approval, credit limits and monitoring procedures, and for certain transactions, we may request letters of credit, prepayments or guarantees.
Customer Concentration
Shell Trading (US) Company, a customer of our Crude segment, accounted for more than 10% of our consolidated revenue for the three months ended June 30, 2014, at approximately 38%. Shell Trading (US) Company, a customer of our Crude segment, accounted for more than 10% of our consolidated revenue for the six months ended June 30, 2014, at approximately 35%. Although we have contracts with customers of varying durations, if one or more of our major customers were to default on their contract, or if we were unable to renew our contract with one or more of these customers on favorable terms, we might not be able to replace any of these customers in a timely fashion, on favorable terms or at all. In any of these situations, our revenues and our ability to pay cash dividends to our stockholders may be adversely affected. We expect our exposure to risk of non-payment or non-performance to continue as long as we remain substantially dependent on a relatively small number of customers for a substantial portion of our Adjusted gross margin.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303 of Regulation S-K.
Commitments
There have been no material changes to our contractual obligations outside the ordinary course of our business from those previously disclosed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013, although the value of product purchase commitments is less at June 30, 2014 than it was at June 30, 2013.
We routinely enter into agreements to purchase and sell petroleum products at specified future dates. We establish a margin for these purchases by entering into various types of physical and financial sale and exchange transactions through which we seek to maintain a position that is substantially balanced between purchases on the one hand and sales and future delivery obligations on the other. We account for 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 (volumes and dollars in thousands):
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| Volume (Barrels) | | Value |
Fixed price purchases | 145 |
| | $ | 13,348 |
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Fixed price sales | 175 |
| | $ | 17,720 |
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Floating price purchases | 9,329 |
| | $ | 949,093 |
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Floating price sales | 12,080 |
| | $ | 1,047,077 |
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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 began in July 2011 and 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. In addition, our SemGas segment enters into contracts under which we are responsible for marketing the majority of the gas and natural gas liquids produced by the counterparties to the agreements. During the three months and six months ended June 30, 2014, the majority of SemGas’ revenues were generated from such contracts.
Critical Accounting Policies and Estimates
For disclosure regarding our critical accounting policies and estimates, see the discussion under the caption “Critical Accounting Policies and Estimates” in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
This discussion on market risks represents an estimate of possible changes in future earnings that would occur assuming hypothetical future movements in commodity prices, interest rates and currency exchange rates. Our views on market risk are not necessarily indicative of actual results that may occur, and do not represent the maximum possible gains and losses that may occur since actual gains and losses will differ from those estimated based on actual fluctuations in commodity prices, interest rates, currency exchange rates and the timing of transactions.
We are exposed to various market risks, including changes in (i) petroleum prices, particularly crude oil, natural gas and natural gas liquids, (ii) interest rates and (iii) currency exchange rates. We may use from time-to-time various derivative instruments to manage such exposure. Our risk management policies and procedures are designed to monitor physical and financial commodity positions and the resulting outright commodity price risk as well as basis risk resulting from differences in commodity grades, purchase and sales locations and purchase and sale timing. We have a risk management function that has responsibility and authority for our Comprehensive Risk Management Policy, which governs our enterprise-wide risks, including the market risks discussed in this item. Subject to our Comprehensive Risk Management Policy, our finance and treasury function has responsibility and authority for managing exposure to interest rates and currency exchange rates. To manage the risks discussed above, we engage in price risk management activities.
Commodity Price Risk
The table below outlines the range of NYMEX prompt month daily settle prices for crude oil and natural gas futures, and the range of daily propane spot prices provided by an independent, third-party broker for the three months and six months ended June 30, 2014 and June 30, 2013 and the year ended December 31, 2013.
