SEMG 9.30.2012 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 September 30, 2012
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 October 31, 2012 |
Class A | Common stock, $0.01 par | | 41,883,447 |
| | Shares |
Class B | Common stock, $0.01 par | | 28,235 |
| | 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 (“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; |
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• | Our ability to comply with the covenants contained in, and maintain certain financial ratios required by, our credit facilities; |
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• | 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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• | The possibility that our hedging activities may result in losses or may have a negative impact on our financial results; |
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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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• | The effects of having filed for, and emerged from, bankruptcy protection; |
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• | Any future impairment to goodwill resulting from the loss of customers or business; |
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• | Changes in currency exchange rates; and |
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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. |
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.
_________________________________________________________________________________________________
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
(Dollars in thousands)
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| | | | | | | |
| (Unaudited) | | |
| September 30, 2012 | | December 31, 2011 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 67,461 |
| | $ | 73,613 |
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Restricted cash | 34,912 |
| | 39,543 |
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Accounts receivable (net of allowance of $4,416 and $3,623 at September 30, 2012 and December 31, 2011, respectively) | 335,795 |
| | 209,781 |
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Receivable from affiliates | 5,786 |
| | 6,408 |
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Inventories | 34,479 |
| | 31,994 |
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Other current assets | 17,998 |
| | 28,396 |
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Total current assets | 496,431 |
| | 389,735 |
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Property, plant and equipment (net of accumulated depreciation of $119,547 and $83,481 at September 30, 2012 and December 31, 2011, respectively) | 800,231 |
| | 733,925 |
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Equity method investments | 378,522 |
| | 327,243 |
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Goodwill | 9,956 |
| | 9,453 |
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Other intangible assets (net of accumulated amortization of $6,272 and $4,336 at September 30, 2012 and December 31, 2011, respectively) | 8,181 |
| | 8,950 |
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Other assets, net | 17,744 |
| | 21,875 |
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Total assets | $ | 1,711,065 |
| | $ | 1,491,181 |
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LIABILITIES AND OWNERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 237,357 |
| | $ | 145,203 |
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Payable to affiliates | 1,577 |
| | 6,314 |
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Accrued liabilities | 73,943 |
| | 53,675 |
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Payables to pre-petition creditors | 32,944 |
| | 37,800 |
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Deferred revenue | 15,127 |
| | 23,031 |
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Other current liabilities | 3,495 |
| | 4,430 |
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Current portion of long-term debt | 2,096 |
| | 26,058 |
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Total current liabilities | 366,539 |
| | 296,511 |
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Long-term debt | 189,569 |
| | 83,277 |
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Deferred income taxes | 76,581 |
| | 73,784 |
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Other noncurrent liabilities | 77,024 |
| | 58,944 |
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Commitments and contingencies (Note 9) | | | |
SemGroup owners’ equity: | | | |
Common stock (Note 10) | 419 |
| | 418 |
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Additional paid-in capital | 1,036,978 |
| | 1,032,365 |
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Treasury stock, at cost (Note 10) | (242 | ) | | — |
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Accumulated deficit | (166,768 | ) | | (167,812 | ) |
Accumulated other comprehensive income (loss) | 1,055 |
| | (13,875 | ) |
Total SemGroup owners’ equity | 871,442 |
| | 851,096 |
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Noncontrolling interests in consolidated subsidiaries | 129,910 |
| | 127,569 |
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Total owners’ equity | 1,001,352 |
| | 978,665 |
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Total liabilities and owners’ equity | $ | 1,711,065 |
| | $ | 1,491,181 |
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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 September 30, 2012 | | Three Months Ended September 30, 2011 | | Nine Months Ended September 30, 2012 | | Nine Months Ended September 30, 2011 |
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Revenues: | | | | | | | |
Product | $ | 209,202 |
| | $ | 335,331 |
| | $ | 708,408 |
| | $ | 962,879 |
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Service | 29,800 |
| | 28,565 |
| | 86,727 |
| | 96,782 |
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Other | 38,850 |
| | 27,626 |
| | 126,525 |
| | 75,426 |
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Total revenues | 277,852 |
| | 391,522 |
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| 921,660 |
| | 1,135,087 |
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Expenses: | | | | | | | |
Costs of products sold, exclusive of depreciation and amortization shown below | 189,830 |
| | 313,490 |
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| 651,283 |
| | 896,871 |
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Operating | 52,367 |
| | 41,772 |
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| 172,750 |
| | 116,384 |
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General and administrative | 16,680 |
| | 16,883 |
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| 53,073 |
| | 56,443 |
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Depreciation and amortization | 12,081 |
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| 12,894 |
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| 35,687 |
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| 38,355 |
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Gain on disposal or impairment of long-lived assets, net | (3,615 | ) |
| — |
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| (3,496 | ) |
| (136 | ) |
Total expenses | 267,343 |
| | 385,039 |
| | 909,297 |
| | 1,107,917 |
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Earnings from equity method investments | 3,116 |
| | 4,016 |
| | 22,903 |
| | 10,166 |
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Operating income | 13,625 |
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| 10,499 |
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| 35,266 |
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| 37,336 |
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Other expenses (income): | | | | | | | |
Interest expense | 1,992 |
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| 6,013 |
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| 7,763 |
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| 49,321 |
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Foreign currency transaction (gain) loss | 355 |
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| (2,874 | ) | | 358 |
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| (3,430 | ) |
Other (income) expense, net | 9,354 |
| | (8,973 | ) | | 16,783 |
| | (14,564 | ) |
Total other (income) expenses, net | 11,701 |
| | (5,834 | ) | | 24,904 |
| | 31,327 |
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Income from continuing operations before income taxes | 1,924 |
| | 16,333 |
| | 10,362 |
| | 6,009 |
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Income tax expense | 2,091 |
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| 1,308 |
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| 985 |
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| 3,202 |
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Income (loss) from continuing operations | (167 | ) | | 15,025 |
| | 9,377 |
| | 2,807 |
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Loss from discontinued operations, net of income taxes | (265 | ) |
| (686 | ) | | (456 | ) |
| (735 | ) |
Net income (loss) | (432 | ) | | 14,339 |
| | 8,921 |
| | 2,072 |
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Less: net income attributable to noncontrolling interests | 2,336 |
| | — |
| | 7,915 |
| | — |
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Net income (loss) attributable to SemGroup | $ | (2,768 | ) | | $ | 14,339 |
| | $ | 1,006 |
| | $ | 2,072 |
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Net income (loss) | $ | (432 | ) |
| $ | 14,339 |
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| $ | 8,921 |
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| $ | 2,072 |
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Other comprehensive income (loss), net of income taxes | 12,072 |
| | (18,103 | ) | | 14,930 |
|
| (11,465 | ) |
Comprehensive income (loss) | 11,640 |
| | (3,764 | ) | | 23,851 |
| | (9,393 | ) |
Less: comprehensive income attributable to noncontrolling interests | 2,336 |
| | — |
| | 7,915 |
| | — |
|
Comprehensive income (loss) attributable to SemGroup | $ | 9,304 |
| | $ | (3,764 | ) | | $ | 15,936 |
| | $ | (9,393 | ) |
Net income (loss) per common share (Note 11): | | | | | | | |
Basic | $ | (0.07 | ) | | $ | 0.34 |
| | $ | 0.02 |
| | $ | 0.05 |
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Diluted | $ | (0.07 | ) | | $ | 0.34 |
| | $ | 0.02 |
| | $ | (0.15 | ) |
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)
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| | | | | | | |
| Nine Months Ended September 30, 2012 | | Nine Months Ended September 30, 2011 |
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Cash flows from operating activities: | | | |
Net income | $ | 8,921 |
| | $ | 2,072 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Net unrealized (gain) loss related to derivative instruments | (432 | ) | | (9,394 | ) |
Depreciation and amortization | 36,123 |
| | 39,556 |
|
Gain on disposal or impairment of long-lived assets, net | (3,496 | ) | | (137 | ) |
Equity earnings from investments | (22,903 | ) | | (10,166 | ) |
Distributions from equity investments | 25,053 |
| | 10,166 |
|
Amortization and write down of debt issuance costs | 2,078 |
| | 23,235 |
|
Deferred tax benefit | (3,738 | ) | | (4,019 | ) |
Non-cash equity compensation | 4,832 |
| | 3,949 |
|
Provision for uncollectible accounts receivable, net of recoveries | (828 | ) | | (5,340 | ) |
Currency (gain) loss | 358 |
| | (3,430 | ) |
Changes in operating assets and liabilities (Note 12) | 5,790 |
| | (54,726 | ) |
Net cash provided by (used in) operating activities | 51,758 |
| | (8,234 | ) |
Cash flows from investing activities: | | | |
Capital expenditures | (82,123 | ) | | (50,879 | ) |
Proceeds from sale of long-lived assets | 347 |
| | 1,093 |
|
Investments in non-consolidated subsidiaries | (63,999 | ) | | (2,863 | ) |
Proceeds from the sale of non-consolidated affiliate | 3,500 |
| | — |
|
Distributions in excess of equity in earnings of affiliates | 10,569 |
| | 9,745 |
|
Net cash used in investing activities | (131,706 | ) | | (42,904 | ) |
Cash flows from financing activities: | | | |
Debt issuance costs | (694 | ) | | (10,639 | ) |
Borrowings on debt and other obligations | 260,500 |
| | 153,434 |
|
Principal payments on debt and other obligations | (179,001 | ) | | (115,425 | ) |
Distributions to noncontrolling interests | (5,754 | ) | | — |
|
Repurchase of stock-based awards for payment of statutory taxes due on stock-based compensation | (242 | ) | | — |
|
Net cash provided by financing activities | 74,809 |
| | 27,370 |
|
Effect of exchange rate changes on cash and cash equivalents | (977 | ) | | 1,005 |
|
Change in cash and cash equivalents | (6,116 | ) | | (22,763 | ) |
Change in cash and cash equivalents included in discontinued operations | (36 | ) | | (1,206 | ) |
Change in cash and cash equivalents from continuing operations | (6,152 | ) | | (23,969 | ) |
Cash and cash equivalents at beginning of period | 73,613 |
| | 87,821 |
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Cash and cash equivalents at end of period | $ | 67,461 |
| | $ | 63,852 |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
1. OVERVIEW
SemGroup Corporation is a Delaware corporation headquartered in Tulsa, Oklahoma. SemGroup Corporation is the successor entity of SemGroup, L.P., which was an Oklahoma limited partnership. The terms “we,” “our,” “us,” “SemGroup,” “the Company” and similar language used in these notes to the unaudited condensed consolidated financial statements refer to SemGroup Corporation, SemGroup, L.P., and their subsidiaries.
On July 22, 2008 (the “Petition Date”), SemGroup, L.P. and certain subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Also on July 22, 2008, SemGroup, L.P.’s Canadian subsidiaries filed applications for creditor protection in Canada under the Companies’ Creditors Arrangement Act. Later during 2008, certain other U.S. subsidiaries filed petitions for reorganization.
During the reorganization process, SemGroup, L.P. filed a Plan of Reorganization with the court, which was confirmed on October 28, 2009. The Plan of Reorganization determined, among other things, how pre-Petition Date obligations would be settled, the equity structure of the reorganized company upon emergence and the financing arrangements upon emergence. SemGroup Corporation emerged from bankruptcy on November 30, 2009 (the “Emergence Date”).
Basis of presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and the rules and regulations of the Securities and Exchange Commission. These financial statements include all normal and recurring adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of its operations and its cash flows.
The accompanying condensed consolidated financial statements are unaudited. The condensed consolidated balance sheet at December 31, 2011 is derived from audited financial statements.
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 nine months ended September 30, 2012, are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.
Pursuant to the rules and regulations of the Securities and Exchange Commission, the accompanying condensed consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2011, which are included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission.
Certain reclassifications have been made to conform previously reported balances to the current presentation, including the reclass of prior periods to reflect the SemStream segment's Arizona operations as discontinued operations and classify assets and liabilites as held for sale. On September 12, 2012, we entered into an agreement to sell the Arizona operations, subject to regulatory approval.
Our significant accounting policies are consistent with those described in our Annual Report on Form 10-K for the year ended December 31, 2011.
Recent accounting pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”), which creates common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. We adopted this guidance on January 1, 2012. The impact of adoption was not material.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
1. OVERVIEW, Continued
During June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. This ASU is designed to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which deferred certain presentation requirements in ASU No. 2011-05 for items reclassified out of accumulated other comprehensive income. We adopted this guidance on January 1, 2012. The impact of adoption was not material.
During September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment”. This ASU is designed to simplify how entities test goodwill for impairment. Under the new standard, an entity may first assess qualitative factors to determine whether it is more likely than not that the fair value of an asset group is less than the carrying amount, for the purpose of determining whether it is necessary to estimate the fair value of the asset group to which the goodwill relates. We adopted this guidance on January 1, 2012, and will test goodwill for impairment on October 1st in accordance with SemGroup Corporation’s policy.
2. ROSE ROCK MIDSTREAM, L.P.
On December 14, 2011, our subsidiary Rose Rock Midstream, L.P. (“Rose Rock”) completed an initial public offering (“IPO”) of 7 million common units representing limited partner interests (NYSE: RRMS). We control the operations of Rose Rock through our ownership of the general partner interest, and we continue to consolidate Rose Rock. Our ownership interest in Rose Rock as of September 30, 2012 (unaudited) and December 31, 2011 is shown in the table below:
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General partner interest | 2 | % |
Limited partner interest (a) | 57 | % |
Total ownership interest | 59 | % |
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(a) | Represents 1.4 million common units and 8.4 million subordinated units |
Outside ownership interests in Rose Rock are reflected in “noncontrolling interests in consolidated subsidiaries” on our condensed consolidated balance sheets at September 30, 2012 and December 31, 2011. The portion of Rose Rock’s net income attributable to outside owners is reflected within “net income attributable to noncontrolling interests” in our condensed consolidated statements of operations and comprehensive income (loss) for the three months and nine months ended September 30, 2012.
We receive distributions from Rose Rock on our common and subordinated units and our two percent general partner interest, which includes our 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. Rose Rock’s partnership agreement requires Rose Rock to distribute all of its available cash each quarter in the following manner:
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| | | | | | | | | | | | | | | | | | | | |
| Total Quarterly Distributions Per Unit Target Amount | | Marginal Percentage Interest in Distributions |
| Unitholders | | General Partner | | Incentive Distribution Rights |
Minimum Quarterly Distributions | | | | | | | $ | 0.362500 |
| | 98.0 | % | | 2.0 | % | | — |
|
First Target Distribution | above | | $ | 0.362500 |
| | up to | | $ | 0.416875 |
| | 98.0 | % | | 2.0 | % | | — |
|
Second Target Distribution | above | | $ | 0.416875 |
| | up to | | $ | 0.453125 |
| | 85.0 | % | | 2.0 | % | | 13.0 | % |
Third Target Distribution | above | | $ | 0.453125 |
| | up to | | $ | 0.543750 |
| | 75.0 | % | | 2.0 | % | | 23.0 | % |
Thereafter | | | | | above | | $ | 0.543750 |
| | 50.0 | % | | 2.0 | % | | 48.0 | % |
The following table shows the distributions paid or expected to be paid (in thousands, except for per unit amounts):
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
2. ROSE ROCK MIDSTREAM, L.P., Continued
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Record Date | | Payment Date | | Distri-bution Per Unit | | Distributions Paid/To Be Paid |
Quarter Ended | | SemGroup | | Noncontrolling Interest Common Units | | Total Distributions |
| General Partner | | Incentive Distri-butions | | Common Units | | Subord-inated Units | |
December 31, 2011 | * | February 3, 2012 | | February 13, 2012 | | $ | 0.0670 |
| * | $ | 23 |
| | $ | — |
| | $ | 93 |
| | $ | 561 |
| | $ | 470 |
| | $ | 1,147 |
|
March 31, 2012 | | May 7, 2012 | | May 15, 2012 | | $ | 0.3725 |
| | $ | 128 |
| | $ | — |
| | $ | 517 |
| | $ | 3,125 |
| | $ | 2,607 |
| | $ | 6,377 |
|
June 30, 2012 | | August 6, 2012 | | August 14, 2012 | | $ | 0.3825 |
| | $ | 131 |
| | $ | — |
| | $ | 532 |
| | $ | 3,209 |
| | $ | 2,678 |
| | $ | 6,549 |
|
September 30, 2012 | | November 5, 2012 | | November 14, 2012 | ** | $ | 0.3925 |
| ** | $ | 134 |
| | $ | — |
| | $ | 545 |
| | $ | 3,293 |
| | $ | 2,748 |
| | $ | 6,720 |
|
*Minimum quarterly distribution for quarter ended December 31, 2011 was prorated for the period beginning immediately after the closing of Rose Rock’s IPO, December 14, 2011 through December 31, 2011.
**Expected payment date and amounts for distributions related to the quarter ended September 30, 2012.Certain summarized balance sheet information of Rose Rock is shown below (in thousands):
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| | | | | | | |
| (unaudited) | | |
| September 30, 2012 | | December 31, 2011 |
Cash | $ | 13,498 |
| | $ | 9,709 |
|
Other current assets | 236,144 |
| | 156,873 |
|
Property, plant and equipment, net | 285,244 |
| | 276,246 |
|
Other noncurrent assets, net | 2,665 |
| | 2,666 |
|
Total assets | $ | 537,551 |
| | $ | 445,494 |
|
Current liabilities | $ | 227,131 |
| | $ | 140,553 |
|
Long-term debt | 69 |
| | 87 |
|
Partners’ capital attributable to SemGroup | 180,441 |
| | 177,323 |
|
Partners’ capital attributable to noncontrolling interests | 129,910 |
| | 127,531 |
|
Total liabilities and partners’ capital | $ | 537,551 |
| | $ | 445,494 |
|
Certain summarized income statement information of Rose Rock for the three months and nine months ended September 30, 2012 and September 30, 2011 is shown below (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2012 | | Three Months Ended September 30, 2011 | | Nine Months Ended September 30, 2012 | | Nine Months Ended September 30, 2011 |
| | | |
Revenue | $ | 131,554 |
| | $ | 104,616 |
| | $ | 468,687 |
| | $ | 299,121 |
|
Cost of products sold | $ | 111,790 |
| | $ | 90,660 |
| | $ | 412,847 |
| | $ | 252,804 |
|
Operating, general and administrative expenses | $ | 9,779 |
| | $ | 6,570 |
| | $ | 25,976 |
| | $ | 20,202 |
|
Depreciation and amortization expense | $ | 3,066 |
| | $ | 3,122 |
| | $ | 9,032 |
| | $ | 8,505 |
|
Net income | $ | 6,469 |
| | $ | 3,830 |
| | $ | 19,353 |
| | $ | 16,407 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
3. INVESTMENTS IN NON-CONSOLIDATED SUBSIDIARIES
White Cliffs
We account for our 51% ownership of White Cliffs Pipeline, L.L.C. (“White Cliffs”) under the equity method, as the other owners have substantive rights to participate in its management. Under the equity method, we do not report the individual assets and liabilities of White Cliffs 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. Certain summarized income statement information of White Cliffs for the three months and nine months ended September 30, 2012 and September 30, 2011 is shown below (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2012 | | Three Months Ended September 30, 2011 | | Nine Months Ended September 30, 2012 | | Nine Months Ended September 30, 2011 |
Revenue | $ | 28,522 |
| | $ | 17,515 |
| | $ | 76,910 |
| | $ | 47,878 |
|
Operating, general and administrative expenses | $ | 3,857 |
| | $ | 3,824 |
| | $ | 11,382 |
| | $ | 10,029 |
|
Depreciation and amortization expense | $ | 4,995 |
| | $ | 5,214 |
| | $ | 14,964 |
| | $ | 15,622 |
|
Net income | $ | 19,670 |
| | $ | 8,477 |
| | $ | 50,564 |
| | $ | 22,227 |
|
Distributions paid to SemGroup | $ | (10,794 | ) | | $ | (7,239 | ) | | $ | (30,561 | ) | | $ | (19,912 | ) |
The equity in earnings of White Cliffs for the three months and nine months ended September 30, 2012 and September 30, 2011 reported in our condensed consolidated statement of operations and comprehensive income (loss) is less than 51% of the net income of White Cliffs for the same period. This is due to certain general and administrative expenses we incur in managing the operations of White Cliffs that the other owners are not obligated to share. Such expenses are recorded by White Cliffs, and are allocated to our ownership interest. White Cliffs recorded $24.0 thousand and $0.6 million of such general and administrative expense for the three months ended September 30, 2012 and September 30, 2011, respectively. White Cliffs recorded $1.5 million and $2.4 million of such general and administrative expense for the nine months ended September 30, 2012 and September 30, 2011, respectively. The decrease in allocated costs from prior year is primarily due to revisions to our cost allocations based on a transfer pricing study completed in the third quarter for which year to date adjustments were booked in September 2012.
In September 2012, we received $3.5 million from the other owners of White Cliffs related to the September 2010 exercise of their rights to purchase additional ownership interests in White Cliffs. This gain is reported in gain on disposal or impairment of long-lived assets, net in the condensed consolidated statements of operations and comprehensive income (loss).
NGL Energy
We own 9,133,409 common units representing limited partner interests in NGL Energy Partners LP (NYSE: NGL) (“NGL Energy”), which represents approximately 18.0% of the total 50,669,109 limited partner units of NGL Energy outstanding at June 30, 2012, and a 6.42% interest in the general partner of NGL Energy. Our limited and general partner ownership interests reflect the dilution caused by an NGL Energy acquisition completed June 19, 2012. In conjunction with the June 2012 transaction, we received 201,378 additional common units.
At September 30, 2012, the fair market value of our 9,133,409 common unit investment in NGL Energy was $219.6 million, based on a September 28, 2012 closing price of $24.04 per common unit. This does not reflect our interest in the general partner of NGL Energy. The excess of the recorded amount of our investment over the book value of our share of the underlying net assets primarily represents equity method goodwill. 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, we have recorded losses representing our equity in earnings of NGL Energy of $6.9 million and $2.2 million in our condensed consolidated statements of operations and comprehensive income (loss) for the three months and nine months ended September 30, 2012, respectively, which relate to the earnings of NGL Energy for the three months and nine months ended June 30, 2012, prorated for the period of time we held our ownership interest in NGL Energy. We received cash distributions of $2.1 million and $5.1 million for the three months and nine months ended September 30, 2012, respectively,
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
3. INVESTMENTS IN NON-CONSOLIDATED SUBSIDIARIES, Continued
related to these earnings from NGL Energy. The agreement to waive our distribution rights on approximately 3.9 million common units expired in the third quarter 2012 and any third quarter distributions declared related to these units will be received in the fourth quarter 2012.
Certain unaudited summarized income statement information of NGL Energy for the three months and nine months ended June 30, 2012 is shown below (in thousands):
|
| | | | | | | |
| Three Months Ended June 30, 2012 | | Nine Months Ended June 30, 2012 |
| |
Revenue | $ | 326,436 |
| | $ | 1,236,023 |
|
Cost of products sold | $ | 298,985 |
| | $ | 1,128,581 |
|
Operating, general and administrative expenses | $ | 33,298 |
| | $ | 76,015 |
|
Depreciation and amortization expense | $ | 9,227 |
| | $ | 21,260 |
|
Net income | $ | (24,710 | ) | | $ | (4,678 | ) |
Glass Mountain Pipeline LLC
In May 2012, we formed a joint venture, Glass Mountain Pipeline, LLC (“GMP”), to construct, maintain and operate a 210-mile crude oil pipeline system originating in Alva and Arnett, Oklahoma and terminating at Cushing, Oklahoma. Construction of the pipeline is expected to be completed by the end of 2013. Once the pipeline is in service, it will be operated by a subsidiary of Rose Rock. In September 2012, we acquired an additional 25% ownership interest in GMP. As of September 30, 2012, we have invested $62.5 million in GMP, including our capital contributions and amounts paid to acquire the additional ownership percentage. We also assumed the responsibility for future capital contributions related to the additional 25% ownership. Subsequent to this transaction, we have a 50% ownership interest in GMP and account for our investment in GMP using the equity method.
As of September 30, 2012, we expect to make additional contributions of approximately $11.2 million and $51.6 million in 2012 and 2013, respectively.
4. SEGMENTS
Our businesses are organized based on the nature and location of the services they provide. Certain summarized information related to our reportable segments is shown in the tables below. None of the operating segments have been aggregated, other than White Cliffs, which has been included within the Crude segment. Our investment in NGL Energy is included within the SemStream segment. Although “Corporate and Other” does not represent an operating segment, it is included in the tables below to reconcile segment information to that of the consolidated Company. Eliminations of transactions between segments are also included within “Corporate and Other” in the tables below.
The accounting policies of each segment are the same as the accounting policies of the consolidated Company. Transactions between segments are generally recorded based on prices negotiated between the segments. Certain general and administrative and interest expenses incurred at the corporate level are allocated to the segments, based on our allocation policies in effect at the time.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
4. SEGMENTS, Continued
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2012 |
| Crude |
| SemStream |
| SemCAMS |
| SemGas |
| SemLogistics |
| SemMexico |
| Corporate and Other |
| Consolidated |
| | | | | | | (dollars in thousands) | | | | | | |
Revenues: | | | | | | | | | | | | | | | |
External | $ | 131,616 |
| | $ | — |
| | $ | 54,301 |
| | $ | 27,627 |
| | $ | 2,213 |
| | $ | 62,095 |
| | $ | — |
| | $ | 277,852 |
|
Intersegment | — |
| | — |
| | — |
| | 2,251 |
| | — |
| | — |
| | (2,251 | ) | | — |
|
Total revenues | 131,616 |
| | — |
| | 54,301 |
| | 29,878 |
| | 2,213 |
| | 62,095 |
| | (2,251 | ) | | 277,852 |
|
Expenses: | | | | | | | | | | | | | | | |
Costs of products sold, exclusive of depreciation and amortization shown below | 111,790 |
| | — |
| | 309 |
| | 24,068 |
| | 97 |
| | 55,817 |
| | (2,251 | ) | | 189,830 |
|
Operating | 6,042 |
| | 7 |
| | 40,081 |
| | 2,931 |
| | 1,436 |
| | 1,870 |
| | — |
| | 52,367 |
|
General and administrative | 5,015 |
| | 528 |
| | 3,354 |
| | 1,329 |
| | 990 |
| | 1,501 |
| | 3,963 |
| | 16,680 |
|
Depreciation and amortization | 3,066 |
| | — |
| | 2,664 |
| | 1,797 |
| | 2,388 |
| | 1,536 |
| | 630 |
| | 12,081 |
|
Gain on disposal or impairment of long-lived assets, net | (3,500 | ) | | — |
| | — |
| | (3 | ) | | — |
| | (112 | ) | | — |
| | (3,615 | ) |
Total expenses | 122,413 |
| | 535 |
|
| 46,408 |
|
| 30,122 |
|
| 4,911 |
|
| 60,612 |
|
| 2,342 |
|
| 267,343 |
|
Earnings from equity method investments | 10,021 |
| | (6,905 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | 3,116 |
|
Operating income (loss) | 19,224 |
| | (7,440 | ) | | 7,893 |
| | (244 | ) | | (2,698 | ) | | 1,483 |
| | (4,593 | ) |
| 13,625 |
|
Other expenses (income), net | (119 | ) | | (2,551 | ) | | 3,419 |
| | (378 | ) | | 337 |
| | (82 | ) | | 11,075 |
| | 11,701 |
|
Income (loss) from continuing operations before income taxes | $ | 19,343 |
| | $ | (4,889 | ) | | $ | 4,474 |
| | $ | 134 |
| | $ | (3,035 | ) | | $ | 1,565 |
| | $ | (15,668 | ) |
| $ | 1,924 |
|
Total assets at September 30, 2012 (excluding intersegment receivables) | $ | 747,200 |
| | $ | 190,736 |
| | $ | 298,867 |
| | $ | 124,130 |
| | $ | 175,269 |
| | $ | 90,906 |
| | $ | 83,957 |
| | $ | 1,711,065 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
4. SEGMENTS, Continued
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2011 |
| Crude | | SemStream | | SemCAMS | | SemGas | | SemLogistics | | SemMexico | | Corporate and Other | | Consolidated |
| | | | | | | (dollars in thousands) | | | | | | |
Revenues: | | | | | | | | | | | | | | | |
External | $ | 105,938 |
| | $ | 168,051 |
| | $ | 41,368 |
| | $ | 15,192 |
| | $ | 4,230 |
| | $ | 56,743 |
| | $ | — |
| | $ | 391,522 |
|
Intersegment | (1,322 | ) | | 14,725 |
| | — |
| | 13,158 |
| | — |
| | — |
| | (26,561 | ) | | — |
|
Total revenues | 104,616 |
| | 182,776 |
| | 41,368 |
| | 28,350 |
| | 4,230 |
| | 56,743 |
| | (26,561 | ) | | 391,522 |
|
Expenses: | | | | | | | | | | | | | | |
|
Costs of products sold, exclusive of depreciation and amortization shown below | 90,660 |
| | 178,904 |
| | — |
| | 20,512 |
| | 152 |
| | 49,823 |
| | (26,561 | ) | | 313,490 |
|
Operating | 4,530 |
| | 2,018 |
| | 29,845 |
| | 2,432 |
| | 1,564 |
| | 1,383 |
| | — |
| | 41,772 |
|
General and administrative | 2,040 |
| | 2,164 |
| | 3,378 |
| | 1,591 |
| | 1,604 |
| | 2,825 |
| | 3,281 |
| | 16,883 |
|
Depreciation and amortization | 3,122 |
| | 878 |
| | 2,577 |
| | 1,528 |
| | 2,339 |
| | 1,653 |
| | 797 |
| | 12,894 |
|
Loss (gain) on disposal or impairment of long-lived assets, net | — |
| | (24 | ) | | — |
| | 4 |
| | — |
| | 20 |
| | — |
| | — |
|
Total expenses | 100,352 |
| | 183,940 |
| | 35,800 |
| | 26,067 |
| | 5,659 |
| | 55,704 |
| | (22,483 | ) | | 385,039 |
|
Earnings from equity method investments | 4,016 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,016 |
|
Operating income (loss) | 8,280 |
| | (1,164 | ) | | 5,568 |
| | 2,283 |
| | (1,429 | ) | | 1,039 |
| | (4,078 | ) | | 10,499 |
|
Other expenses (income), net | (349 | ) | | (638 | ) | | 1,990 |
| | 82 |
| | 312 |
| | 479 |
| | (7,710 | ) | | (5,834 | ) |
Income (loss) from continuing operations before income taxes | $ | 8,629 |
| | $ | (526 | ) | | $ | 3,578 |
| | $ | 2,201 |
| | $ | (1,741 | ) | | $ | 560 |
| | $ | 3,632 |
| | $ | 16,333 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
4. SEGMENTS, Continued
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2012 |
| Crude | | SemStream | | SemCAMS | | SemGas | | SemLogistics | | SemMexico | | Corporate and Other | | Consolidated |
| (dollars in thousands) |
Revenues: | | | | | | | | | | | | | | | |
External | $ | 468,748 |
| | $ | 7 |
| | $ | 169,149 |
| | $ | 81,917 |
| | $ | 8,610 |
| | $ | 193,229 |
| | $ | — |
| | $ | 921,660 |
|
Intersegment | — |
| | — |
| | — |
| | 7,535 |
| | — |
| | — |
| | (7,535 | ) | | — |
|
Total revenues | 468,748 |
| | 7 |
| | 169,149 |
| | 89,452 |
| | 8,610 |
| | 193,229 |
| | (7,535 | ) | | 921,660 |
|
Expenses: | | | | | | | | | | | | | | |
|
Costs of products sold, exclusive of depreciation and amortization shown below | 412,847 |
| | 33 |
| | 499 |
| | 70,607 |
| | 196 |
| | 174,636 |
| | (7,535 | ) | | 651,283 |
|
Operating | 17,957 |
| | (18 | ) | | 135,165 |
| | 9,092 |
| | 4,521 |
| | 6,033 |
| | — |
| | 172,750 |
|
General and administrative | 9,796 |
| | 582 |
| | 10,404 |
| | 4,564 |
| | 4,249 |
| | 6,730 |
| | 16,748 |
| | 53,073 |
|
Depreciation and amortization | 9,032 |
| | — |
| | 7,910 |
| | 5,153 |
| | 7,040 |
| | 4,614 |
| | 1,938 |
| | 35,687 |
|
Gain on disposal or impairment of long-lived assets, net | (3,444 | ) | | — |
| | — |
| | (3 | ) | | — |
| | (49 | ) | | — |
| | (3,496 | ) |
Total expenses | 446,188 |
| | 597 |
| | 153,978 |
| | 89,413 |
| | 16,006 |
| | 191,964 |
| | 11,151 |
| | 909,297 |
|
Earnings from equity method investments | 25,053 |
| | (2,150 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | 22,903 |
|
Operating income (loss) | 47,613 |
| | (2,740 | ) | | 15,171 |
| | 39 |
| | (7,396 | ) | | 1,265 |
| | (18,686 | ) | | 35,266 |
|
Other expenses (income), net | (739 | ) | | (2,507 | ) | | 13,974 |
| | 924 |
| | 1,805 |
| | 233 |
| | 11,214 |
| | 24,904 |
|
Income (loss) from continuing operations before income taxes | $ | 48,352 |
| | $ | (233 | ) | | $ | 1,197 |
| | $ | (885 | ) | | $ | (9,201 | ) | | $ | 1,032 |
| | $ | (29,900 | ) | | $ | 10,362 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
4. SEGMENTS, Continued
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2011 |
| Crude | | SemStream | | SemCAMS | | SemGas | | SemLogistics | | SemMexico | | Corporate and Other | | Consolidated |
| (dollars in thousands) |
Revenues: | | | | | | | | | | | | | | | |
External | $ | 301,626 |
| | $ | 492,938 |
| | $ | 122,004 |
| | $ | 42,923 |
| | $ | 18,815 |
| | $ | 156,024 |
| | $ | 757 |
| | $ | 1,135,087 |
|
Intersegment | (2,505 | ) | | 44,249 |
| | — |
| | 31,753 |
| | — |
| | — |
| | (73,497 | ) | | — |
|
Total revenues | 299,121 |
| | 537,187 |
| | 122,004 |
| | 74,676 |
| | 18,815 |
| | 156,024 |
| | (72,740 | ) | | 1,135,087 |
|
Expenses: | | | | | | |
| | | | | | | |
|
Costs of products sold, exclusive of depreciation and amortization shown below | 252,804 |
| | 528,356 |
| | 10 |
| | 52,150 |
| | 152 |
| | 136,378 |
| | (72,979 | ) | | 896,871 |
|
Operating | 13,683 |
| | 6,390 |
| | 80,611 |
| | 6,282 |
| | 5,129 |
| | 4,231 |
| | 58 |
| | 116,384 |
|
General and administrative | 6,508 |
| | 6,727 |
| | 12,737 |
| | 4,829 |
| | 5,276 |
| | 8,983 |
| | 11,383 |
| | 56,443 |
|
Depreciation and amortization | 8,505 |
| | 3,501 |
| | 7,746 |
| | 4,410 |
| | 6,943 |
| | 4,912 |
| | 2,338 |
| | 38,355 |
|
Loss (gain) on disposal or impairment of long-lived assets, net | 12 |
| | 40 |
| | — |
| | 4 |
| | — |
| | (186 | ) | | (6 | ) | | (136 | ) |
Total expenses | 281,512 |
| | 545,014 |
| | 101,104 |
| | 67,675 |
| | 17,500 |
| | 154,318 |
| | (59,206 | ) | | 1,107,917 |
|
Earnings from equity method investments | 10,166 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,166 |
|
Operating income (loss) | 27,775 |
| | (7,827 | ) | | 20,900 |
| | 7,001 |
| | 1,315 |
| | 1,706 |
| | (13,534 | ) | | 37,336 |
|
Other expenses (income), net | 1,919 |
| | 14,323 |
| | 16,661 |
| | 1,829 |
| | 740 |
| | (145 | ) | | (4,000 | ) | | 31,327 |
|
Income (loss) from continuing operations before income taxes | $ | 25,856 |
| | $ | (22,150 | ) | | $ | 4,239 |
| | $ | 5,172 |
| | $ | 575 |
| | $ | 1,851 |
| | $ | (9,534 | ) | | $ | 6,009 |
|
5. INVENTORIES
Inventories consist of the following (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
Crude oil | $ | 29,181 |
| | $ | 21,803 |
|
Asphalt and other | 5,298 |
| | 10,191 |
|
| $ | 34,479 |
| | $ | 31,994 |
|
6. FINANCIAL INSTRUMENTS
Fair value of financial instruments
We record certain financial assets and liabilities at fair value at each balance sheet date. The tables below summarize the balances of these assets and liabilities at September 30, 2012 and December 31, 2011 (in thousands):
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
6. FINANCIAL INSTRUMENTS, Continued
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| Level 1 | | Level 2 | | Level 3 | | Netting* | | Total | | Level 1 | | Level 2 | | Level 3 | | Netting* | | Total |
Assets: | | | | | | | | | | | | | | | | | | | |
Commodity derivatives | $ | 609 |
| | $ | — |
| | $ | — |
| | $ | (15 | ) | | $ | 594 |
| | $ | 393 |
| | $ | — |
| | $ | — |
| | $ | (231 | ) | | $ | 162 |
|
Total assets | 609 |
| | — |
| | — |
| | (15 | ) | | 594 |
| | 393 |
| | — |
| | — |
| | (231 | ) | | 162 |
|
Liabilities: | | | | | | | | | | | | | | | | | | | |
Commodity derivatives | $ | 15 |
| | $ | — |
| | $ | — |
| | $ | (15 | ) | | $ | — |
| | $ | 231 |
| | $ | — |
| | $ | — |
| | $ | (231 | ) | | $ | — |
|
Warrants | 29,263 |
| | — |
| | — |
| | — |
| | 29,263 |
| | 12,180 |
| | — |
| | — |
| | — |
| | 12,180 |
|
Interest rate swaps | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 358 |
| | — |
| | — |
| | 358 |
|
Total liabilities | 29,278 |
| | — |
| | — |
| | (15 | ) | | 29,263 |
| | 12,411 |
| | 358 |
| | — |
| | (231 | ) | | 12,538 |
|
Net liabilities at fair value | $ | (28,669 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (28,669 | ) | | $ | (12,018 | ) | | $ | (358 | ) | | $ | — |
| | $ | — |
| | $ | (12,376 | ) |
*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 use as inputs 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), beginning in September 2011, when the warrants began to be traded on the New York Stock Exchange.
“Level 2” measurements use as inputs market observable and corroborated prices for similar commodity derivative contracts. Assets and liabilities classified as Level 2 include over-the-counter (“OTC”) traded forward contracts and swaps.
“Level 3” measurements use as inputs information from a pricing service and 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. Level 3 measurements also included common stock warrants until September 2011, when the warrants began to be traded on the New York Stock Exchange. Prior to that point, we used a Black-Scholes pricing model to estimate the fair value of the warrants.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value levels.
There were no financial assets or liabilities classified as Level 3 during the three months and nine months ended September 30, 2012. The following table summarizes changes in the fair value of our net financial assets (liabilities) classified as Level 3 in the fair value hierarchy (in thousands):
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
6. FINANCIAL INSTRUMENTS, Continued
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2012 | | Three Months Ended September 30, 2011 |
| |
| Warrants | | Commodity Derivatives | | Total | | Warrants | | Commodity Derivatives | | Total |
Net liabilities—beginning balance | $ | — |
| | $ | — |
| | $ | — |
| | $ | (13,618 | ) | | $ | (1,736 | ) | | $ | (15,354 | ) |
Transfers out of Level 3(*) | — |
| | — |
| | — |
| | 8,934 |
| | 6 |
| | 8,940 |
|
Total gain (realized and unrealized) included in earnings(**) | — |
| | — |
| | — |
| | 4,684 |
| | 3,156 |
| | 7,840 |
|
Settlements | — |
| | — |
| | — |
| | — |
| | (1,884 | ) | | (1,884 | ) |
Net liabilities—ending balance | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (458 | ) | | $ | (458 | ) |
Amount of total gain included in earnings for the period attributable to the change in unrealized gain or loss relating to assets and liabilities still held at the reporting date | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,156 |
| | $ | 3,156 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2012 | | Nine Months Ended September 30, 2011 |
| |
| Warrants | | Commodity Derivatives | | Total | | Warrants | | Commodity Derivatives | | Total |
Net liabilities—beginning balance | $ | — |
| | $ | — |
| | $ | — |
| | $ | (17,192 | ) | | $ | (547 | ) | | $ | (17,739 | ) |
Transfers out of Level 3(*) | — |
| | — |
| | — |
| | 8,934 |
| | (419 | ) | | 8,515 |
|
Total gain (realized and unrealized) included in earnings(**) | — |
| | — |
| | — |
| | 8,258 |
| | 2,783 |
| | 11,041 |
|
Settlements | — |
| | — |
| | — |
| | — |
| | (2,275 | ) | | (2,275 | ) |
Net liabilities—ending balance | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (458 | ) | | $ | (458 | ) |
Amount of total gain included in earnings for the period attributable to the change in unrealized gain or loss relating to assets and liabilities still held at the reporting date | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,783 |
| | $ | 2,783 |
|
(*) In these tables, transfers in and transfers out are recognized as of the beginning of the reporting period for commodity derivatives and as of the transfer date for warrants.
(**) Gains and losses related to commodity derivatives are reported in product revenue and gains and losses related to warrants are recorded in other expense (income) in the condensed consolidated statements of operations and comprehensive income (loss).
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 crude oil to create back-to-back transactions that are intended to lock in positive margins based on the timing, location or quality of the crude oil purchased and delivered or (ii) derivative contracts. 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.
We contributed the primary operating assets of SemStream, L.P. (“SemStream) to NGL Energy on November 1, 2011, including all of SemStream’s commodity derivatives. Prior to November 1, 2011, SemStream managed commodity price risk by limiting its net open positions subject to outright price risk and basis risk resulting from grade, location or time differences. SemStream did so by selling and purchasing similar quantities of natural gas liquids with purchase and sale transactions for current or future delivery, by entering into future delivery and purchase obligations with futures contracts or other commodity derivatives and employing its storage and transportation assets. SemStream, at times, hedged its natural gas liquids commodity
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
6. FINANCIAL INSTRUMENTS, Continued
price exposure with derivatives on commodities other than natural gas liquids due to the limited size of the market for natural gas liquids derivatives. In addition, physical transaction sale and purchase strategies were intended to lock in positive margins for SemStream, e.g., the sales price was sufficient to cover purchase costs, any other fixed and variable costs and SemStream’s profit. All marketing activities were subject to our Comprehensive Risk Management Policy, which establishes limits to manage risk and mitigate financial exposure.
Our commodity derivatives were comprised of swaps, future contracts and forward contracts of crude oil and natural gas liquids. These are defined as follows:
Swaps – Over the counter transactions where a floating price, basis or index is exchanged for a fixed (or a different floating) price, basis or index at a preset schedule in the future, according to an agreed-upon formula.
Futures contracts – Exchange traded contracts to buy or sell a commodity. These contracts are standardized by the exchange in terms of quality, quantity, delivery period and location for each commodity.
Forward contracts – Over the counter contracts to buy or sell a commodity at an agreed upon future date. The buyer and seller agree on specific terms (price, quantity, delivery period and location) and conditions at the inception of the contract.
The following table sets forth the unaudited notional quantities for commodity derivative instruments entered into (in thousands of barrels):
|
| | | | | | | | | | | |
| Three Months Ended September 30, 2012 | | Three Months Ended September 30, 2011 | | Nine Months Ended September 30, 2012 | | Nine Months Ended September 30, 2011 |
| | | |
Sales | 470 |
| | 5,189 |
| | 1,153 |
| | 18,000 |
|
Purchases | 380 |
| | 4,344 |
| | 1,066 |
| | 17,716 |
|
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):
|
| | | | | | | | | | | | | | | |
| September 30, 2012 | | December 31, 2011 |
| Assets | | Liabilities | | Assets | | Liabilities |
Commodity contracts | $ | 594 |
| | $ | — |
| | $ | 162 |
| | $ | — |
|
Realized and unrealized gains (losses) from our commodity derivatives were recorded to product revenue in the following amounts (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2012 | | Three Months Ended September 30, 2011 | | Nine Months Ended September 30, 2012 | | Nine Months Ended September 30, 2011 |
| | | |
| $ | (631 | ) | | $ | 2,960 |
| | $ | (342 | ) | | $ | 62 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
6. FINANCIAL INSTRUMENTS, Continued
Warrants
As described in Note 10, upon emergence from bankruptcy, we issued certain common stock warrants. These warrants are recorded at fair value in other noncurrent liabilities on the condensed consolidated balance sheets, with changes in the fair value recorded to other expense (income). Beginning in September 2011, the warrants began to be traded on the New York Stock Exchange.
7. INCOME TAXES
Due to our emergence from bankruptcy and overall restructuring, we have recorded a full valuation allowance on all U.S. federal and state deferred tax assets. We have determined that no accruals related to uncertainty in tax positions are required. The effective tax rate was 109% for the three months ended September 30, 2012, and 8% for the three months ended September 30, 2011. The effective tax rate was 10% for the nine months ended September 30, 2012, and 53% for the nine months ended September 30, 2011. Significant items that impacted the effective tax rate for each period, as compared to the U.S. Federal statutory rate of 35%, include earnings in foreign jurisdictions taxed at lower rates and the full valuation allowance which was recorded against our deferred tax assets. Further, the foreign earnings are taxed in foreign jurisdictions as well as in the U.S., since they are disregarded entities for U.S. federal income tax purposes. For the three months and nine months ended September 30, 2012, the rate is impacted by a noncontrolling interest in Rose Rock for which taxes are not provided. 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.
8. LONG-TERM DEBT
Our long-term debt consisted of the following (in thousands):
|
| | | | | | | |
| September 30, 2012 | | December 31, 2011 |
SemGroup corporate revolving credit facility | $ | 189,500 |
| | $ | 82,000 |
|
Rose Rock credit facility | — |
| | — |
|
SemLogistics credit facility | — |
| | 23,180 |
|
SemMexico credit facility | 2,072 |
| | 4,046 |
|
Capital leases | 93 |
| | 109 |
|
Total long-term debt | $ | 191,665 |
| | $ | 109,335 |
|
less: current portion of long-term debt | 2,096 |
| | 26,058 |
|
Noncurrent portion of long-term debt | $ | 189,569 |
| | $ | 83,277 |
|
SemGroup corporate credit agreement
Our revolving credit facility had a capacity of $300 million at September 30, 2012. The capacity was reduced from $320 million to $300 million during the first quarter of 2012 following the close of Rose Rock’s IPO. This capacity may be used either for cash borrowings or letters of credit, although the maximum letter of credit capacity is $250 million. At September 30, 2012, we had outstanding cash borrowings of $189.5 million on this facility and outstanding letters of credit of $2.1 million.
At September 30, 2012, $90 million of our outstanding cash borrowings incurred interest at the Eurodollar rate and $99.5 million incurred interest at the alternate base rate (“ABR”). The interest rate in effect at September 30, 2012, on $50 million of Eurodollar rate borrowings was 3.23%, calculated as LIBOR of 0.7334% plus a margin of 2.5%. The interest rate in effect at September 30, 2012, on $40 million of Eurodollar rate borrowings was 2.96%, calculated as LIBOR of 0.46060% plus a margin of 2.5%. The interest rate in effect at September 30, 2012, on the $99.5 million of ABR borrowings was 4.75%, calculated as the prime rate of 3.25% plus a margin of 1.5%.
At September 30, 2012, the commitment rate in effect on letters of credit was 2.5%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit. A commitment fee of 0.5% is charged on any unused capacity on the revolving credit facility.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
8. LONG-TERM DEBT, Continued
At September 30, 2012, $3.7 million in capitalized loan fees, net of accumulated amortization, was recorded in other noncurrent assets, which is being amortized over the life of the loan.
We recorded interest expense related to the SemGroup revolving credit facility of $1.7 million and $4.9 million for the three months and nine months ended September 30, 2012, respectively, including amortization of debt issuance costs.
At September 30, 2012, we were in compliance with the terms of the credit agreement.
Rose Rock credit facility
At September 30, 2012, there were no revolving cash borrowings on Rose Rock’s $150 million revolving credit facility. We had $38.2 million in outstanding letters of credit, and the rate in effect was 2.25%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit. A commitment fee that ranges from 0.375% to 0.50%, depending on a leverage ratio specified in the credit agreement, is charged on any unused capacity of the revolving credit facility. We had $8.4 million of Secured Bilateral Letters of Credit outstanding and the interest rate in effect on $2.7 million of Secured Bilateral Letters of Credit was 1.75%. The interest rate in effect on $5.7 million of Secured Bilateral Letters of Credit was 2.00%. Secured Bilateral Letters of Credit are external to the facility and do not reduce revolver availability. At September 30, 2012, we were in compliance with the terms of the credit agreement.
In September 2012, we amended the credit agreement such that the revolving credit facility may under certain conditions be increased by up to an additional $400 million. The previous agreement provided for an increase of up to $200 million.
We recorded $0.5 million and $1.4 million of interest expense during the three months and nine months ended September 30, 2012, respectively, including amortization of debt issuance costs.
At September 30, 2012, $1.6 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.
SemLogistics credit facilities
SemLogistics entered into a credit agreement in December 2010, which included a £15 million term loan and a £15 million revolving credit facility. This facility was terminated in March 2012.
At December 31, 2011, unamortized debt issuance costs of $0.8 million were included in other noncurrent assets. This balance was amortized to interest expense during first quarter 2012.
During February 2011, we entered into three interest swap agreements. The intent of the swaps was to offset a portion of the variability in interest payments due under the term loan. These swaps were terminated in March 2012 with a loss on closure of $0.4 million, including a reclass of $0.3 million from accumulated other comprehensive income to earnings.
SemMexico facilities
During 2010, SemMexico entered into a credit agreement that allowed SemMexico to borrow up to 80 million Mexican pesos at any time through June 2011. Borrowings on this facility are required to be repaid with monthly payments through May 2013. At September 30, 2012, borrowings of 26.7 million Mexican pesos (U.S. $2.1 million at the September 30, 2012 exchange rate) were outstanding on this facility. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.5%. At September 30, 2012, the interest rate in effect was 6.30%, calculated as 1.5% plus the bank prime rate of 4.80%.
SemMexico also has outstanding letters of credit of 292.8 million Mexican pesos at September 30, 2012 (U.S. $22.8 million at the September 30, 2012 exchange rate). Fees are generally charged on outstanding letters of credit at a rate of 0.46%.
On June 13, 2012, SemMexico entered into an additional revolving credit agreement that allows SemMexico to borrow up to 44 million Mexican pesos (U.S. $3.4 million at the September 30, 2012 exchange rate) at any time during the term of the facility, which matures in June 2015. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 2.0%. At September 30, 2012, there were no outstanding borrowings on this facility.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
8. LONG-TERM DEBT, Continued
On July 13, 2012, SemMexico entered into an additional credit agreement that allows SemMexico to borrow up to 56 million Mexican pesos (U.S. $4.4 million at the September 30, 2012 exchange rate) at any time during the term of the facility, which matures in July 2013. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.7%. At September 30, 2012, there were no outstanding borrowings on this facility.
SemMexico recorded interest expense of $0.1 million and $0.2 million during the three months and nine months ended September 30, 2012, respectively, related to these facilities. At September 30, 2012, we were in compliance with the terms of these facilities.
Fair value
We estimate that the fair value of our long-term debt was not materially different than the recorded values at September 30, 2012, and is categorized as a Level 3 measurement. 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 debt outstanding at September 30, 2012.
9. COMMITMENTS AND CONTINGENCIES
Bankruptcy matters
(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. While we believe that this action is without merit and are vigorously defending this matter on appeal, an adverse ruling on this action could have a material adverse impact on us.
(b) Investigations
Around the time of our bankruptcy filings, several governmental agencies launched investigations regarding the circumstances of the filings. The mandate and scope of these investigations were very broad and some of the investigations are ongoing.
Bankruptcy examiner. On October 14, 2008, the bankruptcy court appointed an examiner to (i) investigate the circumstances surrounding our trading strategy prior to bankruptcy filings; (ii) investigate the circumstances surrounding certain insider transactions and the formation of SemGroup Energy Partners L.P. (a former subsidiary); (iii) investigate the circumstances surrounding the potential improper use of borrowed funds and funds generated from operations and the liquidation of assets to satisfy margin calls related to our trading strategy and that of certain entities owned or controlled by former officers and directors of the general partner of SemGroup, L.P.; (iv) determine whether any directors, officers or employees of the general partner of SemGroup, L.P. participated in fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of our affairs; and (v) determine whether the SemGroup debtor estates have causes of action against current or former officers, directors or employees of the general partner of SemGroup, L.P. arising from such participation. The examiner’s report was filed with the bankruptcy court on April 15, 2009.
Certain current and prior employees of the general partner of SemGroup, L.P. are referenced in the examiner’s report and the report’s conclusions may suggest possible civil or criminal liability on their part. To the extent such claims exist, they are property of a litigation trust that was established for the benefit of pre-petition creditors pursuant to the Plan of Reorganization, and are not property of the reorganized SemGroup Corporation. This litigation trust is pursuing claims relating to findings in the examiner’s report, 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 former 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.
DOJ. On July 15, 2008, we received a subpoena from the Department of Justice (“DOJ”) directing us to produce documents responsive to the subpoena. We contacted the DOJ regarding the subpoena and the DOJ verbally voluntarily stayed compliance with the subpoena. We have not produced any documents to the DOJ and, to our knowledge, the DOJ is not currently pursuing any such production. We are unaware of any currently pending formal charges against us by the DOJ.
(c) Claims reconciliation process
A large number of parties have made claims against us for obligations alleged to have been incurred prior to our bankruptcy filing. On September 15, 2010, the bankruptcy court entered an order estimating the contingent, unliquidated and disputed claims and authorizing distributions to holders of allowed claims. Pursuant to that order, we have begun making distributions to the claimants. We continue to attempt to settle unresolved claims.
Pursuant to the Plan of Reorganization, we committed to settle authorized and allowed bankruptcy claims by paying a specified amount of cash, issuing a specified number of warrants, and issuing a specified number of shares of SemGroup Corporation common stock. We do not believe the resolution of the remaining outstanding claims will exceed the total amount of consideration established under the Plan of Reorganization for all claimants; instead, the resolution of the remaining claims in some cases will impact the relative share of the established pool of common stock and warrants that certain claimants receive.
However, under certain circumstances we could be required to pay additional funds to settle the specified group of claims to be settled with cash. Pursuant to the Plan of Reorganization, a specified amount of restricted cash was set aside at the Emergence Date, which we expect to be sufficient to settle this group of claims. Since the Emergence Date, we have made significant progress in resolving these claims, and we continue to believe that the cash set aside at the Emergence Date will be sufficient to settle these claims. However, we have not yet reached a resolution of all of these claims, and if the total settlement amount of all of these claims exceeds the specified amount, we will be required to pay additional funds to satisfy the total settlement amount for this specified group of claims. If this were to become probable of occurring, we would be required to record a liability and a corresponding expense.
Blueknight claim
Blueknight Energy Partners, L.P. (“Blueknight”), which was formerly a subsidiary of SemGroup, together with other entities related to Blueknight, entered into a Shared Services Agreement on April 7, 2009, with SemCrude, L.P. and SemManagement, L.L.C. (which are currently subsidiaries of SemGroup). The services provided by SemCrude to Blueknight under this agreement included the coordination of movement of crude oil belonging to Blueknight’s customers and the operation of Blueknight’s Oklahoma pipeline system and its Cushing, Oklahoma terminal. Under the subsequent amendments to the agreements beginning in May 2010, certain of these services were phased out, and Blueknight began to manage the movement of its crude oil and the operation of its Cushing terminal.
In a letter dated August 18, 2011, Blueknight claimed that SemCrude owes Blueknight approximately 141,000 barrels of crude oil. We responded to Blueknight’s letter denying their charges and requesting documentation from Blueknight of its claim. On February 14, 2012, after months of interaction between the parties through which we requested Blueknight to substantiate its claim, Blueknight filed suit against us in the District Court of Oklahoma County, Oklahoma. On May 1, 2012, the court approved our motion to transfer this case to Tulsa County, Oklahoma. On July 2, 2012, the Tulsa County District Court appointed a Special Master to conduct a review of whether Blueknight is missing 141,000 barrels of crude oil from operations occurring during the months of April through June, 2010. The Special Master will prepare an advisory report to the Court of her findings and conclusions. We believe this matter is without merit and will vigorously defend our position; however, we cannot predict the outcome.
Environmental
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
9. COMMITMENTS AND CONTINGENCIES, Continued
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 and results indicate that four of the sites have limited amounts of soil contamination that will require remediation and 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.
A water pipeline break occurred at a SemCAMS facility during August 2010. This resulted in a spill of material that was predominantly salt water containing a small amount of hydrocarbons. The incident was investigated by Environment Canada and Alberta Environment. On February 14, 2012, charges were filed against SemCAMS by the Federal Government of Canada (Department of Fisheries) and the Province of Alberta (Alberta Environment) in connection with this incident. We are currently reviewing disclosure received from the agencies and have engaged our expert to assist us in formulating our response. Although it is not possible to predict the outcome of these proceedings, we accrued a liability for estimated fines and environmental contributions of $0.4 million in December 2010, which we continue to carry on our books at September 30, 2012.
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 $39.7 million at September 30, 2012, which is included within other noncurrent liabilities on our condensed consolidated balance sheets. This amount was calculated using the $109.1 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 do not believe the present value of such obligations under current laws and regulations, after taking into account the estimated lives of our facilities, is material to our financial position or results of operations.
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.
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
9. COMMITMENTS AND CONTINGENCIES, Continued
Purchase and sale commitments
We routinely enter into agreements to purchase and sell petroleum products at specified future dates. We account for derivatives at fair value with the exception of commitments which have been designated as normal purchases and sales for which we do not record assets or liabilities related to these agreements until the product is purchased or sold. At September 30, 2012, such commitments included the following (in thousands): |
| | | | | | |
| Volume (Barrels) | | Value |
Fixed price purchases | 77 |
| | $ | 6,922 |
|
Fixed price sales | 88 |
| | $ | 8,440 |
|
Floating price purchases | 25,422 |
| | $ | 2,397,146 |
|
Floating price sales | 25,483 |
| | $ | 2,411,393 |
|
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 2015. At September 30, 2012, approximately $0.1 million was due under the contract and the amount of future obligation is approximately $3.3 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. In 2012, the majority of SemGas’ revenues were generated from such contracts.
During the first quarter 2012, SemGas committed to purchasing equipment related to a 125 MMcf per day processing facility. At September 30, 2012, the future obligation associated with this purchase is $6.6 million.
See Note 3 for commitments related to Glass Mountain Pipeline LLC.
10. EQUITY
Unaudited condensed consolidated statement of changes in owners’ equity
The following table shows the changes in our consolidated owners’ equity accounts from December 31, 2011 to September 30, 2012 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total Owners’ Equity |
Balance at December 31, 2011 | $ | 418 |
| | $ | 1,032,365 |
| | $ | — |
| | $ | (167,812 | ) | | $ | (13,875 | ) | | $ | 127,569 |
| | $ | 978,665 |
|
Net income | — |
| | — |
| | — |
| | 1,006 |
| | — |
| | 7,915 |
| | 8,921 |
|
Other comprehensive income, net of income taxes | — |
| | — |
| | — |
| | — |
| | 14,930 |
| | — |
| | 14,930 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (5,754 | ) | | (5,754 | ) |
Non-cash equity compensation | — |
| | 4,614 |
| | — |
| | — |
| | — |
| | 218 |
| | 4,832 |
|
Issuance of common stock under compensation plans | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
Repurchase of common stock | — |
| | — |
| | (242 | ) | | — |
| | — |
| | — |
| | (242 | ) |
Other | — |
| | — |
| | — |
| | 38 |
| | — |
| | (38 | ) | | — |
|
Balance at September 30, 2012 | $ | 419 |
| | $ | 1,036,978 |
| | $ | (242 | ) | | $ | (166,768 | ) | | $ | 1,055 |
| | $ | 129,910 |
| | $ | 1,001,352 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
10. EQUITY, Continued
Accumulated other comprehensive income (loss)
The following table presents the changes in the components of accumulated other comprehensive income (loss) from December 31, 2011 to September 30, 2012 (in thousands):
|
| | | | | | | | | | | | | | | |
| Currency Translation | | Employee Benefit Plans | | Interest Rate Swaps | | Total |
Balance, December 31, 2011 | $ | (10,780 | ) | | $ | (2,811 | ) | | $ | (284 | ) | | $ | (13,875 | ) |
Currency translation adjustment | 14,531 |
| | — |
| | — |
| | 14,531 |
|
Changes related to interest rate swaps | — |
| | — |
| | 284 |
| | 284 |
|
Changes related to benefit plans, net of income tax expense of $39 | — |
| | 115 |
| | — |
| | 115 |
|
Balance, September 30, 2012 | $ | 3,751 |
| | $ | (2,696 | ) | | $ | — |
| | $ | 1,055 |
|
Common stock
Upon emergence from bankruptcy, we issued 40,882,496 shares of common stock. The Plan of Reorganization specified that we were to issue an additional 517,500 shares of common stock in settlement of pre-petition claims. As of September 30, 2012, we have issued 198,616 shares of this stock and will issue the remainder as the process of resolving the claims progresses. The owners’ equity balances on the condensed consolidated balance sheets include the shares that are required to be issued in settlement of pre-petition claims. The shares of common stock reflected on the condensed consolidated balance sheet at September 30, 2012 are summarized below:
|
| | | |
Shares issued on Emergence Date | 40,882,496 |
|
Shares subsequently issued in settlement of pre-petition claims | 198,616 |
|
Remaining shares required to be issued in settlement of pre-petition claims | 318,884 |
|
Issuance of shares under employee and director compensation programs(*) | 549,732 |
|
Shares issued upon exercise of warrants | 7 |
|
Total shares | 41,949,735 |
|
Par value per share | $ | 0.01 |
|
Common stock on September 30, 2012 balance sheet | $ | 419,497 |
|
(*) These shares include 130,326 shares which vested during the nine months ended September 30, 2012. Of these vested shares, recipients sold back to the Company 8,994 shares to satisfy tax withholding obligations which are being recognized at cost as treasury stock on the condensed consolidated balance sheet.
In addition to the shares in the table above, there are shares of unvested restricted stock outstanding at September 30, 2012. The par value of these shares has not yet been reflected in common stock on the condensed consolidated balance sheet, as these shares have not yet vested. There are also shares of restricted stock that were returned to treasury upon forfeiture. The par value of these shares is not reflected in the condensed consolidated balance sheet, as no accounting recognition is given to forfeited shares.
The common stock includes Class A and Class B stock. Class A stock is eligible to be listed on an exchange, whereas Class B stock is not. Any share of Class B stock may be converted to Class A at the election of the holder. Both classes of stock have full voting rights. Both classes of stock have a par value of $0.01 per share. The total number of shares authorized for issuance is 90,000,000 shares of Class A stock and 10,000,000 shares of Class B stock.
Equity-based compensation
We have reserved common stock for issuance pursuant to director and employee compensation programs. At September 30, 2012, there were approximately 485,000 unvested shares that have been granted under these 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. Shares of restricted stock awards that were forfeited were returned to treasury. The par value of these shares is not
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
10. EQUITY, Continued
reflected in the condensed consolidated balance sheet, as no accounting recognition is given to forfeited shares. For certain of the awards, the number of shares that will vest is contingent upon our achievement of certain specified targets. If we meet the specified maximum targets, approximately 68,000 additional shares could vest.
Warrants
Upon emergence from bankruptcy, we issued 1,634,210 warrants. The Plan of Reorganization specified that we were to issue an additional 544,737 warrants in settlement of the pre-petition claims. As of September 30, 2012, we have issued 209,056 of the warrants and will issue the remainder as the process of resolving the claims progresses. Beginning September 2011, the warrants began trading on the New York Stock Exchange under the ticker symbol, SEMGWS, and its fair value is classified as a Level 1 measurement. The warrants reflected on the condensed consolidated balance sheet at September 30, 2012 are summarized below:
|
| | | |
Warrants issued on Emergence Date | 1,634,210 |
|
Warrants subsequently issued in settlement of pre-petition claims | 209,056 |
|
Remaining warrants to be issued in settlement of pre-petition claims | 335,681 |
|
Warrants exercised | (7 | ) |
Total warrants at September 30, 2012 | 2,178,940 |
|
Fair value per warrant at September 30, 2012 | $ | 13.43 |
|
Warrant value included within other noncurrent liabilities on September 30, 2012 consolidated balance sheet | $ | 29,263,164 |
|
Each warrant entitles the holder to purchase one share of common stock for $25 at any time before the November 30, 2014 expiration date. Upon exercise, a holder may elect a cashless exercise, whereby the number of shares to be issued to the holder is reduced, in lieu of a cash payment. The closing price of our common stock was $36.85 per share on September 28, 2012. In the event of a change in control of the Company, the holders of the warrants would have the right to sell the warrants to us, and we would have the right to purchase the warrants from the holders. In either case, the price to be paid for the warrants would be calculated using a standard pricing model with inputs specified in the warrant agreement.
11. EARNINGS PER SHARE
The following summarizes the calculation of basic earnings per share for the three months and nine months ended September 30, 2012 and September 30, 2011 (in thousands, except per share amounts):
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
11. EARNINGS PER SHARE, Continued
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2012 | | Three Months Ended September 30, 2011 |
| Continuing Operations | | Discontinued Operations | | Net | | Continuing Operations | | Discontinued Operations | | Net |
Income (loss) | $ | (167 | ) | | $ | (265 | ) | | $ | (432 | ) | | $ | 15,025 |
| | $ | (686 | ) | | $ | 14,339 |
|
less: Income attributable to noncontrolling interests | 2,336 |
| | — |
| | 2,336 |
| | — |
| | — |
| | — |
|
Numerator | $ | (2,503 | ) | | $ | (265 | ) | | $ | (2,768 | ) | | $ | 15,025 |
| | $ | (686 | ) | | $ | 14,339 |
|
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 | 549 |
| | 549 |
| | 549 |
| | 242 |
| | 242 |
| | 242 |
|
Denominator | 41,949 |
| | 41,949 |
| | 41,949 |
| | 41,642 |
| | 41,642 |
| | 41,642 |
|
Basic earnings (loss) per share | $ | (0.06 | ) | | $ | (0.01 | ) | | $ | (0.07 | ) | | $ | 0.36 |
| | $ | (0.02 | ) | | $ | 0.34 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, 2012 | | Nine Months Ended September 30, 2011 |
| Continuing Operations | | Discontinued Operations | | Net | | Continuing Operations | | Discontinued Operations | | Net |
Income (loss) | $ | 9,377 |
| | $ | (456 | ) | | $ | 8,921 |
| | $ | 2,807 |
| | $ | (735 | ) | | $ | 2,072 |
|
less: Income attributable to noncontrolling interests | 7,915 |
| | — |
| | 7,915 |
| | — |
| | — |
| | — |
|
Numerator | $ | 1,462 |
| | $ | (456 | ) | | $ | 1,006 |
| | $ | 2,807 |
| | $ | (735 | ) | | $ | 2,072 |
|
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 | 530 |
| | 530 |
| | 530 |
| | 221 |
| | 221 |
| | 221 |
|
Denominator | 41,930 |
| | 41,930 |
| | 41,930 |
| | 41,621 |
| | 41,621 |
| | 41,621 |
|
Basic earnings (loss) per share | $ | 0.03 |
| | $ | (0.01 | ) | | $ | 0.02 |
| | $ | 0.07 |
| | $ | (0.02 | ) | | $ | 0.05 |
|
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
11. EARNINGS PER SHARE, Continued
The following summarizes the calculation of diluted earnings per share for the three months and nine months ended September 30, 2012 and September 30, 2011 (amounts in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2012 | | Three Months Ended September 30, 2011 |
| Continuing Operations | | Discontinued Operations | | Net | | Continuing Operations | | Discontinued Operations | | Net |
Income (loss) | $ | (167 | ) | | $ | (265 | ) | | $ | (432 | ) | | $ | 15,025 |
| | $ | (686 | ) | | $ | 14,339 |
|
less: Income attributable to noncontrolling interests | 2,336 |
| | — |
| | 2,336 |
| | — |
| | — |
| | — |
|
Numerator | $ | (2,503 | ) | | $ | (265 | ) | | $ | (2,768 | ) | | $ | 15,025 |
| | $ | (686 | ) | | $ | 14,339 |
|
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 | 549 |
| | 549 |
| | 549 |
| | 242 |
| | 242 |
| | 242 |
|
Effect of dilutive securities | 285 |
| | 285 |
| | 285 |
| | 316 |
| | 316 |
| | 316 |
|
Denominator | 42,234 |
| | 42,234 |
| | 42,234 |
| | 41,958 |
| | 41,958 |
| | 41,958 |
|
Diluted earnings (loss) per share | $ | (0.06 | ) | | $ | (0.01 | ) | | $ | (0.07 | ) | | $ | 0.36 |
| | $ | (0.02 | ) | | $ | 0.34 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, 2012 | | Nine Months Ended September 30, 2011 |
| Continuing Operations | | Discontinued Operations | | Net | | Continuing Operations | | Discontinued Operations | | Net |
Income (loss) | $ | 9,377 |
| | $ | (456 | ) | | $ | 8,921 |
| | $ | 2,807 |
| | $ | (735 | ) | | $ | 2,072 |
|
less: Income attributable to noncontrolling interests | 7,915 |
| | — |
| | 7,915 |
| | — |
| | — |
| | — |
|
less: Income resulting from change in fair value of warrants | — |
| | — |
| | — |
| | 8,258 |
| | — |
| | 8,258 |
|
Numerator | $ | 1,462 |
| | $ | (456 | ) | | $ | 1,006 |
| | $ | (5,451 | ) | | $ | (735 | ) | | $ | (6,186 | ) |
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 | 530 |
| | 530 |
| | 530 |
| | 221 |
| | 221 |
| | 221 |
|
Effect of dilutive securities | 252 |
| | 252 |
| | 252 |
| | — |
| | — |
| | — |
|
Denominator | 42,182 |
| | 42,182 |
| | 42,182 |
| | 41,621 |
| | 41,621 |
| | 41,621 |
|
Diluted earnings (loss) per share | $ | 0.03 |
| | $ | (0.01 | ) | | $ | 0.02 |
| | $ | (0.13 | ) | | $ | (0.02 | ) | | $ | (0.15 | ) |
During the three months and nine months ended September 30, 2012, we recorded expenses of $9.5 million and $17.1 million, respectively, related to the change in fair value of the warrants. Because of this, the warrants would have been antidilutive and, therefore, were not included in the computation of diluted earnings per share. For the three months ended September 30, 2011, the average price of our common stock was at or below the exercise price of the warrants, and therefore the warrants did not cause any dilution for this period.
12. SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes the changes in the components of operating assets and liabilities shown on our condensed consolidated statements of cash flows (in thousands):
SEMGROUP CORPORATION
Notes to Unaudited Condensed Consolidated Financial Statements
12. SUPPLEMENTAL CASH FLOW INFORMATION, Continued
|
| | | | | | | |
| Nine Months Ended September 30, 2012 | | Nine Months Ended September 30, 2011 |
| |
Decrease (increase) in restricted cash | $ | 4,691 |
| | $ | 19,963 |
|
Decrease (increase) in accounts receivable | (116,987 | ) | | (18,939 | ) |
Decrease (increase) in receivable from affiliates | 622 |
| | (38 | ) |
Decrease (increase) in inventories | (1,804 | ) | | (27,497 | ) |
Decrease (increase) in derivatives and margin deposits | 457 |
| | 8,653 |
|
Decrease (increase) in other current assets | 8,393 |
| | (199 | ) |
Decrease (increase) in other assets | 2,457 |
| | (2,842 | ) |
Increase (decrease) in accounts payable and accrued liabilities | 97,638 |
| | 8,156 |
|
Increase (decrease) in payable to affiliates | (5,160 | ) | | 3 |
|
Increase (decrease) in payables to pre-petition creditors | (4,541 | ) | | (35,652 | ) |
Increase (decrease) in other noncurrent liabilities | 20,024 |
| | (6,334 | ) |
| $ | 5,790 |
| | $ | (54,726 | ) |
13. RELATED PARTY TRANSACTIONS
NGL Energy
As described in Note 3, we own interests in NGL Energy, which we account for under the equity method.
During the three months and nine months ended September 30, 2012, we generated the following transactions with NGL Energy (in thousands):
|
| | | | | | | |
| Three Months Ended September 30, 2012 | | Nine Months Ended September 30, 2012 |
| |
Revenues | $ | 14,395 |
| | $ | 41,945 |
|
Purchases | $ | 6,009 |
| | $ | 36,573 |
|
Reimbursements from NGL Energy for transition services | $ | 28 |
| | $ | 526 |
|
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 September 30, 2012 and 2011, we generated revenue from White Cliffs of approximately $0.6 million and $0.6 million, respectively. We generated revenue from White Cliffs of approximately $1.8 million and $1.6 million during the nine months ended September 30, 2012 and 2011, respectively.
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 $0.5 million and $1.2 million in legal fees and related expenses to this law firm during the three months and nine months ended September 30, 2012, respectively (of which $9,909 and $56,085, respectively, was paid by White Cliffs). SemGroup paid $0.2 million and $1.3 million in legal fees and related expenses to this law firm during the three months and nine months ended September 30, 2011, respectively (of which $29,280 and $124,001, respectively, was paid by White Cliffs).
| |
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, 2011, filed with the SEC.
Overview of Business
We 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.”), Canada and the West Coast of the United Kingdom (the “U.K.”). 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 in North American production and supply areas, including the Gulf Coast, Midwest, Rocky Mountain and Western Canadian regions. We maintain and operate storage, terminal and marine facilities at Milford Haven in 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 business is conducted through six primary business segments – Crude, SemStream®, SemCAMS, SemLogistics, SemMexico, and SemGas®. Our assets include:
| |
• | A 51% interest in the White Cliffs Pipeline (a 527-mile crude oil pipeline running from Platteville, CO to Cushing, OK), which Crude operates; |
| |
• | A 2% general partner interest and a 57% limited partner interest in Rose Rock, which owns an approximately 640-mile crude oil pipeline network in Kansas and Oklahoma and a crude oil storage facility in Cushing, Oklahoma with a capacity of 7.0 million barrels; |
| |
• | 9.1 million common units of NGL Energy Partners LP (“NGL Energy”) and a 6.42% interest in NGL Energy Holdings LLC, the general partner of NGL Energy; |
| |
• | more than 1,560 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 United Kingdom; |
| |
• | 12 liquid asphalt cement terminals and modification facilities and two emulsion distribution terminals in Mexico; |
| |
• | three natural gas processing plants in the U.S., with 98 million cubic feet per day of capacity; and |
| |
• | majority ownership interests in two sour gas and two sweet gas processing plants in Alberta, Canada, with combined operating capacity of 694 million cubic feet per day. |
We believe that the variety of our petroleum product assets creates opportunities for us and our customers year round.
Recent Developments
Increased Ownership in Glass Mountain Pipeline LLC
On October 10, 2012, SemGroup and Gavilon Energy Holdings II, LLC ("Gavilon") announced that each had completed the acquisition of a 25% share of Glass Mountain Pipeline LLC ("GMP"), previously owned by an affiliate of Chesapeake Energy Corporation ("Chesapeake"). Following this purchase, SemGroup now owns 50% of GMP, with the remaining 50% owned by Gavilon. Chesapeake will maintain its long-term transportation agreement with GMP, providing the economic incentive for its construction.
Results of Operations
Consolidated Results of Operations
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | 277,852 |
| | $ | 391,522 |
| | $ | 921,660 |
| | $ | 1,135,087 |
|
Expenses | | | | | | | |
Costs of products sold | 189,830 |
| | 313,490 |
| | 651,283 |
| | 896,871 |
|
Operating | 52,367 |
| | 41,772 |
| | 172,750 |
| | 116,384 |
|
General and administrative | 16,680 |
| | 16,883 |
| | 53,073 |
| | 56,443 |
|
Depreciation and amortization | 12,081 |
| | 12,894 |
| | 35,687 |
| | 38,355 |
|
Gain on disposal or impairment | (3,615 | ) | | — |
| | (3,496 | ) | | (136 | ) |
Total expenses | 267,343 |
| | 385,039 |
| | 909,297 |
| | 1,107,917 |
|
Earnings from equity method investments | 3,116 |
| | 4,016 |
| | 22,903 |
| | 10,166 |
|
Operating income | 13,625 |
|
| 10,499 |
|
| 35,266 |
|
| 37,336 |
|
Other expense (income) | | | | | | | |
Interest expense | 1,992 |
| | 6,013 |
| | 7,763 |
| | 49,321 |
|
Other (income) expense, net | 9,709 |
| | (11,847 | ) | | 17,141 |
| | (17,994 | ) |
Total other (income) expenses, net | 11,701 |
| | (5,834 | ) | | 24,904 |
| | 31,327 |
|
Income from continuing operations before income taxes | 1,924 |
| | 16,333 |
| | 10,362 |
| | 6,009 |
|
Income tax expense | 2,091 |
| | 1,308 |
| | 985 |
| | 3,202 |
|
Income (loss) from continuing operations | (167 | ) | | 15,025 |
| | 9,377 |
| | 2,807 |
|
Loss from discontinued operations | (265 | ) | | (686 | ) | | (456 | ) | | (735 | ) |
Net income (loss) | $ | (432 | ) | | $ | 14,339 |
| | $ | 8,921 |
| | $ | 2,072 |
|
Revenues and Expenses
Revenue and expenses before intercompany eliminations leading to operating income (loss) are analyzed by operating segment below.
Interest Expense
Interest expense decreased in the three months ended September 30, 2012 to $2.0 million from $6.0 million in the three months ended September 30, 2011. Interest expense also decreased in the nine months ended September 30, 2012 to $7.8 million from $49.3 million in the nine months ended September 30, 2011. The outstanding debt balance decreased to $191.7 million at September 30, 2012 from $387.0 million at September 30, 2011. The reduction in outstanding debt is due to repayments made from proceeds received from the sale of the SemStream assets and Rose Rock’s initial public offering which were completed in the fourth quarter of 2011. The reduction in the outstanding debt balance, coupled with a significant reduction in interest rates due to the refinancing of the credit facility that was completed in the second quarter of 2011, comprise the majority of the decrease in interest expense. Also contributing to the decrease is the write-off in June 2011 of $17.3 million of unamortized capitalized loan fees related to the refinancing of the credit facility.
Other Expense (Income), net
Other expense was $9.7 million for the three months ended September 30, 2012, compared to other income of $11.8 million for the same period in 2011. Other expense was $17.1 million for the nine months ended September 30, 2012, compared to other income of $18.0 million for the same period in 2011. Other expense (income) for all periods presented was comprised primarily of gains and losses due to the change in the fair value of our warrants.
Income Tax Expense (Benefit)
The effective tax rate was 109% for the three months ended September 30, 2012 and 8% for the three months ended September 30, 2011. The effective tax rate for nine months ended September 30, 2012 and 2011 was 10% and 53%, respectively. Significant items that impacted the effective tax rate for each period, as compared to the U.S. Federal statutory rate of 35%, include earnings in foreign jurisdictions taxed at lower rates and the full valuation allowance which was recorded against our deferred tax assets. Further, the foreign earnings are taxed in foreign jurisdictions as well as in the U.S., since they are disregarded entities for U.S. federal income tax purposes. For the three months and nine months ended September 30, 2012, the rate is impacted by a noncontrolling interest in Rose Rock for which taxes are not provided. 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 September 30, | | Nine Months Ended September 30, |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | 131,616 |
| | $ | 104,616 |
| | $ | 468,748 |
| | $ | 299,121 |
|
Expenses | | | | | | | |
Costs of products sold | 111,790 |
| | 90,660 |
| | 412,847 |
| | 252,804 |
|
Operating | 6,042 |
| | 4,530 |
| | 17,957 |
| | 13,683 |
|
General and administrative | 5,015 |
| | 2,040 |
| | 9,796 |
| | 6,508 |
|
Depreciation and amortization | 3,066 |
| | 3,122 |
| | 9,032 |
| | 8,505 |
|
Loss (gain) on disposal or impairment | (3,500 | ) | | — |
| | (3,444 | ) | | 12 |
|
Total expenses | 122,413 |
| | 100,352 |
| | 446,188 |
| | 281,512 |
|
Equity earnings in White Cliffs | 10,021 |
| | 4,016 |
| | 25,053 |
| | 10,166 |
|
Operating income | $ | 19,224 |
|
| $ | 8,280 |
|
| $ | 47,613 |
|
| $ | 27,775 |
|
Three months ended September 30, 2012 versus three months ended September 30, 2011
Revenue
Revenue increased in the three months ended September 30, 2012 to $132 million from $105 million in the three months ended September 30, 2011.
|
| | | | | | | |
| Three Months Ended September 30, |
| 2012 | | 2011 |
| (in thousands) |
Gross product revenue | $ | 565,595 |
| | $ | 266,132 |
|
ASC 845-10-15 | (445,791 | ) | | (169,512 | ) |
Unrealized gain (loss) on derivatives, net | 554 |
| | (1,190 | ) |
Product revenue | 120,358 |
| | 95,430 |
|
Service revenue | 11,196 |
| | 9,142 |
|
Other | 62 |
| | 44 |
|
Total revenue | $ | 131,616 |
| | $ | 104,616 |
|
Gross product revenue increased in the three months ended September 30, 2012 to $566 million from $266 million in the three months ended September 30, 2011. The increase was primarily a result of increased sales volumes to 6.2 million barrels for the three months ended September 30, 2012 from 3.0 million barrels for the same period in 2011, and an increase in the average sales price of crude oil to $91 per barrel for the three months ended September 30, 2012 from $89 per barrel for the same period in 2011.
ASC 845-10-15, “Nonmonetary Transactions,” requires certain transactions – those where inventory is purchased from a customer then resold to the same customer – to be presented in the income statement on a net basis, resulting in a reduction of revenue and costs of products sold by the same amount, but has no effect on operating income (loss). However, changes in the level of such purchase and sale activity between periods can have an effect on the comparison between those periods. Gross product revenue was reduced by $446 million and $170 million during the three months ended September 30, 2012 and 2011, respectively, in accordance with ASC 845-10-15.
Service revenue increased in the three months ended September 30, 2012 to $11 million from $9 million for the three months ended September 30, 2011, due to additional storage capacity at Cushing, OK.
Costs of products sold
Costs of products sold increased in the three months ended September 30, 2012 to $112 million from $91 million for the same period in 2011. Costs of products sold were reduced by $446 million and $170 million in the three months ended September 30, 2012 and 2011, respectively, in accordance with ASC 845-10-15. Costs of products sold increased in the three months ended September 30, 2012, primarily as a result of an increase in the volume sold offset, in part, by an increase in the average cost of crude oil per barrel to $89 from $87 per barrel for the same period in 2011.
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 by our fee-based services, our fixed-margin transactions and our marketing activities for the three months ended September 30, 2012 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Storage | | Transportation | | Marketing Activities | | Other(1) | | Total |
Revenues | $ | 8,367 |
| | $ | 4,768 |
| | $ | 116,318 |
| | $ | 2,163 |
| | $ | 131,616 |
|
Less: Costs of products sold, exclusive of depreciation and amortization | — |
| | — |
| | 111,790 |
| | — |
| | 111,790 |
|
Less: Unrealized gain (loss) on derivatives | — |
| | — |
| | 554 |
| | — |
| | 554 |
|
Adjusted gross margin | $ | 8,367 |
| | $ | 4,768 |
| | $ | 3,974 |
| | $ | 2,163 |
| | $ | 19,272 |
|
| |
(1) | This category includes fee-based services such as unloading and ancillary storage terminal services. |
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 September 30, 2011 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Storage | | Transportation | | Marketing Activities | | Other(1) | | Total |
Revenues | $ | 6,108 |
| | $ | 3,365 |
| | $ | 93,591 |
| | $ | 1,552 |
| | $ | 104,616 |
|
Less: Costs of products sold, exclusive of depreciation and amortization | — |
| | — |
| | 90,660 |
| | — |
| | 90,660 |
|
Less: Unrealized gain (loss) on derivatives | — |
| | — |
| | (1,190 | ) | | — |
| | (1,190 | ) |
Adjusted gross margin | $ | 6,108 |
| | $ | 3,365 |
| | $ | 4,121 |
| | $ | 1,552 |
| | $ | 15,146 |
|
| |
(1) | This category includes fee-based services such as unloading and ancillary storage terminal services. |
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 September 30, |
| 2012 | | 2011 |
| (in thousands) |
Reconciliation of operating income to Adjusted gross margin: | | | |
Operating income | $ | 19,224 |
| | $ | 8,280 |
|
Add: | | | |
Operating expense | 6,042 |
| | 4,530 |
|
General and administrative expense | 5,015 |
| | 2,040 |
|
Depreciation and amortization expense | 3,066 |
| | 3,122 |
|
Gain on disposal or impairment | (3,500 | ) | | — |
|
Less: | | | |
Unrealized gain (loss) on derivatives | 554 |
| | (1,190 | ) |
Earnings from equity method investment | 10,021 |
| | 4,016 |
|
Adjusted gross margin | $ | 19,272 |
| | $ | 15,146 |
|
Operating expense
Operating expense increased in the three months ended September 30, 2012, to $6 million from $5 million for the three months ended September 30, 2011. This increase is due primarily to increased allocation of corporate engineering costs ($345 thousand), field expense ($300 thousand), employment expense ($250 thousand) and maintenance expense ($175 thousand). In addition, a recovery in 2011 of a previously written off account receivable ($300 thousand) did not reoccur in 2012.
General and administrative
General and administrative expense increased in the three months ended September 30, 2012, to $5 million from $2 million for the three months ended September 30, 2011. This increase is primarily the result of giving year to date effect to a recently completed transfer pricing study which increased the allocation of corporate costs by approximately $3 million.
Gain on disposal or impairment
We sold a portion of our ownership interest in White Cliffs during September 2010. At the time, we recorded a loss of $6.8 million on disposal of that asset. In September 2012, we reached a settlement in a dispute concerning the selling price of that ownership interest and reduced the loss by $3.5 million.
Earnings from equity method investment
Crude’s only equity method investment is in White Cliffs. Earnings from this investment increased in the three months ended September 30, 2012 to $10 million from $4 million in the three months ended September 30, 2011. This increase is due primarily to a 61% increase in the crude oil volume shipped from Platteville, CO to Cushing, OK.
Nine months ended September 30, 2012 versus nine months ended September 30, 2011
Revenue
Revenue increased in the nine months ended September 30, 2012 to $469 million from $299 million in the nine months ended September 30, 2011.
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2012 | | 2011 |
| (in thousands) |
Gross product revenue | $ | 1,538,805 |
| | $ | 748,121 |
|
ASC 845-10-15 | (1,103,424 | ) | | (476,631 | ) |
Unrealized gain (loss) on derivatives, net | 432 |
| | 334 |
|
Product revenue | 435,813 |
| | 271,824 |
|
Service revenue | 32,932 |
| | 27,077 |
|
Other | 3 |
| | 220 |
|
Total revenue | $ | 468,748 |
| | $ | 299,121 |
|
Gross product revenue increased in the nine months ended September 30, 2012 to $1.5 billion from $748 million in the nine months ended September 30, 2011. The increase was primarily a result of increased sales volumes to 16.4 million barrels for the nine months ended September 30, 2012 from 8.0 million barrels for the same period in 2011, and an increase in the average sales price of crude to $94 per barrel for the nine months ended September 30, 2012 from $93 per barrel for the same period in 2011.
ASC 845-10-15, “Nonmonetary Transactions,” requires certain transactions – those where inventory is purchased from a customer then resold to the same customer – to be presented in the income statement on a net basis, resulting in a reduction of revenue and costs of products sold by the same amount, but has no effect on operating income (loss). However, changes in the level of such purchase and sale activity between periods can have an effect on the comparison between those periods.
Gross product revenue was reduced by $1.1 billion and $477 million during the nine months ended September 30, 2012 and 2011, respectively, in accordance with ASC 845-10-15.
Service revenue increased in the nine months ended September 30, 2012 to $33 million from $27 million for the nine months ended September 30, 2011, due to additional storage capacity at Cushing, OK.
Costs of products sold
Costs of products sold increased in the nine months ended September 30, 2012 to $413 million from $253 million for the same period in 2011. Costs of products sold were reduced by $1.1 billion and $477 million in the nine months ended September 30, 2012 and 2011, respectively, in accordance with ASC 845-10-15. Costs of products sold increased in the nine months ended September 30, 2012, as a result of increased volume of barrels sold and an increase in the average cost of crude oil per barrel to $93 from $91 per barrel for the same period in 2011.
Adjusted gross margin
The following table shows the Adjusted gross margin generated by our fee-based services, our fixed-margin transactions and our marketing activities for the nine months ended September 30, 2012 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Storage | | Transportation | | Marketing Activities | | Other(1) | | Total |
Revenues | $ | 24,205 |
| | $ | 13,425 |
| | $ | 425,439 |
| | $ | 5,679 |
| | $ | 468,748 |
|
Less: Costs of products sold, exclusive of depreciation and amortization | — |
| | — |
| | 412,847 |
| | — |
| | 412,847 |
|
Less: Unrealized gain (loss) on derivatives | — |
| | — |
| | 432 |
| | — |
| | 432 |
|
Adjusted gross margin | $ | 24,205 |
| | $ | 13,425 |
| | $ | 12,160 |
| | $ | 5,679 |
| | $ | 55,469 |
|
| |
(1) | This category includes fee-based services such as unloading and ancillary storage terminal services. |
The following table shows the Adjusted gross margin generated by our fee-based services, our fixed-margin transactions and our marketing activities for the nine months ended September 30, 2011 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Storage | | Transportation | | Marketing Activities | | Other(1) | | Total |
Revenues | $ | 18,123 |
| | $ | 11,181 |
| | $ | 265,449 |
| | $ | 4,368 |
| | $ | 299,121 |
|
Less: Costs of products sold, exclusive of depreciation and amortization | — |
| | — |
| | 252,804 |
| | — |
| | 252,804 |
|
Less: Unrealized gain (loss) on derivatives | — |
| | — |
| | 334 |
| | — |
| | 334 |
|
Adjusted gross margin | $ | 18,123 |
| | $ | 11,181 |
| | $ | 12,311 |
| | $ | 4,368 |
| | $ | 45,983 |
|
| |
(1) | This category includes fee-based services such as unloading and ancillary storage terminal services. |
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.
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2012 | | 2011 |
| (in thousands) |
Reconciliation of operating income to Adjusted gross margin: | | | |
Operating income | $ | 47,613 |
| | $ | 27,775 |
|
Add: | | | |
Operating expense | 17,957 |
| | 13,683 |
|
General and administrative expense | 9,796 |
| | 6,508 |
|
Depreciation and amortization expense | 9,032 |
| | 8,505 |
|
Loss (gain) on disposal or impairment | (3,444 | ) | | 12 |
|
Less: | | | |
Unrealized gain (loss) on derivatives | 432 |
| | 334 |
|
Earnings from equity method investment | 25,053 |
| | 10,166 |
|
Adjusted gross margin | $ | 55,469 |
| | $ | 45,983 |
|
Operating expense
Operating expense increased in the nine months ended September 30, 2012, to $18 million from $14 million in the nine months ended September 30, 2011. This increase is due primarily to increased compensation expense ($1.2 million), allocation of corporate engineering costs ($800 thousand), field expense ($600 thousand) and maintenance expense ($350 thousand). In addition, a recovery in 2011 of a previously written off account receivable ($900 thousand) did not reoccur in 2012.
General and administrative expense
General and administrative expense increased in the nine months ended September 30, 2012, to $10 million from $7 million in the nine months ended September 30, 2011. This increase is primarily the result of giving year to date effect to a recently completed transfer pricing study which increased the allocation of corporate costs by approximately $3 million.
Gain on disposal or impairment
We sold a portion of our ownership interest in White Cliffs during September 2010. At the time, we recorded a loss of $6.8 million on disposal of that asset. In September 2012, we reached a settlement in a dispute concerning the selling price of that ownership interest and reduced the loss by $3.5 million.
Earnings from equity method investment
Crude’s only equity method investment is in White Cliffs. Earnings from this investment increased in the nine months ended September 30, 2012 to $25 million from $10 million in the same period in 2011. This increase is due primarily to a 52% increase in the crude oil volume shipped from Platteville, CO to Cushing, OK.
SemStream
On November 1, 2011, we contributed the primary operating assets of our SemStream segment to NGL Energy. We did not, however, contribute any of the assets or liabilities of SemStream’s Arizona residential business to NGL Energy. On September 12, 2012, we entered into a definitive agreement to sell those assets and liabilities. This sale is subject to approval by the Arizona Corporation Commission and will close shortly after that approval is granted; therefore, results are reported as discontinued operations. The results of operations shown below for 2012 reflect only 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.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | — |
| | $ | 182,776 |
| | $ | 7 |
| | $ | 537,187 |
|
Expenses | | | | | | | |
Costs of products sold | — |
| | 178,904 |
| | 33 |
| | 528,356 |
|
Operating | 7 |
| | 2,018 |
| | (18 | ) | | 6,390 |
|
General and administrative | 528 |
| | 2,164 |
| | 582 |
| | 6,727 |
|
Depreciation and amortization | — |
| | 878 |
| | — |
| | 3,501 |
|
Loss (gain) on disposal or impairment | — |
| | (24 | ) | | — |
| | 40 |
|
Total expenses | 535 |
| | 183,940 |
| | 597 |
| | 545,014 |
|
Equity earnings in NGL Energy | (6,905 | ) | | — |
| | (2,150 | ) | | — |
|
Operating loss | $ | (7,440 | ) |
| $ | (1,164 | ) |
| $ | (2,740 | ) |
| $ | (7,827 | ) |
SemLogistics
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | 2,213 |
| | $ | 4,230 |
| | $ | 8,610 |
| | $ | 18,815 |
|
Expenses | | | | | | | |
Costs of products sold | 97 |
| | 152 |
| | 196 |
| | 152 |
|
Operating | 1,436 |
| | 1,564 |
| | 4,521 |
| | 5,129 |
|
General and administrative | 990 |
| | 1,604 |
| | 4,249 |
| | 5,276 |
|
Depreciation and amortization | 2,388 |
| | 2,339 |
| | 7,040 |
| | 6,943 |
|
Total expenses | 4,911 |
| | 5,659 |
| | 16,006 |
| | 17,500 |
|
Operating income (loss) | $ | (2,698 | ) |
| $ | (1,429 | ) |
| $ | (7,396 | ) |
| $ | 1,315 |
|
Three months ended September 30, 2012 versus three months ended September 30, 2011
Revenue
Revenue decreased in the three months ended September 30, 2012 to $2 million from $4 million in the three months ended September 30, 2011.
The decline in revenue is a result of a decline in the volume of storage leased and a drop in storage rates. In addition, low utilization has also reduced revenue from fees for ancillary terminal services. 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 through 2012. These factors have a negative effect on storage economics. As a result, the demand for storage is depressed and we have experienced 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. As a result, during the third quarter 2012 we conducted a test for recoverability in accordance with the guidance provided in ASC 360-10-15-3, Impairment and Disposal of Long-Lived Assets. The estimated undiscounted cash flows exceeded the carrying amount of the assets; therefore, the carrying amount of the long-lived assets are considered recoverable and an impairment was not recorded. We are aware that it is necessary to 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 every category of expense, the amounts for the third quarter of 2012 are roughly equivalent to those of the third quarter of 2011.
Nine months ended September 30, 2012 versus nine months ended September 30, 2011
Revenue
Revenue decreased in the nine months ended September 30, 2012 to $9 million from $19 million in the nine months ended September 30, 2011. The explanation for this change is the same as shown above for the three-month period.
General
In every category of expense, the amounts for the nine months ended September 30, 2012 are roughly equivalent to those of the nine months ended September 30, 2011.
SemCAMS
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | 54,301 |
| | $ | 41,368 |
| | $ | 169,149 |
| | $ | 122,004 |
|
Expenses | | | | | | | |
Costs of products sold | 309 |
| | — |
| | 499 |
| | 10 |
|
Operating | 40,081 |
| | 29,845 |
| | 135,165 |
| | 80,611 |
|
General and administrative | 3,354 |
| | 3,378 |
| | 10,404 |
| | 12,737 |
|
Depreciation and amortization | 2,664 |
| | 2,577 |
| | 7,910 |
| | 7,746 |
|
Total expenses | 46,408 |
| | 35,800 |
| | 153,978 |
| | 101,104 |
|
Operating income | $ | 7,893 |
|
| $ | 5,568 |
|
| $ | 15,171 |
|
| $ | 20,900 |
|
Three months ended September 30, 2012 versus three months ended September 30, 2011
Revenue
Revenue in the three months ended September 30, 2012 increased to $54 million from $41 million for the three months ended September 30, 2011. This increase is primarily the result of turnaround costs which are recorded as revenue when they are recoverable from the producers who use the plants. Approximately $13.5 million of such costs are included in revenue for the current period. We also earn revenue by charging the producers a fee for processing the recoverable costs. Approximately $1.3 million of such fees related to the turnaround project are included in revenue for the current period. In addition, a maintenance capital recovery fee of $1.6 million also contributed to the increase. These increases were offset, in part, by lower operating costs approximately ($3.8 million) which are recoverable from producers.
Operating expense
Operating expense increased in the three months ended September 30, 2012 to $40 million from $30 million in the three months ended September 30, 2011. This increase is primarily related to $13.5 million in turnaround costs offset, in part, by the recovery of a previously written off receivable ($1.9 million) and reduced power costs ($1.1 million).
General
In every other category of expense, the amounts for the three months ended September 30, 2012 are roughly equivalent to those of the three months ended September 30, 2011.
Nine months ended September 30, 2012 versus nine months ended September 30, 2011
Revenue
Revenue in the nine months ended September 30, 2012 increased to $169 million from $122 million for the nine months ended September 30, 2011. This increase is primarily the result of turnaround costs which are recorded as revenue when they are recoverable from the producers who use the plants. Approximately $61.1 million of such costs are included in revenue for the current period. We also earn revenue by charging the producers a fee for processing the recoverable costs. Approximately $6.2 million of such fees related to the turnaround project are included in revenue for the current period. In addition, a maintenance capital recovery fee of $1.6 million contributed to the increase. These increases were offset, in part, by lower operating costs approximately ($7.7 million) which are recoverable from producers, foreign exchange changes ($5.0 million), estimated revenue lost due to wells that have been shut in by producers due to relatively low natural gas prices ($3.8 million)and estimated lost revenue due to the turnaround ($3.3 million). (Significant reductions in throughput also impair plant operations and emissions compliance.) Finally, results for 2011 included $6.1 million related to the favorable settlement of a lawsuit and lost revenue due to plant outages ($3.3 million).
Operating expense
Operating expense increased in the nine months ended September 30, 2012 to $135 million from $81 million in the nine months ended September 30, 2011. This increase is primarily related to $61.1 million in turnaround costs, $2.1 million in outage repair costs and $1.4 million in sulphur base pad removal costs offset, in part, by foreign exchange changes ($4.3 million), reduced power costs ($4.1 million), the recovery of a previously written off receivable ($1.9 million), lower labor and contract service costs ($1.8 million) and the reversal of an accrual ($0.6 million). Finally, results for 2011 included $4.5 million related to recovery of previously written off receivables and the reversal of $2.9 million in accruals offset, in part, by outage repair costs ($3.3 million) and severance costs ($1.5 million).
General and administrative
General and administrative expense decreased in the nine months ended September 30, 2012 to $10 million from $13 million in the nine months ended September 30, 2011. This decrease is primarily the result of $2.3 million in severance costs in 2011 which did not reoccur in 2012.
SemMexico
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | 62,095 |
| | $ | 56,743 |
| | $ | 193,229 |
| | $ | 156,024 |
|
Expenses | | | | | | | |
Costs of products sold | 55,817 |
| | 49,823 |
| | 174,636 |
| | 136,378 |
|
Operating | 1,870 |
| | 1,383 |
| | 6,033 |
| | 4,231 |
|
General and administrative | 1,501 |
| | 2,825 |
| | 6,730 |
| | 8,983 |
|
Depreciation and amortization | 1,536 |
| | 1,653 |
| | 4,614 |
| | 4,912 |
|
Loss (gain) on disposal or impairment | (112 | ) | | 20 |
| | (49 | ) | | (186 | ) |
Total expenses | 60,612 |
| | 55,704 |
| | 191,964 |
| | 154,318 |
|
Operating income | $ | 1,483 |
|
| $ | 1,039 |
|
| $ | 1,265 |
|
| $ | 1,706 |
|
Three months ended September 30, 2012 versus three months ended September 30, 2011
Revenue
Revenue increased in the three months ended September 30, 2012 to $62 million from $57 million in the three months ended September 30, 2011. Higher prices ($700 per metric ton versus $661 per metric ton) accounted for 62% of the increase and higher volume (88,124 metric tons versus 84,897 metric tons) accounted for 38% of the remaining increase.
Costs of products sold
Costs of products sold increased in the three months ended September 30, 2012 to $56 million from $50 million in the three months ended September 30, 2011. On a per unit basis, the cost of products sold increased to $633 per metric ton from $586 per metric ton.
Operating expense
Operating expense increased in the three months ended September 30, 2012, to $2 million from $1 million in the three months ended September 30, 2011. This increase is primarily the result of approximately $310 thousand in product application system expense which was reclassified to operating expense from general and administrative expense. In 2011, we had a recovery of approximately $100 thousand which did not reoccur in 2012.
General and administrative expense
General and administrative expense decreased in the three months ended September 30, 2012, to $2 million from $3 million in the three months ended September 30, 2011. The decrease is primarily the result of giving year to date effect to a recently completed transfer pricing study which reduced the allocation of corporate costs by approximately $700 thousand. In addition, approximately $310 thousand in product application system expense was reclassified to operating expense from general and administrative expense. Finally, legal expenses were reduced by approximately $140 thousand compared to the same period in 2011.
Nine months ended September 30, 2012 versus nine months ended September 30, 2011
Revenue
Revenue increased in the nine months ended September 30, 2012 to $193 million from $156 million in the nine months ended September 30, 2011. Higher prices ($695 per metric ton versus $620 per metric ton) accounted for 55% of the increase and higher volume (275,932 metric tons versus 248,937 metric tons) accounted for the remaining 45% of the increase.
Costs of products sold
Costs of products sold increased in the nine months ended September 30, 2012 to $175 million from $136 million in the nine months ended September 30, 2011. On a per unit basis, the cost of products sold increased to $631 per metric ton from $546 per metric ton. In addition, costs of products sold for the period ended September 30, 2012, also includes a $1.0 million charge for inventory shrinkage at one of our plants. An investigation of this matter is on-going.
Operating expense
Operating expense increased in the nine months ended September 30, 2012, to $6 million from $4 million in the nine months ended September 30, 2011. This increase is primarily the result of a reclassification of $1.2 million in product application system expense to operating expense from general and administrative expense. In addition, maintenance expense increased by approximately $640 thousand compared to the same period in 2011.
General and administrative expense
General and administrative expense decreased in the nine months ended September 30, 2012 to $7 million from $9 million in the nine months ended September 30, 2011. This decrease is primarily the result of a reclassification of $1.2 million in product application systems expense to operating expense and giving year to date effect to a recently completed transfer pricing study which reduced the allocation of corporate costs by approximately $800 thousand.
SemGas
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | 29,878 |
| | $ | 28,350 |
| | $ | 89,452 |
| | $ | 74,676 |
|
Expenses | | | | | | | |
Costs of products sold | 24,068 |
| | 20,512 |
| | 70,607 |
| | 52,150 |
|
Operating | 2,931 |
| | 2,432 |
| | 9,092 |
| | 6,282 |
|
General and administrative | 1,329 |
| | 1,591 |
| | 4,564 |
| | 4,829 |
|
Depreciation and amortization | 1,797 |
| | 1,528 |
| | 5,153 |
| | 4,410 |
|
Loss (gain) on disposal or impairment | (3 | ) | | 4 |
| | (3 | ) | | 4 |
|
Total expenses | 30,122 |
| | 26,067 |
| | 89,413 |
| | 67,675 |
|
Operating income (loss) | $ | (244 | ) |
| $ | 2,283 |
|
| $ | 39 |
|
| $ | 7,001 |
|
Three months ended September 30, 2012 versus three months ended September 30, 2011
Revenue
Revenue increased in the three months ended September 30, 2012 to $30 million from $28 million for the three months ended September 30, 2011. This increase is the result of higher sales volume (8,627 MMcf versus 4,960 MMcf) offset, in part, by lower sales price per unit ($3.46/Mcf versus $5.72/Mcf). The increase in volume is primarily a result of increased drilling and production in the area served by our gas plants in Hopeton and Nash, Oklahoma.
Costs of products sold
Costs of products sold increased in the three months ended September 30, 2012 to $24 million from $21 million in the three months ended September 30, 2011. This increase is primarily related to higher volume (8,627 MMcf versus 4,960 MMcf) offset, in part, by lower costs per unit ($2.79/Mcf versus $4.14/Mcf). In addition, certain contracts contain volume incentive tiers whereby producers receive a larger percentage of proceeds as their volume increases, which resulted in higher costs of products sold, expressed as a percentage of revenue.
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 September 30, 2012 and 2011.
|
| | | | | | | |
| Three Months Ended September 30, |
| 2012 | | 2011 |
| (in thousands) |
Revenue | $ | 29,878 |
| | $ | 28,350 |
|
Less: Cost of products sold, exclusive of depreciation | 24,068 |
| | 20,512 |
|
Less: Unrealized gain (loss) on derivatives | — |
| | — |
|
Adjusted gross margin | $ | 5,810 |
| | $ | 7,838 |
|
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 September 30, |
| 2012 | | 2011 |
| (in thousands) |
Reconciliation of operating income (loss) to Adjusted gross margin: | | | |
Operating income (loss) | $ | (244 | ) | | $ | 2,283 |
|
Add: | | | |
Operating expense | 2,931 |
| | 2,432 |
|
General and administrative expense | 1,329 |
| | 1,591 |
|
Depreciation and amortization expense | 1,797 |
| | 1,528 |
|
Loss (gain) on disposal or impairment | (3 | ) | | 4 |
|
Adjusted gross margin | $ | 5,810 |
| | $ | 7,838 |
|
Operating expense
Operating expense increased in the three months ended September 30, 2012 to $3 million from $2 million for the three months ended September 30, 2011. This increase is a result of higher volume in 2012. The primary costs components of the increase are compression rental, contract labor, maintenance, field expenses and employment costs.
General
In every other category of expense, the amounts for the three months ended September 30, 2012 are roughly equivalent to those of the three months ended September 30, 2011.
Nine months ended September 30, 2012 versus nine months ended September 30, 2011
Revenue
Revenue increased in the nine months ended September 30, 2012 to $89 million from $75 million for the nine months ended September 30, 2011. This increase is the result of higher sales volume (25,197 MMcf versus 13,690 MMcf) offset, in part, by lower sales price per unit ($3.55/Mcf versus $5.45/Mcf). The increase in volume is primarily a result of increased drilling and production in the area served by our gas plants in Hopeton and Nash, Oklahoma.
Costs of products sold
Costs of products sold increased in the nine months ended September 30, 2012 to $71 million from $52 million in the nine months ended September 30, 2011. This increase is primarily related to higher volume (25,197 MMcf versus 13,690 MMcf) offset, in part, by lower costs per unit ($2.80/Mcf versus $3.81/Mcf). In addition, certain contracts contain volume incentive tiers whereby producers receive a larger percentage of proceeds as their volume increases, which resulted in higher costs of products sold, expressed as a percentage of revenue. Also, we made a contract adjustment which increased costs of products sold in the first quarter of 2012 by approximately $1.3 million.
Adjusted gross margin
The following table shows the Adjusted gross margin generated in the nine months ended September 30, 2012 and 2011.
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2012 | | 2011 |
| (in thousands) |
Revenue | $ | 89,452 |
| | $ | 74,676 |
|
Less: Cost of products sold, exclusive of depreciation | 70,607 |
| | 52,150 |
|
Less: Unrealized gain (loss) on derivatives | — |
| | — |
|
Adjusted gross margin | $ | 18,845 |
| | $ | 22,526 |
|
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.
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2012 | | 2011 |
| (in thousands) |
Reconciliation of operating income to Adjusted gross margin: | | | |
Operating income | $ | 39 |
| | $ | 7,001 |
|
Add: | | | |
Operating expense | 9,092 |
| | 6,282 |
|
General and administrative expense | 4,564 |
| | 4,829 |
|
Depreciation and amortization expense | 5,153 |
| | 4,410 |
|
Loss (gain) on disposal or impairment | (3 | ) | | 4 |
|
Adjusted gross margin | $ | 18,845 |
| | $ | 22,526 |
|
Operating expense
Operating expense increased in the nine months ended September 30, 2012 to $9 million from $6 million in the nine months ended September 30, 2011. This increase is a result of higher volume in 2012. The primary costs components of the increase are compression rental, contract labor, maintenance, field expenses and employment costs.
General
In every other category of expense, the amounts for the nine months ended September 30, 2012 are roughly equivalent to those of the nine months ended September 30, 2011.
Other and Eliminations
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2012 | | 2011 | | 2012 | | 2011 |
Revenue | $ | (2,251 | ) | | $ | (26,561 | ) | | $ | (7,535 | ) | | $ | (72,740 | ) |
Expenses | | | | | | | |
Costs of products sold | (2,251 | ) | | (26,561 | ) | | (7,535 | ) | | (72,979 | ) |
Operating | — |
| | — |
| | — |
| | 58 |
|
General and administrative | 3,963 |
| | 3,281 |
| | 16,748 |
| | 11,383 |
|
Depreciation and amortization | 630 |
| | 797 |
| | 1,938 |
| | 2,338 |
|
Gain on disposal or impairment | — |
| | — |
| | — |
| | (6 | ) |
Total expenses | 2,342 |
| | (22,483 | ) | | 11,151 |
| | (59,206 | ) |
Operating loss | $ | (4,593 | ) |
| $ | (4,078 | ) |
| $ | (18,686 | ) |
| $ | (13,534 | ) |
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 operations and borrowings under our revolving credit facilities. The consolidated cash balance on September 30, 2012 (including restricted cash) was approximately $102.4 million. Of this amount, approximately $43.8 million was held in Canada and may be subject to tax if transferred to the United States, and approximately $34.9 million is restricted cash primarily set aside for settlement of pre-petition claims. Potential sources of long-term liquidity include debt and equity securities. Our primary cash requirements currently are operating expenses, capital expenditures and quarterly distributions to unitholders of our subsidiary, Rose Rock. In general, we expect to fund:
| |
• | operating expenses, maintenance capital expenditures and cash distributions through existing cash and cash from operating activities; |
| |
• | expansion capital expenditures and working capital deficits through cash on hand and our revolving credit facilities; 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, 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 limited partner units. 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 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 cash for the periods presented:
|
| | | | | | | |
| Nine Months Ended September 30, |
(in thousands) | 2012 | | 2011 |
Statement of cash flow data: | | | |
Cash flows provided by (used in): | | | |
Operating activities | $ | 51,758 |
| | $ | (8,234 | ) |
Investing activities | (131,706 | ) | | (42,904 | ) |
Financing activities | 74,809 |
| | 27,370 |
|
Subtotal | (5,139 | ) | | (23,768 | ) |
Effect of exchange rate on cash and cash equivalents | (977 | ) | | 1,005 |
|
Change in cash and cash equivalents | (6,116 | ) | | (22,763 | ) |
Change in cash and cash equivalents included in discontinued operations | (36 | ) | | (1,206 | ) |
Change in cash and cash equivalents from continuing operations | (6,152 | ) | | (23,969 | ) |
Cash and cash equivalents at beginning of period | 73,613 |
| | 87,821 |
|
Cash and cash equivalents at end of period | $ | 67,461 |
| | $ | 63,852 |
|
Operating Activities
The components of operating cash flows can be summarized as follows (in thousands):
|
| | | | | | | |
| Nine Months Ended September 30, |
(in thousands) | 2012 | | 2011 |
Net income | $ | 8,921 |
| | $ | 2,072 |
|
Non-cash expenses, net | 37,047 |
| | 44,420 |
|
Changes in operating assets and liabilities | 5,790 |
| | (54,726 | ) |
Net cash flows provided by operating activities | $ | 51,758 |
| | $ | (8,234 | ) |
Non-cash expenses decreased to $37.0 million for the nine months ended September 30, 2012 from $44.4 million for the nine months ended September 30, 2011. This decrease is comprised primarily of decreased debt amortization of $21.2 million due to the prior year credit facility refinancing, lower depreciation expense of $3.4 million due primarily to the contribution of SemStream assets to NGL Energy and our $2.2 million equity in NGL Energy's year-to-date net loss. These non-cash expenses were partially offset by a $9.0 million reduction in the net unrealized gain on derivative instruments, a $4.5 million reduction in the change in the allowance for doubtful accounts, a $3.8 million reduction in currency gains and losses and a net increase in gain on disposal or impairment of long-lived assets of $3.4 million due to the September 2012 receipt of additional proceeds from the White Cliffs settlement.
Changes in operating assets and liabilities during the nine months ended September 30, 2012 consisted primarily of a decrease of $4.7 million in restricted cash (due to payments made to settle liabilities to pre-petition creditors), an increase of $117.0 million in accounts receivable (due to a $74.4 million increase at Rose Rock related to increased marketing and buy/sell activities around our Bakken Shale operations and Kansas and Oklahoma system, which are driven by demand in those areas and our ability to capture value related to changing market conditions, along with a $41.7 million increase at SemCAMS due to the timing of billings related to the K3 plant turnaround), a decrease of $8.4 million in other current assets (due the amortization of prepaid expenses), an increase of $97.6 million in accounts payable and accrued liabilities (due to an increase in accounts payable at Rose Rock of $82.8 million related to increased marketing and buy/sell activity, along with an increase in accrued liabilities at SemCAMS of $14.4 million related to the K3 plant turnaround), a decrease of $5.2 million in payables to affiliates (due to decreased payables to NGL Energy), a decrease of $4.5 million in payables to prepetition creditors and an increase of $20.0 million in other noncurrent liabilities (due to an increase in the fair value of warrants of $17.1 million and asset retirement obligation accruals at SemCAMS).
Changes in operating assets and liabilities during the nine months ended September 30, 2011 included primarily a decrease of $20.0 million in restricted cash, an increase of $18.9 million in accounts receivable, an increase of $27.5 million in inventories, a decrease of $8.7 million in derivatives and margin deposits, an increase of $8.2 million in accounts payable and
accrued liabilities, a decrease of $35.7 million in payables to prepetition creditors and a decrease of $6.3 million in other noncurrent liabilities.
Investing Activities
For the nine months ended September 30, 2012, we had net cash outflows of $131.7 million from investing activities, due primarily to $82.1 million of capital expenditures and $64.0 million in investments in non-consolidated subsidiaries, partially offset by net investing cash inflows of $10.6 million in distributions in excess of equity in earnings of affiliates. Year to date capital expenditures primarily relate 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 represents investments in Glass Mountain Pipeline. Distributions in excess of equity earnings include $5.5 million of distributions from White Cliffs and $5.1 million of distributions received from NGL Energy.
For the nine months ended September 30, 2011, we had net cash outflows of $42.9 million from investing activities, due primarily to $50.9 million of capital expenditures and $2.9 million in investments in non-consolidated subsidiaries, partially offset by net investing inflows of $9.7 million in distributions in excess of equity in earnings of affiliates.
Financing Activities
For the nine months ended September 30, 2012, we had net cash inflows of $74.8 million from financing activities, substantially all of which related to borrowings on long-term debt of $260.5 million, partially offset by principal payments of $179.0 million and partnership distributions of $5.8 million.
For the nine months ended September 30, 2011, we had net cash inflows of $27.4 million from financing activities, substantially all of which related to borrowings on long-term debt of $153.4 million, partially offset by principal payments on long-term debt of $115.4 million and capitalized loan fees of $10.6 million.
As compared to the prior year, the increase in cash inflows from financing activities is due to increased credit facility usage related to the increase in capital projects.
SemGroup Revolving Credit Facility
At September 30, 2012, we had $189.5 million outstanding under our $300 million revolving credit facility. In addition, we had $2.1 million in outstanding letters of credit on that date. The maximum letter of credit capacity under this facility is $250 million. The borrowing capacity under this credit facility can be increased by an additional $100 million subject to commitments from new lenders or additional commitments from existing lenders. The credit agreement includes customary affirmative and negative covenants. At September 30, 2012, we were in compliance with the terms of the credit agreement.
Rose Rock Revolving Credit Facility
At September 30, 2012, Rose Rock had no cash borrowings under its $150 million revolving credit facility. There were $38.2 million in outstanding letters of credit. In September 2012, we amended the credit agreement such that the borrowing capacity under this credit facility can be increased by an additional $400 million subject to commitments from new lenders or additional commitments from existing lenders. The previous agreement provided for an increase of up to $200 million. 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, we may make those distributions unless we are in default under the credit agreement or the distribution could result in a default. At September 30, 2012, Rose Rock was in compliance with the terms of the credit agreement.
SemMexico Credit Facilities
At September 30, 2012, we had 26.7 million Mexican pesos (U.S. $2.1 million equivalent at the September 30, 2012 exchange rate) outstanding under a SemMexico credit facility. Borrowings under this facility are required to be repaid with monthly payments through May 2013. In addition, SemMexico also had 292.8 million Mexican pesos (U.S. $22.8 million equivalent at the September 30, 2012 exchange rate) in outstanding letters of credit. SemMexico had no outstanding borrowings under a 56.0 million Mexican pesos (U.S. $4.4 million equivalent at the September 30, 2012 exchange rate) credit facility which matures in July 2013. SemMexico had no outstanding borrowings under a 44 million Mexican pesos (U.S. $3.4 million equivalent at the September 30, 2012 exchange rate) revolving credit facility which matures in June 2015. At September 30, 2012, we were in compliance with the terms of these facilities.
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:
| |
• | 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; or |
| |
• | 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. |
We estimate that the capital expenditures for 2012 will be approximately $230 million, including an estimated $209 million for strategic projects and $21 million for maintenance projects, which includes $4 million for environmental and regulatory projects. Projected capital spending for 2012 also includes investments in Glass Mountain. During the three months and nine months ended September 30, 2012, we spent $38.6 million and $82.1 million (cash basis), respectively, on capital projects, excluding capital contributions to affiliates for funding growth projects.
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.
Rose Rock Distributions
The Rose Rock cash distribution for the fourth quarter of 2011 was $0.0670 per unit. This prorated amount corresponds to the minimum quarterly cash distribution of $0.3625 per unit, or $1.45 per unit on an annualized basis. The proration period began on December 15, 2011, immediately after the close of Rose Rock’s initial public offering, and continued through December 31, 2011. The distribution was paid on February 13, 2012 to all unitholders of record as of February 3, 2012.
The cash distribution for the first quarter of 2012 was $0.3725 per unit, or $1.49 per unit on an annualized basis. This represents a 2.8% increase over the prior quarter. The distribution was paid on May 15, 2012 to all unitholders of record as of May 7, 2012.
The cash distribution for the second quarter of 2012 was $0.3825 per unit, or $1.53 per unit on an annualized basis. This represents a 2.7% increase over the prior quarter. This distribution was paid on August 14, 2012 to all unitholders of record as of August 6, 2012.
The cash distribution for the third quarter of 2012 is $0.3925 per unit, or $1.57 per unit on an annualized basis. This represents a 2.6% increase over the prior quarter. This distribution will be paid on November 14, 2012, to all unitholders of record on November 5, 2012.
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.
Off-Balance Sheet Arrangements
We do not use any off-balance sheet arrangements to enhance our liquidity and capital resources, or for any other purpose.
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, 2011, although the value of product purchase commitments is greater at September 30, 2012 than it was at September 30, 2011.
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 September 30, 2012, such commitments included the following (volumes and dollars in thousands):
|
| | | | | | |
| Volume (Barrels) | | Value |
Fixed price purchases | 77 |
| | $ | 6,922 |
|
Fixed price sales | 88 |
| | $ | 8,440 |
|
Floating price purchases | 25,422 |
| | $ | 2,397,146 |
|
Floating price sales | 25,483 |
| | $ | 2,411,393 |
|
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 2015. On September 30, 2012, approximately $0.1 million was due under the contract and the amount of future obligation is approximately $3.3 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 nine months ended September 30, 2012, the majority of SemGas’ revenues were generated from such contracts.
During the first quarter of 2012, SemGas committed to purchasing equipment related to a 125 MMcf per day processing facility. At September 30, 2012, the future obligation associated with this purchase was $6.6 million.
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, 2011.
Recent Accounting Pronouncements
See Note 1 to our condensed consolidated financial statements.
| |
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 natural gas liquids, crude oil and natural gas, (ii) interest rates and (iii) currency exchange rates. We may utilize 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 nine months ended September 30, 2012 and September 30, 2011 and the years ended December 31, 2011 and 2010.
|
| | | | | | | | | | | | |
| | Light Sweet Crude Oil Futures (Barrel) | | Mont Belvieu (Non-LDH) Spot Propane (Gallon) | | Henry Hub Natural Gas Futures (MMBtu) |
Quarter Ended September 30, 2012 | | | | | | |
High | | $ | 99.00 |
| | $ | 0.99 |
| | $ | 3.32 |
|
Low | | $ | 83.75 |
| | $ | 0.79 |
| | $ | 2.61 |
|
High/Low Differential | | $ | 15.25 |
| | $ | 0.20 |
| | $ | 0.71 |
|
Quarter Ended September 30, 2011 | | | | | | |
High | | $ | 99.87 |
| | $ | 1.62 |
| | $ | 4.55 |
|
Low | | $ | 79.20 |
| | $ | 1.43 |
| | $ | 3.67 |
|
High/Low Differential | | $ | 20.67 |
| | $ | 0.19 |
| | $ | 0.88 |
|
Nine Months Ended September 30, 2012 | | | | | | |
High | | $ | 109.77 |
| | $ | 1.40 |
| | $ | 3.32 |
|
Low | | $ | 77.69 |
| | $ | 0.71 |
| | $ | 1.91 |
|
High/Low Differential | | $ | 32.08 |
| | $ | 0.69 |
| | $ | 1.41 |
|
Nine Months Ended September 30, 2011 | | | | | | |
High | | $ | 113.93 |
| | $ | 1.63 |
| | $ | 4.85 |
|
Low | | $ | 79.20 |
| | $ | 1.30 |
| | $ | 3.67 |
|
High/Low Differential | | $ | 34.73 |
| | $ | 0.33 |
| | $ | 1.18 |
|
Year Ended December 31, 2011 | | | | | | |
High | | $ | 113.93 |
| | $ | 1.63 |
| | $ | 4.85 |
|
Low | | $ | 75.67 |
| | $ | 1.30 |
| | $ | 2.99 |
|
High/Low Differential | | $ | 38.26 |
| | $ | 0.33 |
| | $ | 1.86 |
|
Year Ended December 31, 2010 | | | | | | |
High | | $ | 91.51 |
| | $ | 1.43 |
| | $ | 6.01 |
|
Low | | $ | 68.01 |
| | $ | 0.96 |
| | $ | 3.29 |
|
High/Low Differential | | $ | 23.50 |
| | $ | 0.47 |
| | $ | 2.72 |
|
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 marked-related indices.
Based on our open derivative contracts at September 30, 2012, a 10% increase in the applicable market price or prices for each derivative contract would result in an approximate $1.7 million decrease in the contribution from these derivatives to our crude oil sales revenues. A 10% decrease in the applicable market price or prices for each derivative contract would result in an approximate $1.7 million increase in the contribution from these derivatives to 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):
|
| | | | | | | | | | | | | | | | |
| Notional Volume (Barrels) | | Fair Value | | Effect of 10% Price Increase | | Effect of 10% Price Decrease | | Settlement Date |
Crude oil: | | | | | | | | | |
Futures contracts | 180 |
| | $ | 594 |
| | $ | (1,659 | ) | | $ | 1,659 |
| | October 2012 |
Margin deposits or other credit support, including letters of credit, are generally required on derivative instruments utilized 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 utilize both fixed and 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 utilize 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 September 30, 2012, an increase in these base rates of 1%, above the base rate floors, would increase our interest expense by $1.9 million per year.
The average interest rates presented below are based upon rates in effect at September 30, 2012 and December 31, 2011. 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:
|
| | | |
Liabilities | September 30, 2012 | | December 31, 2011 |
Short-term debt - variable rate | $2.0 million | | $26.1 million |
Average interest rate | 6.3% | | 3.22% |
Long-term debt - variable rate | $189.5 million | | $83.3 million |
Average interest rate | 3.97% | | 3.37% |
Long-term debt - fixed rate | $0 million | | $0 million |
Fixed interest rate | 0.00% | | 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 generally translated using the average exchange rate during the reporting period.
| |
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 Rules 13a-15(e) and 15d-15(e) under the Exchange Act), are effective as of September 30, 2012. 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.
Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2012 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, 2011.
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
| |
Item 3. | Defaults Upon Senior Securities |
None
| |
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 |
10.1 | | Fifth Amendment to the Credit Agreement, dated as of September 26, 2012, among SemGroup Corporation, certain subsidiaries of SemGroup Corporation, as guarantors, the lenders party thereto and The Royal Bank of Scotland plc, as administrative agent and collateral agent for the lenders. |
10.2 | | First Amendment, dated as of September 26, 2012, to the Credit Agreement among Rose Rock Midstream, L.P., certain subsidiaries of Rose Rock Midstream, L.P., as guarantors, the lenders party thereto and The Royal Bank of Scotland plc, as administrative agent and collateral agent for the lenders. |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Norman J. Szydlowski, 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 Norman J. Szydlowski, Chief Executive Officer. |
32.2 | | Section 1350 Certification of Robert N. Fitzgerald, Chief Financial Officer. |
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101 | | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, (ii) the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months and nine months ended September 30, 2012 and 2011, (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, and (iv) the Notes to the Unaudited Condensed Consolidated Financial Statements. |
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: November 9, 2012 | 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 |
10.1 | | Fifth Amendment to the Credit Agreement, dated as of September 26, 2012, among SemGroup Corporation, certain subsidiaries of SemGroup Corporation, as guarantors, the lenders party thereto and The Royal Bank of Scotland plc, as administrative agent and collateral agent for the lenders. |
10.2 | | First Amendment, dated as of September 26, 2012, to the Credit Agreement among Rose Rock Midstream, L.P., certain subsidiaries of Rose Rock Midstream, L.P., as guarantors, the lenders party thereto and The Royal Bank of Scotland plc, as administrative agent and collateral agent for the lenders. |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Norman J. Szydlowski, 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 Norman J. Szydlowski, Chief Executive Officer. |
32.2 | | Section 1350 Certification of Robert N. Fitzgerald, Chief Financial Officer. |
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101 | | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets at September 30, 2012 and December 31, 2011, (ii) the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months and nine months ended September 30, 2012 and 2011, (iii) the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011, and (iv) the Notes to the Unaudited Condensed Consolidated Financial Statements. |