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| | Light Sweet Crude Oil Futures (Barrel) | | Mont Belvieu (Non-LDH) Spot Propane (Gallon) | | Henry Hub Natural Gas Futures (MMBtu) |
Three Months Ended June 30, 2014 | | | | | | |
High | | $107.26 | | $1.13 | | $4.83 |
Low | | $99.42 | | $1.00 | | $4.28 |
High/Low Differential | | $7.84 | | $0.13 | | $0.55 |
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Three Months Ended June 30, 2013 | | | | | | |
High | | $98.44 | | $0.97 | | $4.41 |
Low | | $86.68 | | $0.82 | | $3.57 |
High/Low Differential | | $11.76 | | $0.15 | | $0.84 |
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Six Months Ended June 30, 2014 | | | | | | |
High | | $107.26 | | $1.70 | | $6.15 |
Low | | $91.66 | | $1.00 | | $4.01 |
High/Low Differential | | $15.60 | | $0.70 | | $2.14 |
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Six Months Ended June 30, 2013 | | | | | | |
High | | $98.44 | | $0.97 | | $4.41 |
Low | | $86.68 | | $0.79 | | $3.11 |
High/Low Differential | | $11.76 | | $0.18 | | $1.30 |
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Year Ended December 31, 2013 | | | | | | |
High | | $110.53 | | $1.31 | | $4.46 |
Low | | $86.68 | | $0.79 | | $3.11 |
High/Low Differential | | $23.85 | | $0.52 | | $1.35 |
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Revenue from our asset-based activities is dependent on throughput volume, tariff rates, the level of fees generated from our pipeline systems, capacity leased to third parties, capacity that we use for our own operational or marketing activities and
the level of other fees generated at our terminalling and storage facilities. Profit from our marketing activities is dependent on our ability to sell petroleum products at prices in excess of our aggregate cost. Margins may be affected during transitional periods between a backwardated market (when the prices for future deliveries are lower than the current prices) and a contango market (when the prices for future deliveries are higher than the current prices). Our petroleum product marketing activities within each of our segments are generally not directly affected by the absolute level of petroleum product prices, but are affected by overall levels of supply and demand for petroleum products and relative fluctuations in market-related indices at various locations.
However, the SemGas segment has exposure to commodity price risk because of the nature of certain contracts for which our fee is based on a percentage of proceeds or index related to the prices of natural gas, natural gas liquids and condensate. Given current volumes, liquid recoveries and contract terms, we estimate the following sensitivities over the next twelve months:
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• | A $0.10 change in natural gas price results in approximately a $640 thousand impact to Adjusted gross margin. |
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• | A $0.10 change in natural gas liquids prices (Conway and Mont Belvieu) results in approximately a $1.1 million impact to Adjusted gross margin. |
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• | A $10.00 change in condensate price results in approximately a $5.5 million impact to Adjusted gross margin. |
The above sensitivities may be impacted by changes in contract mix, change in production or other factors which are outside of our control.
Additionally, based on our open derivative contracts at June 30, 2014, an increase in the applicable market price or prices for each derivative contract would result in a decrease in our crude oil sales revenues. Likewise, a decrease in the applicable market price or prices for each derivative contract would result in an increase in our crude oil sales revenues. However, the increases or decreases in crude oil sales revenues we recognize from our open derivative contracts are substantially offset by higher or lower crude oil sales revenues when the physical sale of the product occurs. These contracts may be for the purchase or sale of crude oil or in markets different from the physical markets in which we are attempting to hedge our exposure, or may have timing differences relative to the physical markets. As a result of these factors, our hedges may not eliminate all price risks.
The notional volumes and fair value of our commodity derivatives open positions as well as the change in fair value that would be expected from a 10% market price increase or decrease is shown in the table below (in thousands):
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| Notional Volume (Barrels) | | Fair Value | | Effect of 10% Price Increase | | Effect of 10% Price Decrease | | Settlement Date |
Crude oil: | | | | | | | | | |
Futures contracts | 355 |
| | $ | 185 |
| | $ | (3,741 | ) | | $ | 3,741 |
| | July 2014 |
Margin deposits or other credit support, including letters of credit, are generally required on derivative instruments used to manage our price exposure. As commodity prices increase or decrease, the fair value of our derivative instruments changes, thereby increasing or decreasing our margin deposit or other credit support requirements. Although a component of our risk-management strategy is intended to manage the margin and other credit support requirements on our derivative instruments, volatile spot and forward commodity prices, or an expectation of increased commodity price volatility, could increase the cash needed to manage our commodity price exposure and thereby increase our liquidity requirements. This may limit amounts available to us through borrowing, decrease the volume of petroleum products we purchase and sell or limit our commodity price management activities.
Interest Rate Risk
We use variable rate debt and are exposed to market risk due to the floating interest rates on our credit facilities. Therefore, from time-to-time we may use interest rate derivatives to manage interest obligations on specific debt issuances. Our variable rate debt bears interest at LIBOR or prime, subject to certain floors, plus the applicable margin. At June 30, 2014, an increase in these base rates of 1%, above the base rate floors, would increase our interest expense by $1.2 million and $2.2 million for the three months and six months ended June 30, 2014, respectively.
The average interest rates presented below are based upon rates in effect at June 30, 2014 and December 31, 2013. The carrying value of the variable rate instruments in our credit facilities approximate fair value primarily because our rates fluctuate with prevailing market rates.
The following table summarizes our debt obligations:
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| | | |
Liabilities | June 30, 2014 | | December 31, 2013 |
Short-term debt - variable rate | $4.3 million | | $0.0 million |
Average interest rate | 5.06% | | 0.00% |
Long-term debt - variable rate | $513.0 million | | $315.0 million |
Average interest rate | 4.06% | | 2.28% |
Long-term debt - fixed rate | $300.0 million | | $300.0 million |
Fixed interest rate | 7.50% | | 7.50% |
Long-term debt - fixed rate | $400.0 million | | $0.0 million |
Fixed interest rate | 5.625% | | 0.00% |
Currency Exchange Risk
The cash flows relating to our U.K., Canada and Mexico operations are based on the U.S. dollar equivalent of such amounts measured in British pounds, Canadian dollars and Mexican pesos. Assets and liabilities of our U.K., Canadian and Mexican subsidiaries are translated to U.S. dollars using the applicable exchange rate as of the end of a reporting period. Revenue, expenses and cash flows are translated using the average exchange rate during the reporting period.
A 10% change in the average exchange rate during the three months and six months ended June 30, 2014, would change operating income by $1.7 million and $3.5 million, respectively.
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Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act), are effective as of June 30, 2014. This conclusion is based on an evaluation conducted under the supervision and participation of our Chief Executive Officer and Chief Financial Officer along with our management. Disclosure controls and procedures are those controls and procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2014, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
For information regarding legal proceedings, see the discussion under the captions “Bankruptcy matters”, “Other matters” and “Environmental” in Note 9 of our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which information is incorporated by reference into this Item 1.
There have been no material changes to the risk factors involving us from those previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
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Item 3. | Defaults Upon Senior Securities |
None
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Item 4. | Mine Safety Disclosures |
Not applicable
None
The following exhibits are filed or furnished as part of this Quarterly Report on Form 10-Q:
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Exhibit Number | Description |
2.1 | Contribution Agreement, dated as of June 23, 2014, by and among SemGroup Corporation, Rose Rock Midstream Holdings, LLC, Rose Rock Midstream GP, LLC, Rose Rock Midstream, L.P. and Rose Rock Midstream Operating, LLC (filed as Exhibit 2.1 to our current report on Form 8-K dated June 23, 2014, filed June 23, 2014, and incorporated herein by reference). |
4.1 | Indenture (and form of 5.625% Senior Note due 2022 attached at Exhibit 1 thereto), dated as of July 2, 2014, by and among Rose Rock Midstream, L.P., Rose Rock Finance Corporation, the Guarantors party thereto and Wilmington Trust, National Association, as Trustee (filed as Exhibit 4.1 to Rose Rock Midstream, L.P.'s current report on Form 8-K dated June 27, 2014, filed July 2, 2014, and incorporated herein by reference). |
10.1 | SemGroup Corporation Board of Directors Compensation Plan. |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Carlin G. Conner, Chief Executive Officer. |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Robert N. Fitzgerald, Chief Financial Officer. |
32.1 | Section 1350 Certification of Carlin G. Conner, Chief Executive Officer. |
32.2 | Section 1350 Certification of Robert N. Fitzgerald, Chief Financial Officer. |
101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: August 8, 2014 | SEMGROUP CORPORATION |
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| By: | | /s/ Robert N. Fitzgerald |
| | | Robert N. Fitzgerald |
| | | Senior Vice President and |
| | | Chief Financial Officer |
EXHIBIT INDEX
The following exhibits are filed or furnished as part of this Quarterly Report on Form 10-Q:
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Exhibit Number | Description |
2.1 | Contribution Agreement, dated as of June 23, 2014, by and among SemGroup Corporation, Rose Rock Midstream Holdings, LLC, Rose Rock Midstream GP, LLC, Rose Rock Midstream, L.P. and Rose Rock Midstream Operating, LLC (filed as Exhibit 2.1 to our current report on Form 8-K dated June 23, 2014, filed June 23, 2014, and incorporated herein by reference). |
4.1 | Indenture (and form of 5.625% Senior Note due 2022 attached at Exhibit 1 thereto), dated as of July 2, 2014, by and among Rose Rock Midstream, L.P., Rose Rock Finance Corporation, the Guarantors party thereto and Wilmington Trust, National Association, as Trustee (filed as Exhibit 4.1 to Rose Rock Midstream, L.P.'s current report on Form 8-K dated June 27, 2014, filed July 2, 2014, and incorporated herein by reference). |
10.1 | SemGroup Corporation Board of Directors Compensation Plan. |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Carlin G. Conner, Chief Executive Officer. |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Robert N. Fitzgerald, Chief Financial Officer. |
32.1 | Section 1350 Certification of Carlin G. Conner, Chief Executive Officer. |
32.2 | Section 1350 Certification of Robert N. Fitzgerald, Chief Financial Officer. |
101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |