Item 1A.
Risk Factors
Our business faces many risks. We believe the risks described below identify the material risks we face. However, the risks described below may not be the only risks we face. Additional unknown risks, or risks that we currently consider immaterial, may also impair our business operations. If any of the events or circumstances described below actually occurs, our business, financial condition or results of operations could suffer, and the trading price of our shares of Class A Common Stock could decline significantly. Investors should consider the specific risk factors discussed below, together with other information contained in this report on Form 10-K and the other documents that we will file from time to time with the SEC.
Risks Related to Our Business
The instruments governing our indebtedness contain various covenants limiting the conduct of our business.
Our credit agreements and the indentures governing our 7.5% senior notes and 5.625% senior notes contain various restrictive covenants that limit the conduct of our business and our credit agreements require us to maintain certain financial ratios. These covenants and restrictions limit our ability to respond to changing business and economic conditions and may prevent us from engaging in transactions that might otherwise be considered beneficial to us. In particular, these agreements place certain limits on our ability to, among other things:
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incur additional indebtedness;
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incur liens;
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enter into sale and lease back transactions;
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make investments;
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pay dividends or distributions;
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make certain restricted payments;
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consummate certain asset sales;
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enter into certain transactions with affiliates; and
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merge, consolidate and/or sell or dispose of all, or substantially all, of our assets.
If we fail to comply with the restrictions in our credit agreements or the indentures governing our 7.5% senior notes and 5.625% senior notes or any other subsequent financing agreements, a default may allow the creditors, if the agreements so provide, to accelerate the related indebtedness as well any other indebtedness to which a cross-acceleration or cross-default provision applies. If that occurs, we may not be able to make all of the required payments or borrow sufficient funds to refinance such debt. Even if new financing were available at that time, it may not be available on terms acceptable to us.
If we are unable to repay amounts outstanding under our credit agreements when due, the lenders thereunder could, subject to the terms of the relevant agreements, seek to sell or otherwise transfer our assets granted to them as collateral to secure the indebtedness outstanding under those agreements. Substantially all of our assets have been pledged as collateral to secure our credit agreements. In addition, the lenders under our credit agreements could choose to terminate any commitments to supply us with further funds.
Under certain economic conditions, our access to capital and credit markets may be limited, which may adversely impact our liquidity.
We may require additional funds from outside sources from time to time. Our ability to raise capital or arrange financing or renew existing facilities, along with the cost of such capital, is dependent upon a number of variables, including:
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general economic, financial and business conditions;
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industry specific conditions;
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credit availability from banks and other financial institutions;
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investor confidence in us;
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cash flow and earnings before interest, taxes, depreciation and amortization ("EBITDA") levels;
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competitive, legislative and regulatory matters; and
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provisions of tax and securities laws that may impact raising capital.
In addition, volatility in the capital markets may adversely affect our ability to access any available borrowing capacity under our revolving credit facilities. Our access to these funds is dependent on the ability of the lenders to meet their funding obligations under these revolving facilities. Lenders may not be able to meet their funding commitments if they experience shortages of capital and liquidity, resulting in a reduction of our available borrowing capacity.
Our indebtedness could limit our flexibility, adversely affect our financial health and prevent us from making payments on such indebtedness.
Our substantial indebtedness could have important consequences to you. For example, it could:
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make it difficult for us to satisfy our obligations with respect to our indebtedness;
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make us more vulnerable to general adverse economic and industry conditions;
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require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for operations and other purposes;
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limit our flexibility in planning for, or reacting to, changes in our business and industry in which we operate; and
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place us at a competitive disadvantage compared to competitors that may have proportionately less indebtedness.
In addition, our ability to make scheduled payments or to refinance our obligations depends on our successful financial and operating performance. We cannot assure you that our operating performance will generate sufficient cash flow or that our capital resources will be sufficient for payment of our debt obligations in the future. Our financial and operating performance, cash flow and capital resources depend on prevailing economic conditions and financial, business and other factors, many of which are beyond our control.
If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to sell material assets or operations, obtain additional capital or restructure our debt. In the event that we are required to dispose of material assets or operations or restructure our debt to meet our debt service and other obligations, we cannot assure you as to the terms of any such transaction or how quickly any such transaction could be completed, if at all.
We may incur substantial additional indebtedness in the future. Our incurrence of additional indebtedness would intensify the risks described above.
Our cash flow depends, in part, on the available cash and distributions of Rose Rock.
Our partnership interests in Rose Rock are significant cash-generating assets. Therefore, our cash flow is dependent, to some extent, upon the ability of Rose Rock to make a minimum quarterly distribution to its unitholders, including us. Rose Rock may not have sufficient available cash each quarter to enable it to pay the minimum quarterly distribution, which would have a corresponding negative impact on us. The amount of cash Rose Rock can distribute on its units principally depends upon the amount of cash it generates from its operations, which will fluctuate from quarter to quarter based on, among other things:
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the price of crude oil and the level of production of, and demand for, crude oil in the markets it serves;
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the volume of crude oil that it gathers, transports, stores and/or markets;
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the fees with respect to volumes that it handles;
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the profitability of its marketing operations;
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damage to pipelines, facilities, related equipment and surrounding properties caused by earthquakes, floods, fires, severe weather, explosions and other natural disasters and acts of terrorism or inadvertent damage to pipelines from construction, farm and utility equipment;
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leaks or accidental releases of crude oil or other materials into the environment, whether as a result of human error or otherwise;
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demand charges and volumetric fees associated with its transportation services;
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the level of competition from other midstream energy companies;
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the level of its operating, maintenance and general and administrative costs;
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regulatory action affecting the supply of, or demand for, crude oil, the rates it can charge, how it contracts for services, its existing contracts, its operating costs or its operating flexibility;
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changes in tax laws; and
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prevailing economic conditions.
In addition, the actual amount of cash Rose Rock will have available for distribution will depend on other factors, some of which are beyond its control, including:
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the level of capital expenditures it makes;
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the cost of acquisitions;
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its debt service requirements and other liabilities;
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fluctuations in its working capital needs;
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its ability to borrow funds and access capital markets;
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restrictions contained in debt agreements to which it is a party; and
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the amount of cash reserves established by its general partner.
For further information on the risk factors inherent in the business of Rose Rock, see the other risk factors included in this Form 10-K that are applicable to Rose Rock and “Item 1A. Risk Factors” in Rose Rock’s Annual Report on Form 10-K.
Our operations could be adversely affected if third-party pipelines, or other facilities interconnected to our facilities, become partially or fully unavailable, or if the volumes we gather do not meet the quality requirements of such pipelines or facilities.
Our facilities connect to other pipelines or facilities, some of which are owned by third parties. The continuing operation of such third-party pipelines or facilities is not within our control. These pipelines and other facilities may become unavailable,
or available only at a reduced capacity, because of testing, turnarounds, line repair, reduced operating pressure, lack of operating capacity, curtailments of receipt or deliveries due to insufficient capacity, or for any other reason. If any of these pipelines or facilities becomes unable to transport the products we gather, or if the volumes we gather or transport do not meet the quality requirements of such pipelines or facilities, our results of operations and cash flows could be adversely affected.
Our Comprehensive Risk Management Policy’s provisions governing our internal trading and marketing activities cannot eliminate all risks associated with the trading and marketing of commodities, nor can we ensure full compliance at all times with the Comprehensive Risk Management Policy by our employees, both of which could impact our financial and operational results.
We have in place a Comprehensive Risk Management Policy that establishes authorized commodities and transaction types, delegations of authority, and limits for trading and marketing exposures and requires that we restrict net open positions (e.g., positions that are not fully hedged as to commodity price risk) to specified levels at each of the consolidated and, in certain cases, subsidiary level. Our Comprehensive Risk Management Policy has restrictive terms with respect to acquiring and holding physical inventory, futures contracts or derivative products for the purpose of proprietary trading activity. Net open positions are monitored by our Risk Management department for compliance with policy limits. These policies and practices, however, cannot eliminate all risks. Derivatives contracts and contracts for the future delivery of crude oil expose us to the risk of non-delivery under product purchase contracts or the failure of gathering and transportation systems. Any event that disrupts our anticipated physical supply of products could create a net open position that would expose us to risk of loss resulting from price changes.
We are also exposed to certain price risks that cannot be readily hedged, such as price risks for “basis differentials.” “Basis differentials” can be created to the extent that our purchase or sales contracts call for delivery of a petroleum product of a grade, at a location, or at a time that differs from the specific delivery terms of offsetting purchase and sales agreements or derivative instruments. If this occurs, we may not be able to use the physical or derivative commodity markets to fully hedge our price risk. Our exposure to price risks could impact our operational and financial results.
We also have a risk that employees involved in our trading and marketing operations may not comply at all times with our Comprehensive Risk Management Policy. Even with management oversight, we cannot ensure with certainty that all violations of our Comprehensive Risk Management Policy, particularly if deception or other intentional misconduct is involved, will be detected prior to our businesses being materially affected.
Conventional gas operations face continued competitive pressure from shale gas production.
The U.S. Energy Information Administration reports that higher estimates of domestic shale gas resources support increasing estimates of domestic natural gas production at prices below its previous estimates.
The abundant supply of shale gas, driven by horizontal drilling and hydraulic fracturing, places pressure on all conventional gas production, including sour gas production. In addition, facilities designed to remove hydrogen sulfide from a raw gas stream face increased competitive pressure because sour gas is more expensive to process than gas which does not contain sulfur.
Our construction of new assets is subject to regulatory, environmental, political, legal and economic risks which could adversely affect our business.
One of the ways we intend to continue to grow our business is through the construction of new assets. The construction of additions or modifications to our existing systems and of new assets involves numerous regulatory, environmental, political and legal uncertainties beyond our control. In addition, the construction of additions to our existing gathering and transportation assets may require us to obtain new rights-of-way prior to constructing new pipelines. We may be unable to obtain such rights-of-way to connect new petroleum product supplies to our existing gathering lines or capitalize on other attractive expansion opportunities. Additionally, it may become more expensive for us to obtain new rights-of-way or to renew existing rights-of-way. If the cost of renewing or obtaining new rights-of-way increases, or if we lose our existing rights-of-way through our inability to renew right-of-way contracts or otherwise, our results of operations, cash flows and financial condition could be adversely affected.
Changes in currency exchange rates could adversely affect our results of operations.
A portion of our revenue is generated from our operations in Canada, the U.K. and Mexico, which use the Canadian dollar, British pound and Mexican peso, respectively, as the functional currency. Therefore, changes in the exchange rate between the U.S. dollar and any of such foreign currencies could adversely affect our results of operations.
We are exposed to the creditworthiness and performance of our customers, suppliers and transactional counterparties, including our hedge counterparties, and any material nonpayment or nonperformance by one or more of these parties could adversely affect our financial and operational results.
There can be no assurance we have adequately assessed the creditworthiness of each of our existing or future customers, suppliers or transactional counterparties, including our hedge counterparties, or that there will not be a rapid or unanticipated deterioration in their creditworthiness, which may have an adverse impact on our financial condition and results of operations. There is no certainty that our counterparties will perform or adhere to existing or future contractual arrangements.
We manage our exposure to credit risk through credit analysis and credit monitoring procedures and policies, including credit support requirements for customers and counterparties to which we extend no or limited unsecured credit, such as letters of credit, prepayments and guarantees. However, these procedures and policies cannot fully eliminate counterparty credit risks, and to the extent our procedures and policies prove to be inadequate, our financial and operational results may be negatively impacted.
Some of our counterparties may be highly leveraged or have limited financial resources and will be subject to their own operating and regulatory risks and, even if our credit review and analysis mechanisms work properly, we may experience financial losses in our dealings with such parties. In addition, volatility in commodity prices might have an impact on many of our counterparties, which, in turn, could have a negative impact on their ability to meet their obligations to us and may also increase the magnitude of these obligations.
Any material nonpayment or nonperformance by our counterparties could require us to pursue substitute counterparties for the affected operations, reduce operations or provide alternative services. There can be no assurance that any such efforts would be successful or would provide similar financial and operational results.
Our business involves many hazards and operational risks, some of which may not be covered by insurance.
Leaks and other releases of hydrocarbons are possible in operations involving pipelines and tanks. Other possible operating risks include:
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the breakdown or failure of equipment, information systems or processes;
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the performance of equipment at levels below those originally intended (whether due to misuse, unexpected degradation or design, construction or manufacturing defects);
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failure to maintain adequate inventories of spare parts;
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operator error;
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labor disputes;
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disputes with interconnected facilities and carriers; and
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catastrophic events such as natural disasters, fires, explosions, fractures, acts of terrorism and other similar events, many of which are beyond our control.
These risks could result in substantial losses due to personal injury or loss of life, severe damage to, and destruction of, property and equipment and pollution or other environmental damage, and may result in curtailment or suspension of our related operations. We are not fully insured against all risks incident to our business. In addition, as a result of market conditions, premiums for our insurance could increase significantly. In some instances, insurance could become unavailable or available only for reduced amounts of coverage. If a significant accident or event occurs that is not fully insured, it could adversely affect our results of operations, cash flows and financial condition. Even if a significant accident or event is covered by insurance, we may still have responsibility for applicable deductibles, and in addition, the proceeds of any such insurance may not be paid in a timely manner. With a few exceptions, our customers have not agreed to indemnify us for losses arising from a release of petroleum products, and we may instead be required to indemnify our customers in the event of a release or other incident.
We may not be able to make acquisitions on economically acceptable terms, which may limit our ability to grow. In addition, any acquisition that we pursue will involve risks that may adversely affect our business.
As part of our business strategy, we have expanded our operations through acquisitions and may continue to do so. We cannot accurately predict the timing, size and success of our acquisition efforts. We may be unable to identify attractive acquisition candidates, negotiate acceptable purchase terms or obtain financing for these acquisitions on economically acceptable terms or because we are outbid by competitors. If we are unable to successfully acquire new businesses or assets, our future growth may be limited.
Any acquisition that we may pursue will involve potential risks, including:
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performance from the acquired businesses or assets that is below the forecasts we used in evaluating the acquisition;
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a significant increase in our indebtedness and working capital requirements;
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the inability to timely and effectively integrate the operations of recently acquired businesses or assets;
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the incurrence of substantial unforeseen environmental and other liabilities arising out of the acquired businesses or assets, including liabilities arising from the operation of the acquired businesses or assets prior to our acquisition;
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risks associated with operating in lines of business that are distinct and separate from our historical operations;
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loss of customers or key employees from the acquired businesses; and
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the diversion of management’s attention from other business concerns.
Any of these factors could adversely affect our ability to achieve anticipated levels of cash flows from our acquisitions, realize other anticipated benefits and meet our debt service requirements.
We are subject to the risks of doing business outside of the U.S.
The success of our business depends, in part, on continued performance in our non-U.S. operations. We currently have operations in Canada, Mexico and the U.K. In addition to the other risks described in this report on Form 10-K, there are numerous risks and uncertainties that specifically affect our non-U.S. operations. These risks and uncertainties include political and economic instability, changes in local governmental laws, regulations and policies, including those related to tariffs, investments, taxation, exchange controls, employment regulations and repatriation of earnings, and enforcement of contract and intellectual property rights. International transactions may also involve increased financial and legal risks due to differing legal systems and customs, including risks of non-compliance with U.S. and local laws affecting our activities abroad, including compliance with the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010. While these factors and the impact of these factors are difficult to predict, any one or more of them could adversely affect our financial and operational results.
We may incur significant costs and liabilities resulting from pipeline integrity programs and related repairs.
Pursuant to the Pipeline Safety Improvement Act of 2002, as reauthorized and amended by the Pipeline Inspection, Protection, Enforcement and Safety Act of 2006, the DOT, through the PHMSA, has adopted regulations requiring pipeline operators to develop and implement integrity management programs for pipelines located where a leak or rupture could do the most harm in “high consequence areas,” including high population areas, areas that are sources of drinking water, ecological resource areas that are unusually sensitive to environmental damage from a pipeline release and commercially navigable waterways, unless the operator effectively demonstrates, by risk assessment, that the pipeline could not affect the area. The integrity management regulations require operators, including us, to:
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perform on-going assessments of pipeline integrity on a recurring frequency schedule;
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identify and characterize applicable potential threats to pipeline segments that could impact a high consequence area;
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improve data collection, integration and analysis;
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repair and remediate the pipeline as necessary; and
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implement preventive and mitigating actions.
In addition, states have adopted regulations similar to existing DOT regulations for intrastate gathering and transmission lines. We currently estimate that we will incur an aggregate cost of approximately $6.5 million during 2015 to implement necessary pipeline integrity management program testing along certain segments of our pipelines required by existing DOT and state regulations. This estimate does not include the costs, if any, of any repair, remediation, preventative or mitigating actions that may be determined to be necessary as a result of the testing program, which costs could be substantial. At this time, we cannot predict the ultimate cost of compliance with these regulations, as the cost will vary significantly depending on the number and extent of any repairs found to be necessary as a result of the pipeline integrity testing. We will continue our pipeline integrity testing programs on an on-going basis to assess and maintain the integrity of our pipelines. The results of these tests could cause us to incur significant and unanticipated capital and operating expenditures for repairs or upgrades deemed necessary to ensure the continued safe and reliable operations of our pipelines and, consequently, result in a reduction in our revenue and cash flows from shutting down our pipelines during the pendency of such repairs or upgrades.
The Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 is due for re-authorization in 2015 and there are provisions in the Act of 2011 which could result in the promulgation of additional rules and regulations. There could be
changes to the pipeline safety laws and regulations that could require us to pursue additional capital projects or conduct maintenance programs on an accelerated basis which could result in increased operating costs that could be significant and have a material adverse effect on our financial position or results of operations.
Our cash flow depends, in part, on the available cash and distributions of NGL Energy, and we may fail to realize the anticipated benefits from our investment in NGL Energy Partners LP.
We do not control NGL Energy’s assets and operations, and the value of, and benefits from, our investment in NGL Energy are subject to all of the risks and uncertainties inherent in NGL Energy’s business including, without limitation, the following:
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NGL Energy may not have sufficient cash to enable it to pay minimum quarterly distributions on its common units, including the NGL common units owned by us (the "NGL Common Units");
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The amount of cash NGL Energy has available for distribution to its unitholders, including us, depends primarily on its cash flow rather than on its profitability, which may prevent it from making distributions, even during periods in which it realizes net income;
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Current conditions in the global capital and credit markets, and general economic pressures, may adversely affect NGL Energy’s financial position and results of operations;
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If NGL Energy does not successfully identify acquisition candidates, complete accretive acquisitions on economically acceptable terms, or adequately integrate the acquired operations into its existing operations, its future financial performance may be adversely affected and its growth may be limited;
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Increases in interest rates could adversely impact NGL Energy’s common unit price, its ability to issue equity or incur debt for acquisitions or other purposes, and its ability to make cash distributions at its intended levels;
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NGL Energy’s partnership agreement limits the fiduciary duties of NGL Energy’s general partner to NGL Energy’s unitholders, including us, and restricts the remedies available to the unitholders for actions taken by its general partner that might otherwise be breaches of fiduciary duty;
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Cost reimbursements to NGL Energy’s general partner may be substantial and could reduce its cash available to make quarterly distributions on the common units, including the NGL Common Units;
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NGL Energy’s partnership agreement requires that NGL Energy distribute all of its available cash, which could limit its ability to grow and make acquisitions; and
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Other factors discussed in NGL Energy’s Annual Report on Form 10-K and as are included from time to time in NGL Energy’s public announcements and other filings with the SEC.
To the extent that we desire to sell any of the NGL Common Units, our ability to sell units could be severely limited, both as to timing and amount, as a result of factors beyond our control. Also, the market price of the NGL Common Units may decline substantially before we sell the units.
For the reasons described above, NGL Energy may reduce, or have insufficient available cash to pay, cash distributions on its common units, including the NGL Common Units, and we may not realize an adequate return on our investment and we may incur losses on any sales of our investment in NGL Energy.
One of our subsidiaries acts as the general partner of a publicly traded limited partnership, Rose Rock. As such, this subsidiary’s operations may involve a greater risk of liability than ordinary business operations.
One of our subsidiaries acts as the general partner of Rose Rock, a publicly-traded limited partnership. This subsidiary may be deemed to have undertaken fiduciary obligations with respect to Rose Rock as the general partner and to the limited partners of Rose Rock. Activities determined to involve fiduciary obligations to other persons or entities typically involve a higher standard of conduct than ordinary business operations and, therefore, may involve a greater risk of liability, particularly when a conflict of interests is found to exist. Our control of the general partner of Rose Rock may increase the possibility of claims of breach of fiduciary duties, including claims brought due to conflicts of interest (including conflicts of interest that may arise between Rose Rock, on the one hand, and its general partner and that general partner’s affiliates, including us, on the other hand). Any liability resulting from such claims could be material.
A prolonged decline in index prices at Cushing relative to other index prices could reduce the demand for our transportation to, and storage in, Cushing.
Shifts in the overall supply of, and demand for, crude oil in regional, national and global markets, over which we have no control, can have an adverse impact on crude oil index prices in the markets we serve relative to other index prices. A prolonged decline in the WTI Index price, relative to other index prices, may cause reduced demand for our transportation to, and storage in, Cushing, which could have a material adverse effect on our business, results of operations and financial condition.
Adverse developments in our existing areas of operation could adversely impact our results of operations, cash flows and financial condition.
Our operations are focused on gathering, transporting, storing, processing and treating petroleum products and are principally located in the Midwest and Rocky Mountain supply regions of the U.S. and in Alberta, Canada. As a result, our results of operations, cash flows and financial condition depend upon the demand for our services in these regions. Due to our current lack of broad diversification in industry type and geographic location, adverse developments in our current segment of the midstream industry, or our existing areas of operation, could have a significantly greater impact on our results of operations, cash flows and financial condition than if our operations were more diversified.
We are subject to regulation by multiple governmental agencies, and the nature and degree of regulation from such agencies could adversely impact our business, results of operations and financial condition.
Our operations are subject to substantial regulation from multiple foreign and domestic federal, state, provincial and local authorities. These authorities regulate numerous aspects of our operations, including certain gathering systems, transportation pipelines, construction and maintenance of facilities and certain rate structures, among other things. We cannot predict the impact of any future revisions or changes in interpretation of existing laws or regulations or the adoption of new laws and regulations applicable to our businesses or when or whether any proposals of such revisions, interpretation changes or new laws or regulations may become effective. Revisions, interpretation changes or additional laws or regulations could influence our operating environment and may result in increased costs.
The White Cliffs Pipeline is subject to FERC rules and regulations. The FERC’s regulatory authority applies to the:
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transportation by common carrier of crude oil in interstate commerce, including, but not limited to:
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rates, operating terms and conditions of service; and
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accounts and records.
Regulatory actions in these areas can similarly affect new or expanded pipeline operations.
Our trucking fleet operations are subject to the Federal Motor Carrier Safety Regulations which are enacted, reviewed and amended by the FMCSA. Our fleet currently has an "acceptable" safety rating; however, if our safety rating were downgraded to "unsatisfactory", our business and results of operations could be adversely affected.
All federally regulated carriers safety ratings are measured through a program implemented by the FMCSA known as the Compliance Safety Accountability ("CSA") program. The CSA program measures a carrier's safety performance based on violations observed during roadside inspections as opposed to compliance audits performed by the FMCSA. The quantity and severity of any violations are compared to a peer group of companies of comparable size and annual mileage. If a company rises above a threshold established by the FMCSA, it is subject to action from the FMCSA. There is a progressive intervention strategy that begins with a company providing the FMCSA with an acceptable plan of corrective action that the company will implement. If the issues are not corrected, the intervention escalates to on-site compliance audits and ultimately an "unsatisfactory" rating and the revocation of the company's operating authority by the FMCSA could have an adverse effect on our business, results of operations and financial condition.
We may incur significant costs and liabilities in the future resulting from a failure to comply with new or existing environmental laws or regulations or an accidental release of hazardous substances, petroleum products or wastes into the environment.
Our operations are subject to federal and foreign, state, provincial and local environmental laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws include, for example:
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federal and comparable state and foreign laws that impose obligations related to air emissions;
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federal and comparable state and foreign laws that impose requirements for the handling, storage, treatment or disposal of solid and hazardous waste from our facilities;
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federal and comparable state and foreign laws that regulate the cleanup of hazardous substances that may have been released at properties currently or previously owned or operated by us or at locations to which our hazardous substances have been transported for disposal; and
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federal and comparable state and foreign laws that regulate discharges from our facilities require spill protection planning and preparation and set requirements for other actions for protection of waters.
Failure to comply with these laws and regulations, or newly adopted laws or regulations, may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial requirements and the issuance of orders enjoining future operations or imposing additional compliance requirements on such operations. Claims pursued under certain environmental laws impose strict, joint and several liability for costs required to clean up and restore sites where hazardous substances or petroleum products have been disposed or otherwise released. Provisions also exist that may require remediation or other compensation to pay for damages to natural resources. Moreover, it is not uncommon for individuals to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, petroleum products or waste products in the environment.
There is an inherent risk of incurring environmental costs and liabilities in connection with our operations due to our handling of crude oil and natural gas, air emissions and water discharges related to our operations and historical industry operations and waste disposal practices. For example, an accidental release from one of our facilities could subject us to substantial liabilities for environmental cleanup and restoration costs, claims made by individuals for personal injury, natural resource and property damages and fines or penalties for related violations of environmental laws or regulations. Moreover, the possibility exists that stricter laws, regulations or enforcement policies could significantly increase our operational or compliance costs and, the cost of any remediation that may become necessary. We may not be able to recover all or any of these costs from insurance and fines or penalties paid for compliance violations, whether alleged or proven, will not be covered by insurance.
Our storage operations are influenced by the overall forward market for crude oil, and certain market conditions may adversely affect our financial and operating results.
Our storage operations are influenced by the overall forward market for crude oil. A contango market (meaning that the price of crude oil for future delivery is higher than the current price) is associated with greater demand for crude oil storage capacity, because a party can simultaneously purchase crude oil at current prices for storage and sell at higher prices for future delivery. A backwardated market (meaning that the price of crude oil for future delivery is lower than the current price) is associated with lower demand for crude oil storage capacity, because a party can capture a premium for prompt delivery of crude oil rather than storing it for future sale. A prolonged backwardated market or other adverse market conditions could have an adverse impact on our ability to negotiate favorable prices under new or renewing storage contracts, which could have an adverse impact on our storage revenues. Finally, higher absolute levels of crude oil prices increase the costs of financing and insuring crude oil in storage, which negatively affects storage economics. As a result, the overall forward market for crude oil may have an adverse effect on our business, results of operations and financial condition.
An increase in interest rates could impact demand for our storage capacity.
There is a financing cost for a storage capacity user to own crude oil while it is stored. That financing cost is impacted by the cost of capital or interest rate incurred by the storage user, in addition to the commodity cost of the crude oil in inventory. Absent other factors, a higher financing cost adversely impacts the economics of storing crude oil for future sale. As a result, a significant increase in interest rates could adversely affect the demand for our storage capacity independent of other market factors.
Severe weather conditions and natural or man-made disasters could severely disrupt normal operations and have a material adverse effect on our business, financial condition, results of operations and cash flows.
We operate in various locations across the United States, Canada, Mexico and the United Kingdom which may be adversely affected by severe weather conditions and natural or man-made disasters. During periods of heavy snow, ice, rain or extreme weather conditions such as high winds, tornadoes and hurricanes or after other natural disasters such as earthquakes or wildfires, we may be unable to move our trucks between locations and our facilities may be damaged, thereby reducing our ability to provide services and generate revenues. These same conditions may cause serious damage or destruction to the property and operations of our customers. Such disruptions could potentially have a material adverse effect on our business, financial condition, results of operations and cash flows.
Climate change legislation and related regulatory initiatives could result in increased operating costs and reduced demand for our services.
The EPA has published its findings that emissions of GHGs are an endangerment to public health and the environment because such gases are contributing to the warming of the earth's atmosphere and other climatic changes. The EPA adopted regulations under existing provisions of the federal Clean Air Act that require entities that produce certain gases to inventory, monitor and report such gases. Additionally, the EPA adopted rules to regulate GHG emissions through construction and operating permit programs. A number of state and regional efforts have also emerged which are intended to address climate issues.
Canada does not currently have any federal legislation pending relating to the regulation of GHG emissions from the oil and gas industry. New federal regulations creating GHG performance standards for the transportation sector and for coal-fired electricity generation were introduced in 2012. The federal government has indicated that one of the next sectors that will be targeted by similar regulations will be the oil and gas industry. The adoption and implementation of any regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur additional costs to reduce emissions of GHGs associated with our operations or could adversely affect demand for the petroleum products we gather, treat or otherwise handle in connection with our services.
Although Canada has not enacted federal GHG legislation for the oil and gas industry, the province of Alberta has developed legislation regarding GHG emissions. The Specified Gas Emitters Regulation (SGER) requires large-emitting, established facilities (those that were in operation in the year 2000 that emit more than 100,000 tonnes of GHGs per year; includes several of SemCAMS' facilities) to reduce their emissions intensity by 12% below a 2003 to 2005 baseline. Alberta's intensity-based system focuses on improved production efficiency. GHG emissions are allowed to increase from year to year as a facility expands as long as the facility can successfully reduce the amount of GHGs per unit of production. Further limitations may be imposed in the future which could require additional SemCAMS' facilities to have to file annual GHG emissions reports, or which could increase the costs of compliance for SemCAMS' facilities.
Regulatory actions by the EPA or the passage of new climate change laws or regulations could result in increased costs to (i) operate and maintain our facilities, (ii) install new emission controls on our facilities and (iii) administer and manage our GHG compliance program. If we are unable to recover or pass through our costs to comply with such requirements, it could have a material adverse effect on our results of operations and financial condition. Further, climate change and GHG regulation could reduce demand for our services.
Loss of key employees could significantly reduce our ability to execute strategies.
Much of our future success depends on the continued availability and service of key personnel including the executive team and skilled employees in technical, operational and staff positions. Experienced personnel in the midstream industry are in high demand and competition for their talents is high. We depend on current and new key officers and employees to meet the challenges and complexities of our businesses. If any such officers or employees resign, or become unable to continue in their present roles and are not adequately replaced, or if we are unable to fill currently vacant positions, our business operations could be materially adversely affected. There can be no assurance that we will continue to attract and retain key personnel.
Difficulty in attracting and retaining qualified drivers in our crude oil trucking business could adversely affect our growth and profitability.
Maintaining a staff of qualified truck drivers is critical to the success of our operations. We have in the past experienced difficulty in attracting and retaining sufficient numbers of qualified drivers. Regulatory requirements, including the FMCSA’s CSA initiative, and an improvement in the economy could reduce the number of eligible drivers or require us to pay more to attract and retain drivers. A shortage of qualified drivers and intense competition for drivers from other companies could create difficulties in increasing the number of our drivers for any expansion in our fleet of trucks. If we are unable to continue to attract and retain a sufficient number of qualified drivers, we could have difficulty meeting customer demands, which could materially and adversely affect our growth and profitability.
A failure in our operational systems or cyber security attacks on any of our facilities, or those of third parties, may affect adversely our financial results.
Our business is dependent upon our operational systems to process a large amount of data and complex transactions. If any of our financial, operational, or other data processing systems fail or have other significant shortcomings, our financial results could be adversely affected. Our financial results could also be adversely affected if an employee causes our operational systems to fail, either as a result of inadvertent error or by deliberately tampering with or manipulating our operational systems.
In addition, dependence upon automated systems may further increase the risk that operational system flaws, employee tampering or manipulation of those systems could result in losses that are difficult to detect.
We have become more reliant on technology to help increase efficiency in our business. We use numerous technologies to help run our operations, and this may subject our business to increased risks. Any cyber security attack that affect our facilities, our customers and any financial data could have a material adverse effect on our business. In addition, a cyber attack on our customer and employee data may result in a financial loss, including potential fines for failure to safeguard data, and may negatively impact our reputation. Third-party systems on which we rely could also suffer system failure. Any of these occurrences could disrupt our business, result in potential liability or reputational damage or otherwise have an adverse effect on our financial results.
The threat or attack of terrorists aimed at our facilities could adversely affect our business.
The U.S. government has issued warnings that energy assets, specifically the nation’s pipeline infrastructure, may be future targets of terrorist organizations. Any future terrorist attack that may target our facilities, those of our customers or those of certain other pipelines could have a material adverse effect on our business. In addition, any governmental body mandated actions to prepare for, or protect against, potential terrorist attacks could require us to spend money or modify our operations.
We face intense competition in our gathering, transportation, processing, storage and marketing activities. Competition from other providers of those services that are able to supply our customers with those services at a lower price or on otherwise better terms could adversely affect our business and operating results.
We are subject to competition from other gathering, transportation, processing, storage and marketing operations that may be able to supply our customers with the same or comparable services at a lower price or otherwise on better terms. We compete with national, regional and local gathering, transportation and storage companies of widely varying sizes, financial resources and experience, including the major integrated oil companies. Our ability to compete could be harmed by numerous factors, including:
•
price competition;
•
the perception that another company can provide better service;
•
the availability of alternative supply points, or supply points located closer to the operations of our customers.
Some of our competitors have greater financial, managerial and other resources than we do, and control substantially more storage or transportation capacity than we do. Our competitors may expand their assets or operations, creating additional competition for the services we provide to our customers. In addition, our customers may develop their own gathering, transportation and storage systems or marketing operations in lieu of using ours. Our ability to renew or replace existing contracts with our customers at rates sufficient to maintain current revenues and cash flow could be adversely affected by the activities of our competitors and our customers.
Our profitability depends on the demand for the products we gather, transport, process and store in the markets we serve.
Any sustained reduction in demand for petroleum products in markets served by our midstream assets could result in a significant reduction in the volume of petroleum products that we gather, transport, process and store, thereby adversely affecting our results of operations, cash flows and financial condition. A reduction in demand can result from a number of factors including:
•
an increase in the price of products derived from petroleum products;
•
higher taxes, including federal excise taxes, crude oil severance taxes or sales taxes or other governmental or regulatory actions that increase, directly or indirectly, the cost of petroleum based products;
•
adverse economic conditions which result in lower spending by consumers and businesses on products derived from petroleum products;
•
effects of weather, natural phenomena, terrorism, war, or other similar acts;
•
an increase in fuel economy, whether as a result of a shift by consumers to more fuel efficient vehicles, technological advances by manufacturers or federal or state regulations;
•
decision by our customers or suppliers to use alternate service providers for a portion of all of their needs, operate in different markets not served by us, reduce operations or cease operations entirely; and
•
an increase in the use of alternative fuel sources such as ethanol, biodiesel, fuel cells, solar and wind power.
Because of the natural decline in production from existing wells in our areas of operation, our success depends on our ability to obtain new sources of supply of petroleum products, which is dependent on factors beyond our control. Any decrease in the volumes of these products that we gather could adversely affect our business and operating results.
The volumes that support our business are dependent on the level of production from wells connected to our operations, the production from which may be less than we expect as a result of a natural decline of producing wells over time and the shut-in of wells for economic or other reasons. As a result, in order to maintain or increase the amount of petroleum products that we handle, we must obtain new sources of petroleum products. The primary factors affecting our ability to obtain sources of these products include the level of successful drilling activity near our systems and our ability to compete for volumes from successful new wells.
We have no control over the level of drilling activity in our areas of operation, the amount of reserves associated with wells connected to our operations or the rate at which production from a well declines. In addition, we have no control over producers or their drilling or production decisions, which are affected by, among other things, the availability and cost of capital, prevailing and projected energy prices, demand for petroleum products, levels of reserves, geological considerations, environmental or other governmental regulations, the availability of drilling permits, the availability of drilling rigs, and other drilling, production and development costs.
Fluctuations in energy prices can also greatly affect the development of new petroleum product reserves and, to a lesser extent, production from existing wells. In general terms, energy prices fluctuate in response to changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control. Declines in energy prices could have a negative impact on exploration, development and production activity and, if sustained, could lead to a material decrease in such activity. Sustained reductions in exploration or production activity in our areas of operation would lead to reduced utilization of our assets and a reduced need for our marketing operations. Because of these factors, even if new reserves are known to exist in areas served by our assets, producers may choose not to develop those reserves. If reductions in drilling activity result in our inability to maintain the levels of petroleum products that we handle, it could have a material adverse effect on our business, results of operations and financial condition.
Our construction of new assets may not result in the anticipated revenue increases.
One of the ways we intend to continue to grow our business is through the construction of new assets. If we undertake such projects, they may not be completed on schedule or at the budgeted cost or at all. Moreover, our revenue may not increase immediately, or at all, upon the expenditure of funds on a particular project. For instance, if we expand a pipeline, the construction may occur over an extended period of time and we may not receive any material increases in revenue until the project is completed. Moreover, we may construct facilities to capture anticipated future growth in production in a region in which such growth does not materialize. Since we are not engaged in the exploration for, and the development of, natural gas and crude oil reserves, we do not possess reserve expertise and we often do not have access to third-party estimates of potential reserves in an area prior to constructing facilities in such area. To the extent we rely on estimates of future production in our decision to construct additions to our system, such estimates may prove to be inaccurate because of numerous uncertainties inherent in estimating quantities of future production. As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our results of operations, cash flows and financial condition.
We may not be able to renew or replace expiring storage and transportation contracts.
We have significant exposure to market risk at the time our existing storage and transportation contracts expire and are subject to renegotiation and renewal. The extension or replacement of existing contracts depends on a number of factors beyond our control, including:
•
the level of existing and new competition to provide storage and transportation services to our markets;
•
the macroeconomic factors affecting crude oil storage and transportation economics for our current and potential customers;
•
the balance of supply and demand, on a short-term, seasonal and long-term basis, in our markets;
•
the extent to which the customers in our markets are willing to contract on a long-term basis; and
•
the effects of federal, state or local regulations on the contracting practices of our customers.
Any failure to extend or replace a significant portion of our existing contracts, or extend or replace them at comparable rates, could have a material adverse effect on our business, results of operations, and financial condition.
A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies, or a change in policy by those agencies, could result in increased regulation of our assets, which could affect existing costs and rates.
Interstate transportation and gathering pipelines that do not provide interstate services are not subject to regulation by FERC. However, the distinction between FERC-regulated interstate pipeline transportation, on the one hand, and intrastate pipeline transportation, on the other hand, is a fact-based determination. The classification and regulation of our crude oil pipelines are subject to change based on future determinations by FERC, federal courts, Congress or regulatory commissions, courts or legislatures in the states in which we operate.
Our Kansas and Oklahoma gathering pipeline system carries crude oil owned by us and by third parties. We own all of the crude oil shipped on our pipeline system across state lines. We believe that the pipeline segments on which we provide service to third parties and the services we provide to third parties on the gathering pipeline system meet the traditional tests that FERC has used to determine that the pipeline services provided are not interstate commerce. We believe that the pipeline segments on which we transport only crude oil owned by us should not be subject to regulation by FERC under the ICA, or that these pipeline segments would qualify for waiver from FERC’s regulatory requirements, if applicable. However, we cannot provide assurance that FERC will not in the future, either at the request of other entities or on its own initiative, determine that some or all of our Kansas and Oklahoma gathering pipeline system and the services we provide on that system are within its jurisdiction, or that such a determination would not adversely affect our results of operations. If some or all of the gathering system were subject to FERC jurisdiction, and not otherwise exempt from any applicable regulatory requirements, for that portion of the gathering pipeline system we would be required to file a tariff with FERC, and if our tariff rates were subject to protest, provide a cost justification for the transportation rate subject to protest and provide service to all potential shippers without undue discrimination. In addition, if the services we provide on any segment(s) of our gathering system become regulated by FERC under the ICA, our services could be subject to a protest and/or complaint before FERC. If FERC were to determine, in response to a complaint, that our rates are unjust and unreasonable, we could be required to pay reparations and refunds dating to two years before the filing of the complaint. Furthermore, if in the future our services become subject to state regulation, they could be subject to a protest and/or complaint before a state commission with jurisdiction.
Competition for water resources or limitations on water usage for hydraulic fracturing could disrupt crude oil and natural gas production from shale formations.
Hydraulic fracturing is the process of creating or expanding cracks by pumping water, sand and chemicals under high pressure into an underground formation in order to increase the productivity of crude oil and natural gas wells. Water used in the process is generally fresh water, recycled produced water (which is a by-product of natural gas and liquids) extraction or salt water.
There is competition for fresh water from municipalities, farmers, ranchers and other industrial users. In addition, the available supply of fresh water can also be reduced directly by drought. Prolonged drought conditions increase the intensity of competition for fresh water.
Limitations on oil and gas producers’ access to fresh water may restrict their ability to use hydraulic fracturing and could reduce new production. Such disruptions could potentially have a material adverse impact on our business, financial condition, results of operations and cash flows.
Increased regulation of hydraulic fracturing could result in reductions or delays in crude oil and natural gas production in our areas of operation, which could adversely impact our business and results of operations.
Various federal, state and local initiatives are underway to investigate or regulate hydraulic fracturing which involves the pressurized injection of water, chemicals and other substances into rock formations to stimulate hydrocarbon production. The adoption of new laws or regulations imposing additional permitting, disclosures, restrictions or costs related to hydraulic fracturing could make drilling certain wells less economically attractive. As a result, the volume of crude oil and natural gas we gather, transport and store for our customers could be substantially reduced which could have an adverse effect on our business, results of operations, financial condition and ability to pay dividends to our stockholders.
Risks Related to Our Class A Common Stock
Our Class A Common Stock may experience significant price and volume fluctuations.
The market price of our Class A Common Stock may fluctuate significantly in response to various factors and events beyond our control, including the following:
•
the risk factors described in this report on Form 10-K;
•
our operating and financial results differing from that expected by securities analysts and investors;
•
the financial and stock price performance of our competitors or companies in our industry generally;
•
changes in accounting standards, policies, interpretations or principles;
•
changes in laws or regulations which adversely affect our industry or us;
•
general conditions in our customers’ industries; and
•
general economic conditions and conditions in the securities markets.
Item 1B.
Item 1B.
Unresolved Staff Comments
None.
Item 3.
Item 3.
Legal Proceedings
For information regarding legal proceedings, see the discussion under the captions "Bankruptcy matters", "Dimmit County, TX Claims", "Other matters" and "Environmental" in Note 17 of our consolidated financial statements beginning on page of this Form 10-K, which information is incorporated by reference into this Item 3.
Item 4.
Item 4.
Mine Safety Disclosures
Not applicable.
Executive Officers of the Registrant
Our executive officers are elected annually by, and serve at the discretion of, our Board of Directors. Set forth below is information concerning our executive officers.
Name
Age
Position
Carlin G. Conner
President and Chief Executive Officer and Director
Robert N. Fitzgerald
Senior Vice President and Chief Financial Officer
Candice L. Cheeseman
General Counsel and Secretary
Timothy R. O’Sullivan
Vice President, Corporate Planning and Strategic Initiatives
Peter L. Schwiering
Vice President and President of Rose Rock Midstream Crude, L.P.
Carlin G. Conner. Mr. Conner has served as President and Chief Executive Officer and a Director of SemGroup since April 2014. He has also served as Chairman of the Board of Directors, President and Chief Executive Officer of our subsidiary Rose Rock Midstream GP, LLC, the general partner of Rose Rock, since April 2014. From June 2012 until March 2014, Mr. Conner served as managing director of Oiltanking GmbH, an independent worldwide storage provider of crude oil, refined petroleum products, liquid chemicals and gases. He served as a member of the board of directors of the general partner of Oiltanking Partners, L.P., a publicly traded master limited partnership engaged in independent terminaling, storage and transportation of crude oil, refined petroleum products and liquefied petroleum gas (“Oiltanking Partners”), from March 2011 until March 2014, and was elected chairman in July 2011 in connection with the completion of Oiltanking Partners’ initial public offering. Mr. Conner also served as president and chief executive officer of Oiltanking Partner’s general partner from March 2011 to November 2012 and as president and chief executive officer of Oiltanking Holding Americas, Inc., a wholly owned subsidiary of Oiltanking GmbH from July 2006 to November 2012. Previously, from 2003 to 2006, he worked at Oiltanking GmbH’s corporate headquarters in Hamburg, Germany, where he was responsible for international business development and sat on the boards of several Oiltanking GmbH ventures. He joined Oiltanking Houston, L.P. in 2000. He began his career at GATX Terminals Corporation and served in various roles, including operations and commercial management. Mr. Conner served on the board of directors of NGL Energy Holdings LLC, the general partner of NGL Energy Partners LP, from April 2014 to October 2014. He graduated from McNeese State University with a Bachelor of Science degree in environmental science.
Robert N. Fitzgerald. Mr. Fitzgerald joined SemGroup in November 2009 and serves as SemGroup’s Senior Vice President and Chief Financial Officer. Mr. Fitzgerald has served as the Senior Vice President and Chief Financial Officer and a director of Rose Rock Midstream GP, LLC since August 2011. Prior to joining SemGroup, Mr. Fitzgerald served as chief financial officer from February 2008 to November 2009 of Windsor Energy Group, a private independent oil and gas exploration and development company. He has also served from December 2006 until February 2008 as executive vice president of LinkAmerica Corp. and from January 2003 until December 2006 as chief operating officer and chief financial officer of Arrow Trucking Company, both commodity transportation companies. From January 2000 until January 2003, he served as vice president, finance of Williams
Communications Group, a global communication company. Prior to that, Mr. Fitzgerald was with BP Amoco and Amoco Corporation for 20 years, working in various financial and operations positions in Tulsa, Oklahoma; Houston, Texas; Denver, Colorado; and Chicago, Illinois. Mr. Fitzgerald is currently a member of the American Institute of Certified Public Accountants, the Institute of Management Accountants and the Institute of Internal Auditors. He is a certified public accountant.
Candice L. Cheeseman. Ms. Cheeseman joined SemGroup in February 2010 and serves as SemGroup’s General Counsel and Secretary. Ms. Cheeseman has served as the General Counsel and Secretary of Rose Rock Midstream GP, LLC since August 2011. Prior to joining SemGroup Corporation, Ms. Cheeseman served as general counsel of Global Power Equipment Group Inc., a comprehensive provider of power generation equipment and maintenance services for energy customers, since May 2004. In September 2006, Global Power Equipment Group Inc. and its domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. Global Power Equipment Group and its subsidiaries emerged from bankruptcy protection in January 2008. Prior to Global Power, she was employed by WilTel Communications Group, an internet, data, voice and video service provider, where she served in a variety of capacities, including general counsel and secretary, commencing in November 2002. Ms. Cheeseman has been a practicing attorney for two decades serving in various capacities for Williams Communications, Marriott International and law firms in the Washington D.C. area.
Timothy O’Sullivan. Mr. O’Sullivan serves as Vice President, Corporate Planning and Strategic Initiatives of SemGroup, a position he has held since April 2010. From February 2005 until April 2010, he served as President and Chief Operating Officer of SemGas, L.P. Mr. O’Sullivan has served as the Vice President and a director of Rose Rock Midstream GP, LLC since August 2011. From 2001 until joining SemGroup Corporation, Mr. O’Sullivan worked for Williams Power Company where he was director of global gas and power origination. He was previously employed with Koch Industries, Inc. for 19 years where he served in various capacities in its natural gas division, including business development, marketing and trading, and executive management. Mr. O’Sullivan began his career as a staff accountant for Main Hurdman. Mr. O’Sullivan was a member of the board of directors of the Gas Processors Association and served on its Executive and Finance Committee.
Peter L. Schwiering. Mr. Schwiering serves as Vice President of SemGroup, a position he has held since February 2012, and as President of SemCrude, L.P., a position he has held since August 2009. Mr. Schwiering joined SemCrude, L.P. in 2000 as Vice President of Operations. Mr. Schwiering also serves as the Chief Operating Officer and a director of Rose Rock Midstream GP, LLC, a position he has held since August 2011. Prior to joining SemCrude, L.P., Mr. Schwiering worked for Dynegy Pipeline as manager of pipeline and commercial business. He also served with Sun Company for 25 years in various positions, last serving as the company’s manager of business development - Western Region, based in Oklahoma. Mr. Schwiering has over 40 years of experience in the energy industry.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our Class A Common Stock trades on the New York Stock Exchange under the ticker symbol “SEMG.” At January 31, 2015, we had 3,097 holders of record of our Class A Common Stock. The following table sets forth the high and low sales prices of our Class A Common Stock (New York Stock Exchange composite transactions) during the periods indicated.
Dividends
In January 2013, we announced our intention to pay a quarterly cash dividend to common stockholders beginning in the second quarter of 2013. This dividend is a pass-through of the majority of the cash distributions we receive from our interests in Rose Rock and NGL Energy. The dividend is based on the previous quarter's distributions received. We expect to continue paying a quarterly cash dividend for the foreseeable future.
Our credit agreement places the following restrictions on dividends:
•The dividend cannot exceed our available cash, as defined in the credit agreement;
•No default or event of default under the credit agreement has occurred or is continuing; and
•After giving effect to the dividend, the leverage ratio as determined under the credit agreement cannot exceed 4.00 to 1.00.
The following table sets forth the dividend paid in the quarter indicated. We had not paid any cash dividends on our common stock prior to the second quarter of 2013.
Performance Graph
Set forth below is a line graph comparing the cumulative total stockholder return on our Class A Common Stock with the cumulative total return of the S&P 500 Stock Index and the Alerian MLP Infrastructure Index ("AMZIX Index") for the period
from November 11, 2010 (the date our Class A Common Stock commenced trading on the New York Stock Exchange) to December 31, 2014. The AMZIX Index is a liquid, midstream-focused subset of the Alerian MLP index, comprised of 25 energy infrastructure master limited partnerships. The graph was prepared assuming $100 was invested on November 11, 2010 in our Class A Common Stock, the S&P 500 Stock Index and the AMZIX Index and distributions have been reinvested subsequent to the initial investment.
COMPARISON OF CUMULATIVE TOTAL RETURN
Among SemGroup Corporation, the S&P 500 Index
and the Alerian MLP Infrastructure Index
The above performance graph and related information shall not be deemed “soliciting material” or be deemed to be “filed” with the SEC, nor shall such information be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
Warrant Exercises
Pursuant to our plan of reorganization, in 2009 we issued warrants to purchase shares of our Class A Common Stock or, at the election of the warrantholder, shares of our Class B Common Stock, to certain of our pre-petition creditors. The warrants expired on November 30, 2014. During the year ended December 31, 2014, we issued 904,231 shares of our Class A Common Stock pursuant to warrant exercises (of this amount, 898,466 shares were issued during the fourth quarter of 2014). Such issuances were exempt from the registration requirements of the Securities Act pursuant to Section 1145 of the U.S. Bankruptcy Code.
Item 6.
Item 6. Selected Financial Data
Selected Consolidated Financial Data
The following table provides selected consolidated financial data as of and for the periods shown. The balance sheet data as of December 31, 2014, 2013, 2012, 2011 and 2010, and the statement of operations data for the years ended December 31, 2014, 2013, 2012, 2011 and 2010, have been derived from our audited financial statements for those dates and periods. The selected financial data provided below should be read in conjunction with “Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview of Business
Horizontal drilling and hydraulic fracturing increased the production of crude oil and natural gas in the U.S. As a result, there has been increased demand for the services of midstream companies such as SemGroup, who can gather, transport, process and store these products as they are moved from the wellhead to refiners, industrial users and consumers. We have responded to this demand with additional storage tanks, gas processing facilities and new crude oil gathering and transportation pipelines.
We, and our significant equity method investees, own gathering systems, transportation pipelines, processing plants, storage facilities and terminals in the Midwest and Rocky Mountain regions of the U.S. and in Alberta, Canada.
We maintain and operate storage, terminal and marine facilities at Milford Haven in the U.K. that enable customers to supply products to markets in the Atlantic Basin. We also operate a network of liquid asphalt cement terminals throughout Mexico.
How We Evaluate Our Operations
Our management uses a variety of financial and operational metrics to analyze our performance. We view these metrics as important factors in evaluating our profitability and review these measurements on at least a monthly basis for consistency and trend analysis. These metrics include financial measures such as Adjusted gross margin, operating expenses and Adjusted EBITDA and operating data including contracted storage capacity and sales, transportation and processing volumes.
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 cost basis, capital structure or the impact of fluctuating commodity prices. We define Adjusted gross margin as total revenues minus cost of products sold (exclusive of depreciation) 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.
Operating Expenses
Our management seeks to maximize the profitability of our operations, in part, by minimizing operating expenses. These expenses are comprised of salary and wage expense, utility costs, insurance premiums, taxes and other operating costs, some of which are independent of the volumes we handle.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before interest expense, income tax expense (benefit), depreciation and amortization and adjusted for selected items that SemGroup believes impact the comparability of financial results between reporting periods. We use Adjusted EBITDA as a supplemental performance measure to assess:
•
our operating performance as compared to that of other companies in our industry, without regard to financing methods, historical cost basis, capital structure or the impact of fluctuating commodity prices; and
•
the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
Note About Non-GAAP Financial Measures
Adjusted gross margin and Adjusted EBITDA are not financial measures presented in accordance with GAAP. We believe that the presentation of these non-GAAP financial measures will provide useful information to investors in assessing our financial condition and results of operations.
Operating income (loss) is the GAAP measure most directly comparable to Adjusted gross margin, and net income (loss) is the GAAP measure most directly comparable to Adjusted EBITDA. Our non-GAAP financial measures should not be considered as alternatives to the most directly comparable GAAP financial measures. Each of these non-GAAP financial measures has important limitations as an analytical tool because it excludes some, but not all, items that affect the most directly
comparable GAAP financial measure. You should not consider Adjusted gross margin or Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted gross margin and Adjusted EBITDA may be defined differently by other companies in our industry, our definitions of these non-GAAP financial measures may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
Management compensates for the limitations of Adjusted gross margin and Adjusted EBITDA as an analytical tool by reviewing the comparable GAAP measures, understanding the difference between Adjusted gross margin and Adjusted EBITDA, on the one hand, and operating income (loss) and net income (loss), on the other hand, and incorporating this knowledge into its decision-making processes. We believe that investors benefit from having access to the same financial measures that our management uses in evaluating our operating results.
The following table presents a reconciliation of operating income (loss) to Adjusted gross margin and net income (loss) to Adjusted EBITDA, the most directly comparable GAAP financial measures, on a historical basis for each of the periods indicated.
Business and Performance Drivers
We operate our business through six primary business segments: Crude, SemStream, SemLogistics, SemCAMS, SemMexico and SemGas. We generate revenue in these segments by using our assets to provide products and services to third parties and by selectively using our assets to support our marketing activities. We believe that the variety of our petroleum product assets creates opportunities for us and our customers that avoid seasonal fluctuations.
Certain factors are key to our operations. These include the safe, reliable and efficient operation of the pipelines and facilities that we own and operate, while meeting the regulations that govern the operation of our assets and the costs associated with such regulations. Our revenue is impacted by several factors, including:
Transportation and processing fees
Transportation and processing fees are fees charged to third parties based on volumes of product moved through our pipeline systems, trucking operations and processing facilities.
Service, Storage and Terminalling Fees
Storage and terminalling fees are fees charged to third parties for product storage or terminalling services provided by us and are based on leased shell capacity and volumes moved through our terminal facilities.
Petroleum Product Marketing
We intend to capture the normalized gross margin associated with the purchase and sale of petroleum products. Purchases, sales and derivative transactions related to this activity are tracked in our systems to the ultimate realization of profit. We seek to maintain limited net open positions to manage our exposure to commodity prices. Marketing transactions may only be entered into by persons delegated such authority by senior management, as provided in our Comprehensive Risk Management Policy. Each person authorized to make transactions is subject to internal volume and dollar limits, portfolios are subject to net open position and stop loss limits, and counterparties are subject to credit limits and provisions as approved by our credit department. See “Business-Risk Governance and Comprehensive Risk Management Policy” for more information on our Comprehensive Risk Management Policy.
Revenue
Our revenue is generated through the gathering, transportation, processing and storage of petroleum products. Our customers pay us fees based on volumes gathered, transported, processed and stored. We also generate revenue by marketing petroleum products.
We use futures, swaps and options contracts to manage our exposure to market changes in commodity prices, to protect our gross margins on our purchased petroleum products and to manage our liquidity risk associated with margin deposit requirements on our overall derivative positions. When purchasing petroleum products, we seek to manage our exposure to commodity price risk. As we purchase inventory from suppliers, we may establish a fixed or variable margin with future sales using one of the following methods:
•
we have already sold that product for physical delivery pursuant to sales contracts at a market index price,
•
we sell the product for future physical delivery pursuant to effectively back-to-back sales contracts, or
•
we enter into futures and swaps contracts on the NYMEX or over the counter (“OTC”) markets.
In addition, we may purchase put options or derivatives other than futures or swaps to hedge our inventory of petroleum products prior to our sale of such inventory.
Accounting Standards Codification ("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 affect the comparison between those periods.
Volumes
Generally, we expect revenue to increase or decrease in conjunction with increases or decreases in total volumes. Our total volumes are affected by various factors, including our physical storage or transportation capacity, our working capital and credit availability under our credit facilities to support petroleum product purchases and the availability of the supply of
petroleum product available for purchase, which is determined based primarily upon producer activity in areas near our asset base.
Commodity Prices
Our business is primarily fee based. As a result, our financial results are typically not correlated with increases and decreases in commodity prices. Our financial results, however, are positively correlated with the absolute difference between current (prompt) and future month petroleum product prices. That is, wide contango (when the prices for future deliveries are higher than current prices) spreads generally have a favorable impact on our results relative to a slightly contango, flat or backwardated (when the prices for future deliveries are lower than current prices) market.
Timing of Purchase and Sales
Our financial results are affected by the timing of the purchase and sale of petroleum products, such that financial results may not be comparable between periods. When we enter into an arrangement to purchase product, place the product in storage and resell the product in the future, our financial results do not reflect any related margin until the settlement of the product sale. Prior to the settlement of the product sale, our results reflect the cost of the product in our inventory. Differences in the timing of our product purchases and sales, especially if they extend over fiscal years or quarters, may result in sizable differences between our results over the comparable period.
Analysis of Business Segments
The following provides an overview of the makeup of revenue at each of our respective business segments.
Crude
Crude conducts business through its 2% general partner interest and a 55.2% limited partner interest in Rose Rock and Rose Rock's 51% ownership interest in White Cliffs and 50% ownership interest in Glass Mountain. These operations include crude oil transportation, storage, terminalling, gathering and marketing in Colorado, Kansas, Louisiana, Montana, New Mexico, North Dakota, Ohio, Oklahoma, Texas and Wyoming, for third-party customers as well as for itself.
Fee-Based Services
Rose Rock charges a capacity or volume-based fee for the unloading, transportation and storage of crude oil and related ancillary services. Rose Rock's fee-based services include substantially all of its operations in Cushing, Oklahoma and Platteville, Colorado, as well as trucking and a portion of the transportation services it provides on its Kansas and Oklahoma pipeline system. Some of Rose Rock's fee-based contracts are take-or-pay contracts, whereby the customer is required to pay Rose Rock a fixed minimum monthly fee regardless of usage. For the years ended December 31, 2014, 2013 and 2012, approximately 74%, 64% and 59%, respectively, of Rose Rock's Adjusted gross margin was generated by providing fee-based services to customers.
Fixed-Margin Transactions
Rose Rock purchases crude oil from a producer or supplier at a designated receipt point at an index price, less a transportation fee, and simultaneously sells an identical volume of crude oil at a designated delivery point to the same party at the same index price, thereby locking in a fixed margin that is, in effect, economically equivalent to a transportation fee. We refer to these arrangements as “fixed-margin” or “buy/sell” transactions. These fixed-margin transactions account for a portion of the Adjusted gross margin Rose Rock generates on its Kansas and Oklahoma pipeline system and through its Bakken Shale operations. For the years ended December 31, 2014, 2013 and 2012, approximately 10%, 16% and 20%, respectively, of its Adjusted gross margin was generated through fixed-margin transactions.
Marketing Activities
Rose Rock conducts marketing activities by purchasing crude oil for its own account from producers, aggregators and traders and selling crude oil to traders and refiners. Rose Rock's marketing activities account for a portion of the Adjusted gross margin it generates on its Kansas and Oklahoma pipeline system and through its Bakken Shale operations. For the years ended December 31, 2014, 2013 and 2012, approximately 16%, 20% and 21%, respectively, of its Adjusted gross margin was generated through marketing activities.
We mitigate the commodity price exposure of our crude oil 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 intended to lock in positive margins based on the timing, location or quality of the crude oil purchased and delivered or (ii) derivative contracts.
All of our marketing activities are subject to our Comprehensive Risk Management Policy, which establishes limits to manage risk and mitigate financial exposure.
More specifically, we use futures and swap contracts to manage our exposure to market changes in commodity prices, to protect our Adjusted gross margin on our purchased crude oil and to manage our liquidity risk associated with margin deposit requirements on our overall derivative positions. As we purchase inventory from suppliers, we may establish a fixed or variable margin with future sales by:
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selling a like quantity of crude oil for future physical delivery to create an effective back-to-back transaction; or
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entering into futures and swaps contracts on the NYMEX or OTC markets.
SemStream
Until December 31, 2012, SemStream was engaged in the residential propane supply business through its wholly-owned subsidiary, SemStream Arizona, with operations in Page and Payson, Arizona. In September 2012, we entered into a definitive agreement to sell those assets. The sale was finalized on December 31, 2012, after receiving the required approval by the Arizona Corporation Commission.
Earnings from our equity method investments in NGL Energy and NGL Energy Holdings LLC are reported in the SemStream segment.
SemLogistics
SemLogistics owns a petroleum products storage facility located on the north bank of Milford Haven on the west coast of Wales. The main activities of SemLogistics are the receipt, storage and redelivery of clean petroleum and crude oil products via sea-going vessels. SemLogistics’ revenue is based on fixed-fee storage tank leases and related services.
SemCAMS
SemCAMS operates majority-owned natural gas gathering and processing assets. All of SemCAMS’ assets are located in West-Central Alberta, in the heart of the Western Canadian Sedimentary Basin. SemCAMS’ revenue is based on fee-based throughput arrangements, which represent, in part, operating cost recovery from working interest owners in certain processing plants and is recorded when earned in accordance with the terms of the related agreement.
SemMexico
SemMexico operates a network of liquid asphalt terminals in Mexico. Operations include purchasing, producing, storing and distributing liquid asphalt cement products. SemMexico purchases asphalt from refineries in Mexico and also imports asphalt from the U.S. SemMexico’s revenue is based on contractual arrangements with customers for liquid asphalt cement.
SemGas
SemGas provides gathering and processing services to natural gas producers in the U.S. SemGas owns and operates gathering systems and processing plants in Kansas, Oklahoma and Texas.
Results of Operations
Consolidated Results of Operations
Revenue and expenses
Revenue and expenses are analyzed by operating segment below.
General and administrative expenses
General and administrative expenses of each corporate department are allocated to the segments based on criteria such as actual usage, headcount and estimates of effort or benefit. The method for allocating cost is based on the type of service being provided. For example, internal audit costs are based on an estimate of effort attributable to a segment. In contrast, accounting department costs are allocated based on the number of transactions processed for a given segment compared to the total number processed.
Interest expense
Interest expense increased in 2014 to $49 million from $25 million in 2013. The increase is primarily the result of incremental interest expense of $10 million related to $300 million of 7.50% senior unsecured notes SemGroup sold in June 2013 and $11 million related to $400 million of 5.625% senior unsecured notes Rose Rock sold in July 2014.
Interest increased in 2013 to $25 million from $9 million in 2012. This increase is due to the increase in the outstanding debt balance to $615 million at December 31, 2013, from $206 million at December 31, 2012. The increase in total outstanding debt is primarily attributable to the issuance of $300 million of 7.50% senior unsecured notes in the second quarter of 2013. Also contributing to the increase in total outstanding debt is an increase in the revolver balance at Rose Rock of $240 million related to the drop down of an aggregate of a two-thirds interest in SemCrude Pipeline, LLC in the first and fourth quarters of 2013. These increases are partially offset by a reduction in the outstanding SemGroup revolver balance of $131 million in 2013 from proceeds received from the drop downs.
Other expense/income
Other income increased in 2014 to $21 million from other expense of $46 million in 2013, primarily due to a gain on the sale of NGL Energy common units of $34 million offset by $13 million in losses due to the change in the fair value of our warrants in 2014 compared to $46 million of such losses in 2013.
Other expense increased in 2013 to $46 million from $21 million in 2012, primarily due to losses related to the change in the fair value of our outstanding warrants in each of those years.
Discontinued operations
On November 1, 2011, we contributed the primary operating assets of our SemStream segment to NGL Energy; however, at that time we did not contribute any of the assets or liabilities of SemStream’s Arizona residential business to NGL Energy. On September 12, 2012, we entered into a definitive agreement to sell those assets and liabilities. This sale was subject to regulatory approval by the Arizona Corporation Commission and closed on December 31, 2012 after that approval was granted.
Results of Operations by Reporting Segment
Crude
Adjusted Gross Margin
Adjusted gross margin in this segment is generated by providing fee-based services, by entering into fixed-margin transactions and through marketing activities. Revenues from fee-based services are included in service revenue, and revenues from fixed-margin and marketing activities are included in product revenue.
The following table shows the Adjusted gross margin generated by this segment’s fee-based services, fixed-margin transactions and marketing activities for the year ended December 31, 2014 (in thousands):
The following table shows the Adjusted gross margin generated by this segment’s fee-based services, fixed-margin transactions and marketing activities for the year ended December 31, 2013 (in thousands):
The following table shows the Adjusted gross margin generated by this segment’s fee-based services, fixed-margin transactions and marketing activities for the year ended December 31, 2012 (in thousands):
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.
2014 versus 2013
Revenue
Gross product revenue increased in 2014 to $3.2 billion from $2.8 billion in 2013. The increase was primarily due to an increase in the volume sold to 35.2 million barrels at an average sales price of $91 per barrel in 2014 from 28.8 million barrels at an average sales price of $97 per barrel in 2013.
The increase in sales volume was primarily the result of an increase in marketing activity (as defined above) to 19.1 million barrels in 2014, compared to 11.0 million barrels in 2013 and a decrease in buy/sell transactions (as defined above) to 16.1 million barrels in 2014, compared to 17.8 million barrels in 2013. The buy/sell transactions are used to achieve a transportation margin.
Gross product revenue was reduced by $2.0 billion in 2014 and $2.1 billion in 2013, in accordance with ASC 845-10-15.
Service revenue increased to $113 million in 2014 from $65 million in 2013. The increase was primarily due to additional trucking revenue of $41.6 million. Storage revenue decreased $2.9 million due to the conversion of 0.6 million barrels of storage capacity for operational requirements and marketing opportunities. Additional pipeline transportation and truck unloading revenue at Platteville, Colorado of $8.8 million and $0.7 million accounted for the remaining difference.
Costs of Products Sold
Costs of products sold increased in 2014 to $1.1 billion from $664 million in 2013. Costs of products sold were reduced by $2.0 billion and $2.1 billion in 2014 and 2013, respectively, in accordance with ASC 845-10-15. Costs of products sold increased due to the increase in the barrels sold, as described above, offset by a decrease in the average per barrel cost of crude to $90 for 2014 from $95 for 2013.
Operating Expense
Operating expense increased in 2014 to $81 million from $36 million in 2013, primarily due to crude oil trucking fleet acquisitions in 2013 and 2014. The increase included employment cost of $17.2 million, outside service from contract owner operators of $15.6 million, field expense of $6.4 million, maintenance and repair of $2.2 million and insurance and taxes of $2.0 million. Exclusive of amounts related to trucking, increases occurred in insurance and taxes, field expense, maintenance and repair and employment expense of $0.5 million, $0.3 million, $0.3 million and $0.2 million, respectively.
General and Administrative Expense
General and administrative expense increased in 2014 to $20 million from $17 million in 2013, due primarily to overhead allocation from SemGroup, employment expense and increased insurance expense of $3.2 million, $1.0 million and $0.4 million, respectively. These increases were partially offset by a $1.0 million decrease in professional fees.
Depreciation and Amortization Expense
Depreciation and amortization expense increased in 2014 to $40 million from $24 million in 2013. Approximately $4 million of the depreciation increase is due to a revision of the estimated useful life relating to a 164-mile section of the Kansas and Oklahoma pipeline system. An additional $7 million of the depreciation increase is due to project completions and the crude oil trucking fleet acquisitions in 2013 and 2014. Amortization increased in 2014 to $6 million from $1 million in 2013 due to contracts acquired as part of the crude oil trucking fleet acquisitions in 2013 and 2014.
Earnings from Equity Method Investment
Crude's equity method investments are White Cliffs and Glass Mountain Pipeline. The increase in earnings from equity method investments in 2014 to $62 million from $45 million in 2013 is attributable to increased volume transported by White Cliffs and the completion of the Glass Mountain Pipeline in 2014.
2013 versus 2012
Revenue
Gross product revenue increased in 2013 to $2.8 billion from $2.1 billion in 2012. The increase was primarily due to an increase in the volume sold to 28.8 million barrels at an average sales price of $97 per barrel in 2013 from 23.2 million barrels at an average sales price of $92 per barrel in 2012.
The increase in sales volume was primarily the result of an increase in buy/sell transactions (as defined above) to 17.8 million barrels in 2013 compared to 15.4 million barrels in 2012 and marketing activity (as defined above) to 11.0 million barrels in 2013, compared to 7.8 million barrels in 2012. The buy/sell transactions are used to achieve a transportation margin.
Gross product revenue was reduced by $2.1 billion in 2013 and $1.6 billion in 2012, in accordance with ASC 845-10-15.
Service revenue increased to $65 million in 2013 from $44 million in 2012. The recently acquired crude oil trucking fleet accounted for $14 million of the increase. New storage tanks that came on line in 2012 and 2013, additional pump over activity in Cushing, Oklahoma, additional truck unloading revenue at Platteville, Colorado and the Wattenberg Oil Trunkline accounted for the remaining increase.
Costs of Products Sold
Costs of products sold increased in 2013 to $664 million from $547 million in 2012. Costs of products sold were reduced by $2.1 billion and $1.6 billion in 2013 and 2012, respectively, in accordance with ASC 845-10-15. Costs of products sold increased in 2013 due to the increase in the barrels sold, as described above, combined with an increase in the average per barrel cost of crude to $95 for 2013 from $90 from 2012.
Operating Expense
Operating expense increased in 2013 to $36 million from $24 million in 2012. The increase is due to the newly acquired crude oil trucking fleet in 2013. The increase included outside services from contract owner operators of approximately $5.0 million employment costs of $3.5 million and fuel expense of $2.0 million.
General and Administrative Expense
General and administrative expense increased in 2013 to $17 million from $13 million in 2012, due primarily to increased overhead allocation from SemGroup, professional fees and employment expense of $2.0 million, $1.3 million and $1.1 million, respectively.
Depreciation and Amortization Expense
Depreciation and amortization expense increased in 2013 to $24 million from $12 million in 2012. Approximately $3.4 million of the increase is due to a revision of the estimated useful life relating to a 78-mile section of the Kansas and Oklahoma pipeline. Amortization expense increased in 2013 to $1 million from zero in 2012 due to a contract acquired as part of the crude oil trucking fleet acquisition in 2013.
Earnings From Equity Method Investment
Crude’s equity method investments are White Cliffs and Glass Mountain Pipeline. The increase in earnings from equity method investments in 2013 to $45 million from $36 million in 2012 is attributable to increased volume transported by White Cliffs. The Glass Mountain Pipeline was not completed until 2014.
SemStream
On November 1, 2011, we contributed the primary operating assets of our SemStream segment to NGL Energy in exchange for a limited partnership interest and a general partnership interest in NGL Energy and cash. We did not contribute any of the assets or liabilities of SemStream's Arizona residential business to NGL Energy. On September 12, 2012, we entered into a definitive agreement to sell the assets and liabilities of SemStream's Arizona residential business, subject to regulatory approval by the ACC and classified the operations of SemStream's Arizona residential business as discontinued. In December 2012, the ACC granted SemStream regulatory approval to proceed with the sale which closed on December 31, 2012.
We include our share of NGL Energy's earnings on a one quarter lag because we do not receive their financial statements in sufficient time to apply the equity method to the current period. In addition, our limited partnership interest was diluted in connection with NGL Energy equity offerings and equity issued as consideration for acquisitions in 2014 and 2013. Accordingly, we recorded non-cash gains of $29.0 million and $26.9 million for the years ended December 31, 2014 and 2013, respectively, related to these transactions.
SemLogistics
2014 versus 2013
Revenue
Revenue increased in 2014 to $13 million from $12 million in 2013. Revenue increased as a result of higher storage rates, largely offset by lower volume of leased storage. High crude oil prices and backwardated market conditions (i.e., prices for future deliveries are lower than current prices) existed during much of 2014. Crude oil prices peaked in June 2014 and then dropped throughout the balance of the year falling approximately 50% by the end of the year. The result was a market in contango (i.e., prices for future deliveries are higher than current prices). Contango stimulates demand for storage and we have seen increased interest in contract renewals and interest in long-term contracts.
In addition, 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.
Operating Expense
Operating expense increased in 2014 to $8 million from $7 million in 2013. This increase is primarily the result of higher employee and maintenance costs of $0.7 million and $0.1 million, respectively.
Gain on Disposal or Impairment
We recorded a gain of $2 million during 2014 as a result of the dissolution of a SemLogistics affiliate. This intercompany gain is offset by a loss of an equal amount in consolidation.
2013 versus 2012
Revenue
Revenue remained unchanged at $12 million in 2013 and 2012.
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 reviewed this analysis in the fourth quarter of 2012 and again concluded that impairment was not warranted.
Operating Expense
Operating expense increased in 2013 to $7 million from $6 million in 2012. This increase is primarily the result of higher plant maintenance costs due to deferral of works in 2012.
General
In every other category of expense, the amounts for the year ended 2013 are roughly equivalent to those for the year ended 2012.
SemCAMS
2014 versus 2013
Revenue
Revenue decreased in 2014 to $177 million from $198 million in 2013. This decrease is primarily due to turnaround costs which are recorded as revenue when they are recoverable from the producers who use the plants and outage repair recoveries of $28.5 million and $2.4 million, respectively, in 2013 which did not occur in 2014, and foreign exchange loss of $12.7 million. This decrease was offset, in part, by higher capital fees earned, higher general operating cost flow through expense recoveries, and higher maintenance capital recoveries of $10.9 million, $3.2 million, and $3.7 million, respectively, along with revenues for tie-in fees of $2.2 million, and other miscellaneous revenue of $1.8 million.
Operating Expense
Operating expense decreased in 2014 to $115 million from $150 million in 2013. This decrease is primarily related to the absence of turnaround and outage repair costs in 2014 of $28.5 million and $2.4 million, respectively. Other decreases include power of $5.1 million and operating incentive costs of $4.7 million, offset, in part, by higher costs for salaries, materials, and contract labor of $4.4 million, $4.3 million and $2.9 million, respectively. Foreign exchange changes reduced operating expense by $8.2 million in 2014 compared to 2013.
General and Administrative Expense
General and administrative expense increased in 2014 to $17 million from $15 million in 2013. This increase is primarily the result of increased incentive compensation and salary costs of $2.9 million and $0.4 million, respectively, offset by lower foreign exchange changes of $1.3 million.
Depreciation and Amortization Expense
Depreciation and amortization expense increased in 2014 to $14 million from $11 million in 2013. Of this increase, $2.4 million relates to capital projects that became operational in 2014, in addition to $2.2 million of accelerated depreciation for tie-in activities, both offset by a foreign exchange gain of $1.0 million.
2013 versus 2012
Revenue
Revenue decreased in 2013 to $198 million from $223 million in 2012. This decrease is primarily the result of turnaround costs which are recorded as revenue when they are recoverable from the producers who use the plants. Approximately $28.5 million of such costs are included in revenue for 2013, compared to $63.1 million in 2012. We also earn revenue by charging the producers a fee for processing the recoverable costs. Higher operating costs flow-through unrelated to turnaround activity ($15.0 million) were offset, in part, by foreign exchange changes ($3.5 million) in 2013 compared to 2012.
Operating Expense
Operating expense decreased in 2013 to $150 million from $174 million in 2012. This decrease is primarily related to turnaround costs which were $28.5 million in 2013 compared to $63.1 million in 2012. This decrease was offset, in part, by
higher contract services, operating incentives and power costs of $5.3 million, $5.0 million and $2.9 million, respectively. Foreign exchange changes reduced operating expense by $3.7 million in 2013 compared to 2012.
General
In every other category of expense, the amounts for the year ended 2013 are roughly equivalent to those for the year ended 2012.
SemMexico
2014 versus 2013
Revenue
Revenue increased in 2014 to $291 million from $243 million in 2013. Higher volume (404 thousand metric tons versus 348 thousand metric tons) accounts for over 80% of this increase and higher sales prices ($713/metric ton versus $685/metric ton) accounts for 20% of the increase.
Costs of Products Sold
Costs of products sold increased in 2014 to $252 million from $210 million in 2013 due to higher volume described above. On a per metric ton basis, the cost per metric ton in 2014 increased to $621/metric ton compared to $601/metric ton in 2013.
Operating Expense
Operating expense increased in 2014 to $11 million from $9 million in 2013. This increase is primarily the result of an increase in field expenses (primarily diesel fuel) of approximately $1.0 million.
General and Administrative Expense
General and administrative expense increased in 2014 to $12 million from $11 million in 2013. This increase is primarily the result of increased incentive compensation of $1.0 million and an increase in salaries, commissions and severance payments of approximately $0.5 million.
2013 versus 2012
Revenue
Revenue decreased in 2013 to $243 million from $264 million in 2012. Lower volume (348 thousand metric tons versus 378 thousand metric tons) accounts for 92% of this decrease and lower sales prices ($685/metric ton versus $691/metric ton) accounts for the remaining 8% of the decrease.
Costs of Products Sold
Costs of products sold decreased in 2013 to $210 million from $237 million in 2012. On a per metric ton basis, the cost per metric ton in 2013 decreased to $601/metric ton compared to $627/metric ton in 2012.
Operating Expense
Operating expense increased in 2013 to $9 million from $8 million in 2012. This increase is primarily the result of an increase in field expenses (primarily diesel fuel) of $0.9 million and an increase in salary expense of $0.3 million.
General and Administrative Expense
General and administrative expense increased in 2013 to $11 million from $9 million in 2012. This increase is primarily the result of increased incentive compensation and sales commissions of $1.0 million.
SemGas
2014 versus 2013
Revenue
Revenue increased in 2014 to $380 million from $231 million in 2013 due to higher volume (106,902 MMcf versus 53,761 MMcf) and higher average natural NYMEX price of $4.41/MMbtu versus $3.65/MMbtu and a higher average NGL basket price of $0.96/gallon versus $0.88/gallon. The increase was also affected by higher prices and increased fees ($37 million versus $3 million). The increase in revenue is primarily due to increased volume in northern Oklahoma and increased service contracts.
Costs of Products Sold
Costs of products sold increased in 2014 to $277 million from $170 million in 2013. The increase is attributable to the increased volume generated in northern Oklahoma.
Adjusted Gross Margin
The following table presents a reconciliation of operating income to Adjusted gross margin, the most directly comparable GAAP financial measure for each of the periods indicated.
Operating Expense
Operating expense increased in 2014 to $32 million from $20 million in 2013. This increase is due to increases in equipment lease ($4.2 million), employment expense ($2.4 million), field expense (which includes materials and supplies, lubricants, water disposal, electricity and fuel) ($1.7 million), outside services ($1.5 million), insurance ($1.4 million) and maintenance/repair ($0.8 million). All increases are primarily driven by the growth in volume and assets in northern Oklahoma.
General and Administrative Expense
General and administrative expense increased in 2014 to $9 million from $8 million in 2013. This increase is due primarily to employment costs and higher corporate allocations of approximately $1.1 million and $0.4 million, respectively, offset by a decrease of $0.2 million in outside services. All increases are primarily driven by the growth in volume and assets in northern Oklahoma.
Depreciation and Amortization Expense
Depreciation and amortization expense increased in 2014 to $26 million from $15 million in 2013. The increase is due to the 2013 Chesapeake acquisition and expansion in northern Oklahoma.
Loss on Disposal of Long-Lived Assets
Loss on disposal of long-lived assets increased in 2014 to $20 million from $665 thousand in 2013, related to the sale of certain natural gas gathering assets in eastern Oklahoma. These assets were subject to contract renewal risk at the end of 2014 and were viewed as non-core due to their limited growth potential.
2013 versus 2012
Revenue
Revenue increased in 2013 to $231 million from $128 million in 2012 due to higher volume (53,761 MMcf versus 34,276 MMcf) and higher sales prices ($4.29/Mcf versus $3.73/Mcf). The price per Mcf shown is the revenue derived from the sale of natural gas and natural gas liquids divided by total wellhead volume during the period. The increase in revenue is primarily due to increased volume in northern Oklahoma.
Costs of Products Sold
Costs of products sold increased in 2013 to $170 million from $101 million in 2012. The increase is attributable to the increased volume generated in northern Oklahoma.
Adjusted Gross Margin
The following table presents a reconciliation of operating income to Adjusted gross margin, the most directly comparable GAAP financial measure for each of the periods indicated.
Operating Expense
Operating expense increased in 2013 to $20 million from $13 million in 2012. This increase is due to increases in equipment lease ($2.6 million), field expense ($1.8 million), outside services ($0.8 million), incentive compensation ($0.7 million), salaries and wages ($0.6 million) and maintenance/repair ($0.4 million). All increases are primarily driven by the growth in volume and assets in northern Oklahoma.
General and Administrative Expense
General and administrative expense increased in 2013 to $8 million from $6 million in 2012. This increase is due to increases in incentive compensation ($1.0 million), salaries and wages ($0.3 million), insurance and taxes ($0.3 million), other employee related expense ($0.2 million) and intercompany expense ($0.2 million). All increases are primarily driven by the growth in volume and assets in northern Oklahoma.
Depreciation and Amortization Expense
Depreciation and amortization expense increased in 2013 to $15 million from $7 million in 2012. This increase is due to the Mid-America Midstream Gas Services acquisition in August 2013.
Loss on Disposal of Long-Lived Assets
Loss on disposal of long-lived assets increased in 2013 to $665 thousand from $46 thousand in 2012, related to the transfer of equipment from Hopeton, OK to Sherman, TX.
Other and Eliminations
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.
Loss on Disposal or Impairment
Loss on disposal or impairment of long-lived assets increased in 2014 to $16 million from zero in 2013. This increase is due primarily to an impairment charge of approximately $12 million related to leaseholds of unproved oil and gas properties. (See Note 7 of our consolidated financial statements beginning on Page of this Form 10-K for additional information.) The remaining $4 million increase relates to intercompany balances which were written off.
Liquidity and Capital Resources
Sources and Uses of Cash
Our principal sources of short-term liquidity are cash generated from our operations and borrowings under our revolving credit facilities. The consolidated cash balance on December 31, 2014 (including restricted cash) was $47.6 million. Of this amount, $20.8 million was held in Canada and may be subject to tax if transferred to the U.S., and $3.8 million is restricted cash set aside for settlement of pre-petition claims. Potential sources of long-term liquidity include issuances of debt securities and equity securities and the sale of assets. Our primary cash requirements currently are operating expenses, capital expenditures, our quarterly dividends and quarterly distributions to unitholders of our subsidiary, Rose Rock. In general, we expect to fund:
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operating expenses, maintenance capital expenditures and cash dividends and distributions through existing cash and cash from operating activities;
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expansion capital expenditures and any working capital deficits through cash on hand, borrowings under our credit facilities and the issuance of debt securities and equity securities;
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acquisitions through cash on hand, borrowings under our credit facilities and the issuance of debt securities and equity securities; and
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debt principal payments through cash from operating activities and refinancings when the credit facilities become due.
Our ability to meet our financing requirements and fund our planned capital expenditures will depend on our future operating performance and distributions from our equity investments, which will be affected by prevailing economic conditions in our industry. In addition, we are subject to conditions in the debt and equity markets for any issuances of debt securities and equity securities, including common units in Rose Rock. There can be no assurance we will be able or willing to access the public or private markets in the future. If we would be unable or unwilling to access those markets, we could be required to restrict future expansion capital expenditures and potential future acquisitions.
We believe our cash from operations and our remaining borrowing capacity allow us to manage our day-to-day cash requirements, distribute our quarterly dividends, distribute the minimum quarterly distribution on Rose Rock's outstanding common units and meet our capital expenditures commitments for the coming year.
The following table summarizes our changes in unrestricted cash for the periods presented:
Operating Activities
The components of operating cash flows can be summarized as follows:
2014 Compared to 2013
Non-cash expenses increased to $153.0 million in 2014 from $67.7 million in 2013. Significant changes from prior year include:
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$72.4 million increase in deferred tax expense primarily due to the release of the valuation allowance on our net operating loss carryforward in 2013,
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$32.8 million increase in loss on disposal or impairment of long-lived assets, net, primarily due to a $20.1 million loss on the sale of certain natural gas gathering assets in Eastern Oklahoma and an $11.9 million impairment charge on leaseholds of unproved oil and gas properties located in Kansas,
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$32.0 million increase in depreciation and amortization primarily due to capital projects placed in-service, amortization of intangible assets acquired during 2014 and 2013 and revisions of the useful lives of certain sections of the Kansas and Oklahoma pipeline,
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$21.6 million increase in distributions from equity method investees and an $11.7 million increase in earnings from equity method investments, including distributions and earnings from Glass Mountain which was placed in-service in 2014 and the partial year impact of the White Cliffs expansion which was completed in August 2014,
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$34.2 million gain on the sale of common units of equity method investee related to the disposition of common units of NGL Energy,
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$33.0 million decrease in losses on the fair value of warrants which expired in November 2014, and
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$5.7 million increase in inventory valuation adjustments due to decreases in crude oil prices to levels below our carrying values.
Changes in operating assets and liabilities during the year ended December 31, 2014 relative to the prior year consisted primarily of:
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$37.4 million decrease in accounts payable, including payable to affiliates, and accrued liabilities primarily due to decreases in commodity prices and timing of payments partially offset by increased interest payable on our Rose Rock senior unsecured notes,
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$17.9 million decrease in accounts receivable, including receivable from affiliates, due to decreases of our Crude segment primarily from declining commodity prices, partially offset by increases in receivables of our SemGas segment due to increased revenues in Northern Oklahoma, and
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$6.2 million increase in inventory primarily due to increased inventory of our SemMexico segment.
2013 Compared to 2012
Non-cash expenses increased to $67.7 million in 2013 from $62.0 million in 2012. Significant changes from prior year include:
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$25.1 million increase in expense from the change in the fair value of warrants due to increasing market prices,
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$24.5 million increase in deferred tax benefit primarily due to the release of the valuation allowance on our net operating loss carryforward,
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$17.8 million increase in depreciation and amortization primarily due to capital projects placed in-service and amortization of intangible assets acquired during 2013,
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$26.9 million decrease due to a non-cash gain recognized on the issuance of equity by our investee, which diluted our ownership interest,
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$16.4 million increase in equity earnings from investments,
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$6.4 million decrease in gains on the disposal or impairment of long-lived assets, net,
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$2.2 million increase in net unrealized gains related to derivative instruments, and
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$2.0 million increase in currency gains.
Changes in operating assets and liabilities during the year ended December 31, 2013 relative to the prior year consisted primarily of:
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$49.9 million increase in accounts receivable including receivable from affiliates due primarily to a $50.8 million increase at Rose Rock related to marketing and buy/sell activities around our Bakken Shale operations and Kansas and Oklahoma pipeline system, which are driven by demand in those areas and our ability to capture value related to changing market conditions, and the addition of trucking operations acquired in the Barcas Field Services, L.L.C. acquisition,
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$11.4 million increase in inventory due primarily to a $5.9 million increase at Rose Rock from higher crude oil prices and a $3.2 million increase for SemMexico related to increased inventory to meet higher demand,
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$29.5 million decrease in restricted cash due to payments made to settle liabilities to pre-petition creditors,
•
$9.4 million decrease in other current assets due a reduction in prepaid expenses at SemCAMS as power prepayments are no longer required due to a change in provider,
•
$93.3 million increase in accounts payable, including payable to affiliates, and accrued liabilities due primarily to a $53.8 million accounts payable increase at Rose Rock related to marketing and buy/sell activity, a $19.0 million accounts payable and accrued liabilities increase at SemGas related to revenue distribution payables and capital expenditures from increased northern Oklahoma activity, and
•
$29.6 million decrease in payables to pre-petition creditors (due to settlement payments).
The increases in receivable from and payable to affiliates primarily relate to business acquisitions of our equity method investee, NGL Energy, through which certain customers and suppliers have become related parties.
Investing Activities
For the year ended December 31, 2014, we had net cash outflows of $290.2 million, primarily as a result of $270.5 million in capital expenditures, $71.1 million in contributions to equity method investments and $44.5 million in payments to acquire crude oil trucking assets. These cash outflows were offset, in part, by cash inflows of $79.7 million in proceeds from
the sale of common units of equity method investee, $11.7 million in distributions in excess of equity in earnings of affiliates and $4.4 million in proceeds from the sale of long-lived assets. Capital expenditures included our SemGas segment's Northern Oklahoma gas gathering and processing expansion and our Crude segment's Wattenberg Oil Trunkline extension. Contributions to equity method investments related to the White Cliffs Pipeline expansion and completion of the Glass Mountain Pipeline.
For the year ended December 31, 2013, we had net cash outflows of $738.4 million, primarily as a result of $362.5 million of payments to acquire Barcas Field Services, L.L.C. and Mid-America Midstream Gas Services, L.L.C., $215.6 million of capital expenditures and $173.9 million of contributions to equity method investments. Capital expenditures primarily related to SemGas, SemCAMS, and Crude expansion projects. Contributions to equity method investments primarily related to the Glass Mountain Pipeline and the White Cliffs Pipeline expansion.
For the year ended December 31, 2012, we had net cash outflows of $161.9 million, primarily as a result of $119.3 million in capital expenditures and $78.3 million of contributions to equity method investments. Capital expenditures related primarily to Rose Rock's Cushing expansion projects, SemGas' Northern Oklahoma expansion projects and well connects and the Wattenburg Oil Trunkline. Contributions to equity method investments represent investments primarily in the Glass Mountain Pipeline. The capital expenditures and investments in the Glass Mountain Pipeline were offset by $12.3 million in proceeds from the sale of the assets and liabilities of SemStream’s Arizona residential business in December 2012 and $17.3 million of distributions in excess of equity earnings driven by $8.1 million of distributions from White Cliffs and $9.2 million of distributions received from NGL Energy.
Financing Activities
For the year ended December 31, 2014, we had net cash inflows of $73.3 million, primarily as a result of $152.0 million of net borrowings on debt ($1.3 billion of borrowings, net of $1.1 billion of principal payments), $44.2 million of dividends paid, $28.5 million of Rose Rock cash distributions to noncontrolling interests and $8.7 million of payments related to debt issuances. Net borrowings were primarily used to fund acquisitions and capital expenditures. Debt issuance costs primarily related to the issuance of Rose Rock's senior unsecured notes.
For the year ended December 31, 2013, we had net cash inflows of $561.1 million, primarily as a result of $409.1 million of net borrowings on debt ($1.3 billion of borrowings, net of $859.4 million of principal payments), $210.2 million of proceeds from issuances of equity by our subsidiary, Rose Rock, $25.4 million of dividends paid, $17.6 million of Rose Rock cash distributions to noncontrolling interests and $14.9 million of payments related to debt issuances. Net borrowings were primarily used to fund acquisitions and capital expenditures. Proceeds from issuances of equity by Rose Rock were used to fund Rose Rock's acquisition of interests in SemCrude Pipeline from SemGroup or to pay balances on Rose Rock's revolving credit facility. Payments related to debt issuances were incurred in the issuance of 7.5% senior notes by SemGroup and amendments to the Rose Rock and SemGroup revolving credit facilities, which included increasing borrowing capacity, extending the term, modifying covenants and reducing certain rates and fees.
For the year ended December 31, 2012, we had net cash inflows of $86.5 million, substantially all of which related to borrowings on long-term debt of $318 million, principal payments of $222.1 million and partnership distributions of $8.5 million.
Long-term Debt
SemGroup Senior Unsecured Notes
On June 14, 2013, we completed an offering of $300 million of 7.50% senior unsecured notes due 2021 ("Notes"). The Notes are governed by an indenture, as supplemented, between the Company and its subsidiary Guarantors and Wilmington Trust, N.A., as trustee (the “Indenture”). The Indenture includes customary covenants and events of default.
At December 31, 2014, we were in compliance with the terms of the Indenture.
SemGroup Revolving Credit Facility
At December 31, 2014, we had $35.0 million of cash borrowings outstanding under our $500 million revolving credit facility. In addition, we had $3.8 million in outstanding letters of credit on that date. At December 31, 2014, our available borrowing capacity under the revolving credit facility was $461.2 million. The maximum letter of credit capacity under this facility is $250 million.
During 2013, the credit agreement was amended to (i) permit the increase of the revolving commitments under the credit agreement by an aggregate amount of $300 million subject to the satisfaction of certain conditions, (ii) extend the availability period of the revolving commitments, and the maturity date of the extensions of credit thereunder, to December 11, 2018, (iii)
reduce the interest rate payable in respect of the revolving and term commitments and (iv) modify the commitment fees payable in respect of revolving commitments. Earlier principal payments may be required if we enter into certain transactions to sell assets or obtain new borrowings. We have the right to make additional principal payments without incurring any penalties for early repayment. The credit agreement includes customary affirmative and negative covenants.
At December 31, 2014, we were in compliance with the terms of the credit agreement.
Rose Rock Senior Unsecured Notes
On July 2, 2014, Rose Rock and its wholly-owned subsidiary, Rose Rock Finance Corporation ("Finance Corp."), as co-issuer, sold $400 million of 5.625% senior unsecured notes due 2022 (the “Rose Rock Notes”) to certain initial purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons outside the United States pursuant to Regulation S of the Securities Act. The Rose Rock Notes are guaranteed by all of Rose Rock's existing subsidiaries other than Finance Corp.
The Rose Rock Notes are governed by an indenture between Rose Rock, its subsidiary guarantors, Finance Corp. and Wilmington Trust, National Association, as trustee (the “Rose Rock Indenture”). The Rose Rock Indenture includes customary covenants, including limitations on Rose Rock's ability to incur additional indebtedness or issue certain preferred shares; pay dividends and make certain distributions, investments and other restricted payments; create certain liens; sell assets; enter into transactions with affiliates; merge, consolidate, sell or otherwise dispose of all or substantially all of its assets; and designate its subsidiaries as unrestricted under the Rose Rock Indenture.
At December 31, 2014, we were in compliance with the terms of the Rose Rock Indenture.
Rose Rock Revolving Credit Facility
The Rose Rock credit agreement provides for a revolving credit facility of $585 million and includes a $150 million sub-limit for letters of credit. The credit agreement expires on September 20, 2018 and permits the increase of the facility by not more than $200 million, subject to certain conditions. The agreement allows Rose Rock to incur unsecured or subordinated debt without limitation, subject to certain conditions.
At December 31, 2014, Rose Rock had $32.0 million of outstanding cash borrowings under its $585 million revolving credit facility. There were $17.5 million in outstanding letters of credit. At December 31, 2014, Rose Rock's available borrowing capacity under this agreement was $535.5 million. The credit facility also allows for the use of Secured Bilateral Letters of Credit, which are issued external to the credit facility and do not reduce revolver availability. At December 31, 2014, we had $67.6 million of Bilateral Letters of Credit outstanding. The credit agreement includes customary affirmative and negative covenants and also restricts Rose Rock's ability to make certain types of payments, including the declaration or payment of cash distributions to unitholders; provided that Rose Rock may make quarterly distributions of available cash so long as no default under the credit agreement then exists or would result therefrom.
At December 31, 2014, Rose Rock was in compliance with the terms of the credit agreement.
Subsequent to December 31, 2014, Rose Rock financed $162.1 million of the consideration paid to acquire the Wattenberg Oil Trunkline and a 50% interest in Glass Mountain from SemGroup through a borrowing on our revolving credit facility. The transaction closed on February 13, 2015.
SemMexico Revolving Credit Facilities
SemMexico has two credit facilities: 1) a facility that allows the borrowing of up to 44 million Mexican pesos (U.S. $3.0 million at the December 31, 2014 exchange rate) and matures in May 2015; and 2) a facility that allows the borrowing of up to 56 million Mexican pesos (U.S. $3.8 million at the December 31, 2014 exchange rate) and matures in July 2015. At December 31, 2014, there were no outstanding borrowings. SemMexico had outstanding letters of credit of 292.8 million Mexican pesos (U.S. $19.8 million equivalent at the December 31, 2014 exchange rate) and a $3.0 million USD letter of credit.
At December 31, 2014, we were in compliance with the terms of these facilities.
Shelf Registration Statements
We have access to a universal shelf registration statement which provides us with the ability to offer and sell an unlimited amount of debt and equity securities, subject to market conditions and our capital needs. This shelf registration statement expires in December 2015.
Rose Rock has an effective shelf registration statement with the SEC that, subject to market conditions and its capital needs, allows Rose Rock to issue up to an aggregate of $500 million of debt and equity securities. In August 2013, Rose Rock used this shelf registration to sell 4.750 million common units representing limited partner interests for proceeds of $152.5 million, net of underwriting discounts and commissions of $6.4 million. This shelf registration expires in May 2016.
Subsequent to December 31, 2014, Rose Rock issued and sold 2.3 million common units representing limited partner interests for net proceeds of $89.1 million under this shelf. Proceeds were used in connection with Rose Rock's acquisition of the Wattenberg Oil Trunkline and a 50% interest in Glass Mountain from SemGroup.
Rose Rock also has an effective shelf registration statement for the offer and sale, from time to time, of common units representing limited partner interests having an aggregate offering price of up to $150 million. Rose Rock is able to make sales over a period of time and, from time to time, in transactions at prices which are market prices prevailing at the time of sale, prices related to market price or at negotiated prices. Such sales may be made pursuant to a sales agency financing agreement between Rose Rock and certain underwriters or agents who may act as sales agents or purchase for their own accounts as principals. To date, there have been no such sales.
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:
•
expansion capital expenditures, which are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating income or operating capacity over the long-term; or
•
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.
During the year ended December 31, 2014, we spent $342 million (cash basis), on capital projects including capital contributions to affiliates for funding growth projects. In addition, we spent $44.5 million related to business acquisitions. Projected capital expenditures for 2015 are estimated at $720 million in expansion projects, including capital contributions to equity method investees to fund growth projects, and $55 million in maintenance projects. These estimates may change as future events unfold. See "Cautionary Note Regarding Forward-Looking Statements."
In addition to our budgeted capital program, we anticipate that we will continue to make significant expansion capital expenditures in the future. Consequently, our ability to develop and maintain sources of funds to meet our capital requirements is critical to our ability to meet our growth objectives. We expect that our future expansion capital expenditures will be funded by cash from operations, borrowings under our credit facilities and the issuance of debt and equity securities.
SemGroup Dividends
The table below sets out the dividends declared and/or paid by SemGroup during 2015, 2014 and 2013.
Rose Rock Distributions
The table below sets out the cash distributions paid by Rose Rock during 2015, 2014 and 2013.
Credit Risk
We are subject to risks of loss resulting from nonpayment or nonperformance by our customers. We examine the creditworthiness of third-party customers to whom we extend credit and manage our exposure to credit risk through credit analysis, credit approval, credit limits and monitoring procedures, and for certain transactions, we may request letters of credit, prepayments or guarantees.
Customer Concentration
Shell Trading (US) Company, a customer of our Crude segment, accounted for more than 10% of our consolidated revenue for the year ended December 31, 2014, at approximately 36%. Although we have contracts with customers of varying durations, if one or more of our major customers were to default on their contract, or if we were unable to renew our contract with one or more of these customers on favorable terms, we might not be able to replace any of these customers in a timely fashion, on favorable terms or at all. In any of these situations, our revenues and our ability to pay cash dividends to our stockholders may be adversely affected. We expect our exposure to risk of non-payment or non-performance to continue as long as we remain substantially dependent on a relatively small number of customers for a substantial portion of our Adjusted gross margin.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303 of Regulation S-K.
Commitments
Contractual Obligations
In the ordinary course of business we enter into various contractual obligations for varying terms and amounts. The following table includes our contractual obligations as of December 31, 2014, and our best estimate of the period in which the obligation will be settled (in thousands):
(1)
Assumes interest rates, fee rates and letters of credit and loans outstanding are as of December 31, 2014, and remain constant thereafter until maturity except for required principal payments.
(2)
The bulk 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).
(3)
An amount equal to this payable is held in a restricted cash account for this purpose.
(4)
Capital expenditure expansion projects represent our 51% interest in the White Cliffs Pipeline expansion.
In addition to the items in the table above, we have entered into various operational commitments and agreements related to pipeline operations and to the marketing, transportation, terminalling and storage of petroleum products. We have also entered into certain petroleum products derivative instruments, for which the fair value is a net asset of $1.7 million at December 31, 2014.
Letters of Credit
In connection with our purchasing activities, we provide certain suppliers and transporters with irrevocable standby letters of credit to secure our obligation for the purchase of petroleum products. Our liabilities with respect to these purchase obligations are recorded as accounts payable on our balance sheet in the month the petroleum products are purchased. Generally, these letters of credit are issued for 70-day periods (with a maximum of 364-day periods) and are terminated upon completion of each transaction. At December 31, 2014 and December 31, 2013, we had outstanding letters of credit of approximately $111.7 million and $122.2 million, respectively.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operation are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements and related disclosures requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates and judgments that affect the reported amount of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. The application of these policies involves judgments regarding future events, including the likelihood of success of particular projects and legal and regulatory challenges. These judgments, in and of themselves, could materially affect the financial statements and disclosures based on varying assumptions, which may be appropriate to use. In addition, the financial and operating environment may also have a
significant effect, not only on the operation of the business, but on the results reported through the application of accounting measures used in preparing the financial statements and related disclosures, even if the nature of the accounting policies have not changed.
On an on-going basis, we evaluate these estimates using historical experience, consultation with experts and other methods we consider reasonable. Actual results may differ substantially from our estimates. Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.
Our significant accounting policies are summarized in Note 3 of our consolidated financial statements beginning on page of this Form 10-K. We identify our critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and results of operations, and that require the most difficult, subjective and complex judgments by management regarding estimates about matters that are inherently uncertain.
Accounting Policy
Judgment/Uncertainty Affecting Application
Income Taxes and Valuation Allowance for Deferred Tax Assets
Ability to withstand legal challenges of tax authority decisions or appeals
Anticipated future decisions of tax authorities
Application of tax statutes and regulations to transactions
Ability to use tax benefits carry forwards to future periods
Impairment of Long Lived Assets
Recoverability of investment through future operations
Regulatory and political environments and requirements
Estimated useful lives of assets
Environmental obligations and operational limitations
Estimates of future cash flows
Estimates of fair value
Judgment about triggering events
Goodwill and Other Intangible Assets
Estimated useful lives for finite lived intangible assets
Judgment about impairment triggering events
Identification of reporting units
Purchase price allocation
Estimates of reporting unit's fair value
Derivative Instruments
Instruments used in valuation techniques
Market maturity and economic conditions
Contract interpretation
Market conditions in the energy industry, especially the effects of price volatility on contractual commitments
Contingencies
Estimated financial impact of event
Judgment about the likelihood of event occurring
Regulatory and political environments and requirements
Income Taxes and Valuation Allowance for Deferred Tax Assets
At December 31, 2014, we had a cumulative U.S. federal net operating loss of approximately $82.2 million that can be carried forward to apply against taxable income generated in future years. This carry forward begins to expire in 2031. We had cumulative U.S. state net operating losses of approximately $67.2 million available for carry forward, which begin to expire in 2016. We had a foreign net operating loss of $23.9 million available for indefinite carry forward. We had foreign tax credits of approximately $55.0 million available for carry forward, which begin to expire in 2020.
Considerable judgment is required to determine the tax treatment of a particular item that involves interpretations of complex tax laws. We are subject to examination by taxing authorities for income tax returns filed in the U.S. federal jurisdiction and various state and foreign jurisdictions including Canada, Mexico and the United Kingdom.
Evaluation of Long-Lived Assets for Impairment
In accordance with ASC 360, “Property, Plant and Equipment,” we evaluate property, plant and equipment and certain intangible assets for impairment whenever indicators of impairment exist. Examples of such indicators are:
•
significant decrease in the market price of a long-lived asset;
•
significant adverse change in the manner an asset is used or its physical condition;
•
adverse business climate;
•
accumulation of costs significantly in excess of the amount originally expected for the construction or acquisition of an asset;
•
current period loss combined with a history of losses or the projection of future losses; and
•
change in our intent about an asset from an intent to hold such asset through the end of its estimated useful life to a greater than fifty percent likelihood that such asset will be disposed of before then.
Recoverability of assets to be held and used is measured by comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Generally, fair value will be determined using valuation techniques such as the present value of expected future cash flows. However, actual future market prices and costs could vary from the assumptions used in our estimates and the impact of such variations could be material.
Goodwill and Other Intangible Assets
We apply ASC 805, “Business Combinations,” and ASC 350, “Intangibles - Goodwill and Other,” to account for goodwill and intangible assets. In accordance with these standards, we amortize all finite lived intangible assets over their respective estimated weighted average useful lives, while goodwill has an indefinite life and is not amortized. However, goodwill and all intangible assets are tested for impairment at least annually, or more frequently whenever an event or change in circumstances occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We test for impairment at the reporting unit level using three valuation approaches: first, the income approach which measures the value of an asset by the present value of its future economic benefit; second, the market approach which measures the value of an asset through the analysis of recent sales or offerings of comparable properties; and third, the cost approach which measures the value of an asset by the cost to reconstruct or replace it with another of like utility.
Estimation of future economic benefit requires management to make assumptions about numerous variables including selling prices, costs, the level of activity and appropriate discount rates. If it is determined that the fair value of a reporting unit is below its carrying amount, our goodwill or intangible assets will be impaired at that time.
Derivative Instruments
We follow the guidance of ASC 815, “Derivatives and Hedging,” to account for derivative instruments. ASC 815 requires us to mark-to-market all derivative instruments on the balance sheet, and recognize changes in the fair value of non-hedge derivative instruments immediately in earnings. In certain cases, we may apply hedge accounting to our derivative instruments. The criteria used to determine if hedge accounting treatment is appropriate are: (i) the designation of the hedge to an underlying exposure; (ii) whether the overall risk is being reduced; and (iii) if there is a correlation between the fair value of the derivative instrument and the underlying hedged item. Changes in the fair value of derivative instruments accounted for as hedges are either recognized in earnings as an offset to the changes in the fair value of the related hedged item, or deferred and recorded as a component of other comprehensive income and subsequently recognized in earnings when the hedged transactions occur.
Certain derivative instruments that meet the criteria for derivative accounting treatment also qualify for a scope exception to derivative accounting, as they are considered to be a normal purchase normal sale (“NPNS”). The availability of this exception is based on the assumption that the company has the ability, and it is probable, to deliver or take delivery of the underlying item. These assumptions are based on internal forecasts of sales and historical physical delivery on contracts. Derivatives that are considered to be NPNS are exempt from derivative accounting treatment and are accounted for under accrual accounting. If it is determined that a transaction designated as NPNS no longer meets the scope exception due to
changes in estimates, the related contract would be recorded on the balance sheet at fair value combined with immediate recognition through earnings.
Contingencies
We record a loss contingency when management determines that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such determinations are subject to interpretations of current facts and circumstances, forecasts of future events and estimates of the financial impacts of such events. Gain contingencies are not recorded.
Recent Accounting Pronouncements
See Note 3 of our consolidated financial statements beginning on page of this Form 10-K.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
This discussion on market risks represents an estimate of possible changes in future earnings that would occur assuming hypothetical future movements in commodity prices, interest rates and currency exchange rates. Our views on market risk are not necessarily indicative of actual results that may occur, and do not represent the maximum possible gains and losses that may occur since actual gains and losses will differ from those estimated based on actual fluctuations in commodity prices, interest rates, currency exchange rates and the timing of transactions.
We are exposed to various market risks, including changes in (i) petroleum prices, particularly crude oil, natural gas and natural gas liquids, (ii) interest rates, and (iii) currency exchange rates. We may use from time-to-time various derivative instruments to manage such exposure. Our risk management policies and procedures are designed to monitor physical and financial commodity positions and the resulting outright commodity price risk as well as basis risk resulting from differences in commodity grades, purchase and sale 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 years ended December 31, 2014, 2013 and 2012.
Revenue from our asset-based activities is dependent on throughput volume, tariff rates, the level of fees generated from our pipeline systems, capacity leased to third parties, capacity that we use for our own operational or marketing activities and
the level of other fees generated at our terminalling and storage facilities. Profit from our marketing activities is dependent on our ability to sell petroleum products at prices in excess of our aggregate cost. Margins may be affected during transitional periods between a backwardated market (when the prices for future deliveries are lower than the current prices) and a contango market (when the prices for future deliveries are higher than the current prices). Our petroleum product marketing activities within each of our segments are generally not directly affected by the absolute level of petroleum product prices, but are affected by overall levels of supply and demand for petroleum products and relative fluctuations in market-related indices at various locations.
However, the SemGas segment has exposure to commodity price risk because of the nature of certain contracts for which our fee is based on a percentage of proceeds or index related to the prices of natural gas, natural gas liquids and condensate. Given current volumes, liquid recoveries and contract terms, we estimate the following sensitivities over the next twelve months:
•
A $0.10 change in natural gas price results in approximately a $1.0 million impact to Adjusted gross margin.
•
A $0.10 change in natural gas liquids prices (Conway and Mont Belvieu) results in approximately a $2.3 million impact to Adjusted gross margin.
The above sensitivities may be impacted by changes in contract mix, change in production or other factors which are outside of our control.
Additionally, based on our open derivative contracts at December 31, 2014, an increase in the applicable market price or prices for each derivative contract would result in a decrease in our crude oil sales revenues. Likewise, a decrease in the applicable market price or prices for each derivative contract would result in an increase in our crude oil sales revenues. However, the increases or decreases in crude oil sales revenues we recognize from our open derivative contracts are substantially offset by higher or lower crude oil sales revenues when the physical sale of the product occurs. These contracts may be for the purchase or sale of crude oil or in markets different from the physical markets in which we are attempting to hedge our exposure, or may have timing differences relative to the physical markets. As a result of these factors, our hedges may not eliminate all price risks.
The notional volumes and fair value of our commodity derivatives open positions, as well as the change in fair value that would be expected from a 10% market price increase or decrease, is shown in the table below (in thousands):
Margin deposits or other credit support, including letters of credit, are generally required on derivative instruments used to manage our price exposure. As commodity prices increase or decrease, the fair value of our derivative instruments changes, thereby increasing or decreasing our margin deposit or other credit support requirements. Although a component of our risk-management strategy is intended to manage the margin and other credit support requirements on our derivative instruments, volatile spot and forward commodity prices, or an expectation of increased commodity price volatility, could increase the cash needed to manage our commodity price exposure and thereby increase our liquidity requirements. This may limit amounts available to us through borrowing, decrease the volume of petroleum products we purchase and sell or limit our commodity price management activities.
Interest Rate Risk
We use variable rate debt and are exposed to market risk due to the floating interest rates on our credit facilities. Therefore, from time-to-time we may use interest rate derivatives to manage interest obligations on specific debt issuances. Our variable rate debt bears interest at LIBOR or prime, subject to certain floors, plus the applicable margin. At December 31, 2014, an increase in these base rates of 1%, above the base rate floors, would increase our interest expense by $2.7 million per year.
The average interest rates presented below are based upon rates in effect at December 31, 2014 and December 31, 2013. The carrying value of the variable rate instruments in our credit facilities approximate fair value primarily because our rates fluctuate with prevailing market rates.
The following table summarizes our debt obligations:
Currency Exchange Risk
The cash flows relating to our U.K., Canada and Mexico operations are based on the U.S. dollar equivalent of such amounts measured in British pounds, Canadian dollars and Mexican pesos. Assets and liabilities of our U.K., Canadian and Mexican subsidiaries are translated to U.S. dollars using the applicable exchange rate as of the end of a reporting period. Revenue, expenses and cash flows are translated using the average exchange rate during the reporting period.
A 10% change in the average exchange rate during the years ended December 31, 2014 and 2013, would change operating income by $6.1 million and $4.4 million, respectively.
Item 8.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company required to be included in this Form 10-K appear immediately following the signature page to this Form 10-K beginning on page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) are effective as of December 31, 2014. This conclusion is based on an evaluation conducted under the supervision and participation of our Chief Executive Officer and Chief Financial Officer along with our management. Disclosure controls and procedures are those controls and procedures designed to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our internal control over financial reporting based on the framework in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our evaluation under that framework and applicable SEC rules, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.
Our internal control over financial reporting as of December 31, 2014, has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in their report that is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the most recently completed fiscal quarter ended December 31, 2014, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item concerning our directors and corporate governance matters is incorporated by reference to the information in the sections entitled “PROPOSAL 1 - ELECTION OF DIRECTORS” and “CORPORATE GOVERNANCE,” respectively, of our Proxy Statement for the 2015 Annual Meeting of Stockholders (the “Proxy Statement”). The information required by this item with respect to the Section 16 ownership reports is incorporated by reference to the section entitled “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Proxy Statement. The information required by this item with respect to our executive officers is included in Part I of this Form 10-K under the section entitled “Executive Officers of the Registrant.” A copy of our Code of Business Conduct and Ethics is posted on our website at www.semgroupcorp.com.
Item 11.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the information set forth in the sections entitled “EXECUTIVE COMPENSATION” and “DIRECTOR COMPENSATION” of the Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
The information required by this item regarding security ownership and equity compensation plans is incorporated by reference to the information set forth in the sections entitled “PRINCIPAL STOCKHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT” and “EQUITY COMPENSATION PLAN INFORMATION,” respectively, of the Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item regarding certain relationships and related transactions and director independence is incorporated by reference to the information set forth in the sections entitled “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” and “CORPORATE GOVERNANCE,” respectively, of the Proxy Statement.
Item 14.
Item 14. Principal Accountant Fees and Services
The information required by this item regarding principal accounting fees and services is incorporated by reference to the information set forth in the sections entitled “FEES OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM” and “AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES” of the Proxy Statement.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)
(1) Financial Statements. The consolidated financial statements of the Company included in this Form 10-K are listed on page, which follows the signature page to this Form 10-K.
(2) Financial Statement Schedules. All financial statement schedules are omitted as inapplicable or because the required information is contained in the financial statements or the notes thereto.
The financial statements of White Cliffs Pipeline, L.L.C., our equity method investee, are included in this filing as Exhibit 99.1 pursuant to Rule 3-09 of Regulation S-X.
(3) Exhibits. The following documents are included as exhibits to this Form 10-K. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, such exhibit is filed herewith.
*
Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SEMGROUP CORPORATION
Date: February 27, 2015
By:
/s/ Robert N. Fitzgerald
Robert N. Fitzgerald
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
SemGroup Corporation
Tulsa, Oklahoma
We have audited the accompanying consolidated balance sheets of SemGroup Corporation (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive income (loss), owners’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SemGroup Corporation at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), SemGroup Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 27, 2015 expressed an unqualified opinion thereon.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
SemGroup Corporation
Tulsa, Oklahoma
We have audited the internal control over financial reporting of SemGroup Corporation (the “Company”) as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2014 and 2013, and the related consolidated statements of operations and comprehensive income (loss), owners’ equity, and cash flows for each of the three years in the period ended December 31, 2014 and our report dated February 27, 2015 expressed an unqualified opinion thereon.
SEMGROUP CORPORATION
Consolidated Balance Sheets
(In thousands, except par value)
The accompanying notes are an integral part of these consolidated financial statements.
SEMGROUP CORPORATION
Consolidated Statements of Operations and Comprehensive Income
(Dollars in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated financial statements.
SEMGROUP CORPORATION
Consolidated Statements of Changes in Owners’ Equity
(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SEMGROUP CORPORATION
Consolidated Statements of Cash Flows
(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
1.
OVERVIEW
SemGroup Corporation is a Delaware corporation headquartered in Tulsa, Oklahoma that provides diversified services for end-users and consumers of crude oil, natural gas, natural gas liquids, refined products and asphalt.
The accompanying consolidated financial statements include the activities of SemGroup Corporation and its subsidiaries. The terms “we,” “our,” “us,” “the Company” and similar language used in these notes to consolidated financial statements refer to SemGroup Corporation and its subsidiaries.
At December 31, 2014, our reportable segments include the following:
•
Crude conducts crude oil transportation, storage, terminalling, gathering and marketing operations in the United States. Crude’s assets include:
•
the 2% general partner interest and a 56.8% limited partner interest in Rose Rock Midstream, L.P. ("Rose Rock"), which owns an approximate 570-mile crude oil pipeline network in Kansas and Oklahoma, a crude oil gathering, storage and marketing business in the Bakken Shale in North Dakota and Montana, a crude oil storage facility in Cushing, Oklahoma with a capacity of 7.6 million barrels and a crude oil trucking fleet of over 255 transport trucks and 275 trailers;
•
a 51% ownership interest (through our interest in Rose Rock) in White Cliffs Pipeline, L.L.C. ("White Cliffs"), which owns a 527-mile pipeline, consisting of two 12-inch common carrier, crude oil pipelines, that transports crude oil from Platteville, Colorado to Cushing, Oklahoma (the "White Cliffs Pipeline"); and
•
a 50% ownership interest in Glass Mountain Pipeline LLC ("Glass Mountain"), which owns a 210-mile crude oil pipeline in western and north central Oklahoma ("the Glass Mountain Pipeline").
•
SemStream, which owns 6,652,101 common units representing 7.5% of the total limited partner interests, as of September 30, 2014, in NGL Energy Partners LP ("NGL Energy") (NYSE: NGL), which owns and operates wholesale and retail propane storage and distribution assets, crude oil logistics and water treatment services in the United States, and a 11.78% interest in the general partner of NGL Energy. We report the results of our investment in NGL Energy under the equity method on a one-quarter lag (Note 5).
•
SemCAMS, which provides natural gas gathering and processing services in Alberta, Canada. SemCAMS owns working interests in, and operates, four natural gas processing plants with a combined operating capacity of 695 million cubic feet per day.
•
SemGas, which provides natural gas gathering and processing services in the United States. SemGas owns and operates gathering systems and four processing plants in Oklahoma, Texas and Kansas with 388 million cubic feet per day of capacity.
•
SemLogistics, which provides refined product and crude oil storage services in the United Kingdom. SemLogistics owns a facility in Wales that has multi-product storage capacity of approximately 8.7 million barrels.
•
SemMexico, which purchases, produces, stores, and distributes liquid asphalt cement products in Mexico. SemMexico operates an in-country network of fourteen asphalt cement terminals and modification facilities, one toll manufacturing facility and one portable rail unloading facility.
2.
CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
Consolidated subsidiaries
Our consolidated financial statements include the accounts of our controlled subsidiaries, including Rose Rock. All significant transactions between our consolidated subsidiaries have been eliminated. Outside ownership interests in consolidated subsidiaries are reported as noncontrolling interests in the consolidated financial statements.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
2. CONSOLIDATION AND BASIS OF PRESENTATION, Continued
Proportionally consolidated assets
Our SemCAMS segment owns undivided interests in certain natural gas gathering and processing assets, for which we record only our proportionate share of the assets on the consolidated balance sheets. The net book value of the property, plant and equipment recorded by us associated with these undivided interests is approximately $209.8 million at December 31, 2014. We serve as operator of these facilities and incur the costs of operating the facilities (recorded as operating expenses in the consolidated statements of operations) and charge the other owners for their proportionate share of the costs (recorded as other revenue in the consolidated statements of operations).
Equity method investments
We own a 51% interest in White Cliffs. The other owners have substantive rights to participate in the management of White Cliffs. Because of this, we account for it under the equity method. In 2014 and 2013, we sold our interest in SemCrude Pipeline, which holds the 51% interest in White Cliffs, to our consolidated subsidiary Rose Rock. We will continue to account for our interest under the equity method. No gain was recorded on the transaction as it was between entities under common control.
We own general partner and limited partner interests in NGL Energy which we account for under the equity method.
We own a 50% interest in Glass Mountain which we account for under the equity method.
Discontinued operations
During 2012, we completed the disposition of SemStream's residential propane supply business in Arizona, which is accounted for as a discontinued operation (Note 8).
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES-The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Our significant estimates include, but are not limited to: (1) allowances for doubtful accounts receivable; (2) estimated useful lives of assets, which impact depreciation; (3) estimated fair values of long-lived assets used in impairment tests; (4) fair values of derivative instruments; (5) valuation allowances for deferred tax assets; and (6) accrual and disclosure of contingent losses. Although management believes these estimates are reasonable, actual results could differ materially from these estimates.
CASH AND CASH EQUIVALENTS-Cash includes currency on hand and demand and time deposits with banks or other financial institutions. Cash equivalents include highly liquid investments with maturities of three months or less at the date of purchase. Balances at financial institutions may exceed federally insured limits.
RESTRICTED CASH-At December 31, 2014, we had not yet completed the process of disbursing funds held in reserve accounts to settle pre-petition claims related to our predecessor's bankruptcy. Of the restricted cash balance of $7.0 million at December 31, 2014, approximately $3.8 million is restricted for this purpose. See payables to pre-petition creditors below.
ACCOUNTS RECEIVABLE-Accounts receivable are reported net of the allowance for doubtful accounts. Our assessment of the allowance for doubtful accounts is based on several factors, including the overall creditworthiness of our customers, existing economic conditions, and the amount and age of past due accounts. We enter into netting arrangements with certain counterparties to help mitigate credit risk. Receivables subject to netting are presented as gross receivables (with the related accounts payable also presented gross) until such time as the balances are settled. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are written off against the allowance for doubtful accounts only after all collection attempts have been exhausted.
INVENTORIES-Inventories primarily consist of natural gas and natural gas liquids, crude oil, and asphalt. Inventories are valued at the lower of cost or market, with cost generally determined using the weighted-average method. The cost of inventory includes applicable transportation costs.
We enter into exchanges with third parties whereby we acquire products that differ in location, grade, or delivery date from products we have available for sale. These exchanges are valued at cost, and although a transportation, location or product differential may be recorded, generally no gain or loss is recognized.
PROPERTY, PLANT AND EQUIPMENT-Property, plant and equipment is recorded at cost. We capitalize costs that extend or increase the future economic benefits of property, plant and equipment, and expense maintenance costs that do
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
not. When assets are disposed of, their cost and related accumulated depreciation are removed from the balance sheet, and any resulting gain or loss is recorded as a gain or loss on disposal or impairment of long-lived assets in the consolidated statements of operations.
Our SemCAMS segment operates plants which periodically undergo planned major maintenance activities, typically occurring every four to five years. Planned major maintenance projects that do not increase the overall life or capacity of the related assets are recorded in operating expense as incurred, whereas major maintenance activity costs that materially increase the life or capacity of the underlying assets are capitalized. When maintenance expenses are recoverable from the producers who use the plants, they are recorded as revenue, and typically include a 10% overhead fee.
Depreciation is calculated primarily on the straight-line method over the following estimated useful lives:
Construction in process is reclassified to the fixed asset categories above and depreciation commences once the asset has been placed in-service.
LINEFILL-Pipelines and storage facilities generally require a minimum volume of product in the system to enable the system to operate. Such product, known as linefill, is generally not available to be withdrawn from the system. Linefill owned by us in facilities operated by us is recorded at historical cost, is included in property, plant and equipment in the consolidated balance sheets, and is not depreciated. We also own linefill in third-party facilities, which is included in inventory on the consolidated balance sheets.
IMPAIRMENT OF LONG-LIVED ASSETS-We test long-lived asset groups for impairment when events or circumstances indicate that the net book value of the asset group may not be recoverable. We test an asset group for impairment by estimating the undiscounted cash flows expected to result from its use and eventual disposition. If the estimated undiscounted cash flows are lower than the net book value of the asset group, we then estimate the fair value of the asset group and record a reduction to the net book value of the assets and a corresponding impairment loss.
GOODWILL-We test goodwill for impairment on an annual basis, or more often if circumstances warrant, by estimating the fair value of the asset group to which the goodwill relates and comparing this fair value to the net book value of the asset group. If fair value is less than net book value, we estimate the implied fair value of goodwill, reduce the book value of the goodwill to the implied fair value, and record a corresponding impairment loss. Our policy is to test goodwill for impairment on October 1 of each year.
INTANGIBLE ASSETS-Intangible assets are stated at cost, net of accumulated amortization, which is recorded on a straight-line or accelerated basis over the life of the asset. We review amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If such a review should indicate that the carrying amount of amortizable intangible assets is not recoverable, we reduce the carrying amount of such assets to fair value.
EQUITY METHOD INVESTMENTS-We account for an investment under the equity method when we have significant influence over, but not control of, the significant operating decisions of the investee. Under the equity method, we record in the consolidated statements of operations our share of the earnings or losses of the investee, with a corresponding adjustment to the investment balance on our consolidated balance sheet. When we receive a distribution from an equity method investee, we record a corresponding reduction to the investment balance. When an equity method investee issues additional ownership interests which dilute our ownership interest, we recognize a gain or loss in our consolidated statements of operations.
For equity method investments for which we do not expect financial information to be consistently available on a timely basis to apply the equity method currently, our policy is to apply the equity method consistently on a one-quarter lag.
DEBT ISSUANCE COSTS-Costs incurred in connection with the issuance of long-term debt are reported as other noncurrent assets and are amortized to interest expense using the straight-line method over the term of the related debt. Use of the straight-line method of amortization does not differ materially from the “effective interest” method.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
COMMODITY DERIVATIVE INSTRUMENTS-We generally record the fair value of commodity derivative instruments on the consolidated balance sheets and the change in fair value as an increase or decrease to product revenue.
As shown in Note 14, the fair value of commodity derivatives at December 31, 2014 and 2013 are recorded to other current assets or other current liabilities on the consolidated balance sheets. Related margin deposits are recorded to other current assets or other current liabilities on the consolidated balance sheets. Margin deposits are not generally netted against derivative assets or liabilities.
The fair value of a derivative contract is determined based on the nature of the transaction and the market in which the transaction was executed. Quoted market prices, when available, are used to value derivative transactions. In situations where quoted market prices are not readily available, we estimate the fair value using other valuation techniques that reflect the best information available under the circumstances. Fair value measurements of derivative assets include consideration of counterparty credit risk. Fair value measurements of derivative liabilities include consideration of our creditworthiness.
We have elected “normal purchase” and “normal sale” treatment for certain commitments to purchase or sell petroleum products at future dates. This election is only available when a transaction that would ordinarily meet the definition of a derivative but instead is expected to result in physical delivery of product over a reasonable period in the normal course of business and is not expected to be net settled. Agreements accounted for under this election are not recorded at fair value; instead, the transaction is recorded when the product is delivered.
PAYABLES TO PRE-PETITION CREDITORS-At December 31, 2014, we had not yet completed the process of disbursing funds held in reserve accounts to settle pre-petition claims related to our predecessor's bankruptcy. We recorded a liability of $3.1 million at December 31, 2014 associated with these obligations and a liability of $0.7 million which is associated with discontinued operations and is reported within other current liabilities. Cash is held in accounts restricted for this purpose which is included in Restricted Cash on the balance sheet. All pre-petition claims payable from these accounts have been settled and we expect to disburse the cash as soon as the accounts have been reconciled.
CONTINGENT LOSSES-We record a liability for a contingent loss when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. We record attorneys’ fees incurred in connection with a contingent loss at the time the fees are incurred. We do not record liabilities for attorneys’ fees that are expected to be incurred in the future.
ASSET RETIREMENT OBLIGATIONS-Asset retirement obligations include legal or contractual obligations associated with the retirement of long-lived assets, such as requirements to incur costs to dispose of equipment or to remediate the environmental impacts of the normal operation of the assets. We record liabilities for asset retirement obligations when a known obligation exists under current law or contract and when a reasonable estimate of the value of the liability can be made.
DISCONTINUED OPERATIONS-We classify a component of our business as a discontinued operation when we commit to a plan to sell the component and believe it is probable that a sale will be completed within one year. A component that is disposed of in a manner other than by sale is classified as discontinued when the component is actually disposed. Investments accounted for under the equity method, or the cost method, do not qualify for treatment as discontinued operations. A component that is disposed of may not qualify for treatment as a discontinued operation if we have significant continuing involvement in the operations of the component after the disposal.
Once a component meets the requirements to be classified as a discontinued operation, previous financial statements are retrospectively adjusted to reflect the component as a discontinued operation for all periods presented. Income and losses of discontinued operations (excluding corporate general and administrative expense allocations) are combined into one line on the consolidated statements of operations. The cash flows from discontinued operations are not separately identified in the consolidated statements of cash flows.
In April 2014, the FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," which raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The Company will adopt this guidance in the first quarter of 2015. The impact is not expected to be material.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
REVENUE RECOGNITION-Sales of product, as well as gathering and marketing revenues, are recognized at the time title to the product transfers to the purchaser, which typically occurs upon receipt of the product by the purchaser. Terminal and storage revenues are recognized at the time the service is performed. Revenue for the transportation of product is recognized upon delivery of the product to its destination. Certain revenue transactions are reported on a net basis, including derivative instruments considered held for trading purposes and certain buy/sell transactions (see “Purchases and Sales of Inventory with the Same Counterparty”). Other revenue primarily represents operating cost recovery from working interest owners in certain processing plants and is recorded when earned in accordance with the terms of related agreements. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis (excluded from revenue).
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers", which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.
COSTS OF PRODUCTS SOLD-Costs of products sold consists of the cost to purchase the product, the cost to transport the product to the point of sale, and the cost to store the product until it is sold.
PURCHASES AND SALES OF INVENTORY WITH THE SAME COUNTERPARTY-We routinely enter into transactions to purchase inventory from, and sell inventory to, the same counterparty. Such transactions that are entered into in contemplation of one another are recorded on a net basis.
CURRENCY TRANSLATION-The consolidated financial statements are presented in U.S. dollars. Our segments operate in four countries, and each segment has identified a “functional currency,” which is the primary currency in the environment in which the segment operates. The functional currencies include the U.S. dollar, the Canadian dollar, the British pound sterling, and the Mexican peso.
At the end of each reporting period, the assets and liabilities of each segment are translated from its functional currency to U.S. dollars using the exchange rate at the end of the month. The monthly results of operations of each segment are generally translated from its functional currency to U.S. dollars using the average exchange rate during the month. Changes in exchange rates result in currency translation gains and losses, which are recorded within other comprehensive income (loss).
Certain segments also enter into transactions in currencies other than their functional currencies. At the end of each reporting period, each segment re-measures the related receivables, payables, and cash to its functional currency using the exchange rate at the end of the period. Changes in exchange rates between the time the transactions were entered into and the end of the reporting period result in currency transaction gains or losses, which are recorded in the consolidated statements of operations.
INCOME TAXES-Deferred income taxes are accounted for under the liability method, which takes into account the differences between the basis of the assets and liabilities for financial reporting purposes and amounts recognized for income tax purposes. We record valuation allowances on deferred tax assets when, in the opinion of management, it is more likely than not that the asset will not be recovered.
We monitor uncertain tax positions and we recognize tax benefits only when management believes the relevant tax positions would more likely than not be sustained upon examination. We record any interest and any penalties related to income taxes within income tax expense in the consolidated statements of operations.
In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," which requires an unrecognized tax benefit to be classified as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
carryforward, except in certain circumstances. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2013, and interim periods within those years. The Company adopted this guidance in the first quarter of 2014. The impact was not material.
RECLASSIFICATIONS-Certain reclassifications have been made to conform prior year balances to the current year presentation.
PENSION BENEFITS-Pension cost and obligations are actuarially determined and are affected by assumptions including expected return on plan assets, discount rates, compensation increases, and employee turnover rates. We evaluate our assumptions periodically and make adjustments to these assumptions and the recorded liability as necessary. Actuarial gains or losses are amortized on a straight-line basis over the expected remaining service life of employees in the pension plan.
EQUITY-BASED COMPENSATION-We grant certain of our employees equity-based compensation awards which vest contingent on continued service of the recipient and, in some cases, on their achievement of specific performance targets. We record compensation expense for these outstanding awards over applicable service or performance periods based on their grant date fair value with a corresponding increase to additional paid-in capital. The expense to be recorded over the life of the awards is discounted for expected forfeitures during the vesting period.
NONCONTROLLING INTERESTS IN CONSOLIDATED SUBSIDIARIES-Noncontrolling interests represents third-party limited partner unitholders' interests in our consolidated subsidiary, Rose Rock. Rose Rock allocates net income to its limited partners based on the distributions pertaining to the current period's available cash as defined by Rose Rock's partnership agreement. After adjusting for the appropriate period's distributions, the remaining undistributed earnings or excess distributions over earnings, if any, are allocated to Rose Rock's general partner, limited partners and participating securities in accordance with the contractual terms of Rose Rock's partnership agreement and as further prescribed under the two-class method. Incentive distribution rights do not participate in undistributed earnings.
COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)-Comprehensive income (loss) is defined as a change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Our comprehensive income (loss) consists of currency translation adjustments, changes in the funded status of pension benefit plans and changes in the fair value of interest rate swaps.
On March 4, 2013, the FASB issued ASU 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity - a consensus of the FASB Emerging Issues Task Force”, which indicates that the entire amount of a cumulative translation adjustment ("CTA") related to an entity's investment in a foreign entity should be released when there has been a:
•
sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity;
•
loss of a controlling financial interest in an investment in a foreign entity (i.e., the foreign entity is deconsolidated); or
•
step acquisition for a foreign entity (i.e., when an entity has changed from applying the equity method for an investment in a foreign entity to consolidating the foreign entity).
The ASU does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. For public entities, this ASU is effective for fiscal years beginning on or after December 15, 2013, and interim periods within those years. The Company adopted this guidance in the first quarter of 2014. The impact was not material.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
4.
ROSE ROCK MIDSTREAM, L.P.
At December 31, 2014, we owned the 2% general partner interest and a 56.8% limited partner interest that included 6,814,709 common units, 8,389,709 subordinated units and 3,750,000 Class A units of Rose Rock. We also own certain incentive distribution rights, which are described below. We control the operations of Rose Rock through our ownership of the general partner interest, and we continue to consolidate Rose Rock. The outside ownership interests in Rose Rock are reflected in “noncontrolling interests in consolidated subsidiaries” on our consolidated balance sheets. The portion of the net income of Rose Rock that is attributable to outside owners is reflected within “net income attributable to noncontrolling interests” in our consolidated statements of operations and comprehensive income.
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:
The following table shows the distributions paid related to the earnings for each of the following periods (in thousands, except for per unit amounts):
*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.
** The distribution to common unitholders related to earnings for the quarter ended December 31, 2014 was payable on February 13, 2015 to holders of record at February 3, 2015. As such, the Class A units, which converted to common units on January 1, 2015, were eligible for the distribution which is reflected in the amount paid to common unitholders.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
4.
ROSE ROCK MIDSTREAM, L.P., Continued
Certain summarized balance sheet information of Rose Rock is shown below (in thousands):
Certain summarized income statement information of Rose Rock for the years ended December 31, 2014, 2013, and 2012 is shown below (in thousands):
Drop-down Transactions with Rose Rock
2014 drop-down transaction
On June 23, 2014, we contributed the remaining 33% interest in SemCrude Pipeline, L.L.C. ("SCPL") to Rose Rock in exchange for (i) cash of approximately $114.4 million, (ii) the issuance of 2.425 million common units, (iii) the issuance of 1.25 million Class A units, and (iv) an increase of the capital account of the general partner and a related issuance of general partner interest, to allow the general partner to maintain its 2% general partner interest. Subsequent to this transaction, Rose Rock owns 100% of SCPL, which owns a 51% membership interest in White Cliffs.
The Class A units were not entitled to receive any distribution of available cash (other than upon liquidation) prior to the first day of the month immediately following the first month for which the average daily throughput volumes on the White Cliffs Pipeline for such month are 125,000 barrels per day or greater. The Class A units converted to common units in January 2015.
As this transaction was between parties under common control, Rose Rock recorded its interest in SCPL at SemGroup's historical value and as such no gain on the sale was recognized by SemGroup. Proceeds in excess of the historical value were accounted for as a dividend from Rose Rock to SemGroup and resulted in a $85.2 million reduction to noncontrolling interests in consolidated subsidiaries and an offsetting increase to additional paid-in capital of $53.2 million (net of tax impact of $31.9 million). This non-cash entry represents the portion of the proceeds in excess of
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
4.
ROSE ROCK MIDSTREAM, L.P., Continued
historical cost which were attributed to Rose Rock's third-party unitholders. SemGroup used the proceeds from these transactions to pay amounts owed under its revolving credit facility.
SemGroup incurred approximately $0.9 million of expense associated with this transaction, including $0.4 million of costs incurred by Rose Rock.
2013 drop-down transactions
On January 11, 2013, we contributed a 33% interest in SCPL to Rose Rock in exchange for (i) cash of approximately $189.5 million, (ii) the issuance of 1.5 million common units, (iii) the issuance of 1.25 million Class A units and (iv) an increase of the capital account of the general partner of Rose Rock and a related issuance of general partner interest, to allow the general partner of Rose Rock to maintain its 2% general partner interest.
In connection with this transaction, Rose Rock issued and sold 2.0 million common units to third-party purchasers in a private placement for aggregate consideration of approximately $59.3 million. In addition, Rose Rock made a borrowing of $133.5 million under its revolving credit facility. The proceeds from the private placement and the borrowing were used by Rose Rock to fund the cash consideration in the transaction with us and to pay certain related transaction costs and expenses.
On December 16, 2013, we contributed an additional 33% interest in SCPL to Rose Rock in exchange for (i) cash of approximately $173.1 million, (ii) the issuance of 1.5 million common units, (iii) the issuance of 1.25 million Class A units, and (iv) an increase of the capital account of the general partner of Rose Rock and a related issuance of general partner interest, to allow the general partner of Rose Rock to maintain its 2% general partner interest. The cash consideration was funded through a borrowing under Rose Rock's credit facility.
As these transactions were between parties under common control, Rose Rock recorded its interest in SCPL at SemGroup's historical value and as such no gain was recognized by SemGroup. Proceeds in excess of the historical value were accounted for as a dividend from Rose Rock to SemGroup and resulted in a $180.2 million reduction to noncontrolling interests in consolidated subsidiaries and an offsetting increase to additional paid-in capital of $112.9 million (net of tax impact of $67.3 million). This non-cash entry represents the portion of the proceeds in excess of historical cost which were attributed to Rose Rock's third-party unitholders. SemGroup used the proceeds from these transactions to pay amounts owed under its revolving credit facility.
SemGroup incurred approximately $2.2 million of expense associated with these transactions, including expenses of Rose Rock. Rose Rock incurred $1.6 million of equity issuance costs which were offset against proceeds, $1.6 million of costs related to the January 2013 borrowing which were deferred, and $0.9 million of acquisition related costs which were expensed.
Rose Rock equity issuance
In August 2013, Rose Rock sold 4.75 million common limited partner units to third-party purchasers for $152.5 million, net of underwriting discounts and commissions. Proceeds were used to repay borrowings on the Rose Rock credit facility.
Rose Rock subsequent events
On January 1, 2015, certain operational targets were achieved by White Cliffs and all 3,750,000 Class A units held by the Company were converted to common units on a one-for-one basis. The conversion did not impact the total number of the Rose Rock's outstanding units representing limited partner interests.
On February 13, 2015, we contributed the Wattenberg Oil Trunkline and Glass Mountain Holding, LLC, which holds our 50% interest in Glass Mountain, to Rose Rock in exchange for (i) cash of approximately $251.2 million, (ii) the issuance of 1.75 million common units and (iii) an increase of the capital account of the general partner of Rose Rock and a related issuance of general partner interest, to allow the general partner of Rose Rock to maintain its 2% general partner interest. The cash consideration was funded through a borrowing under Rose Rock's credit facility and the issuance and sale of 2.3 million common units in an underwritten public offering for net proceeds of $89.1 million. As the acquisition was between parties under common control, Rose Rock will record its interest in acquired assets and liabilities at SemGroup's historical value and SemGroup will not recognize a gain on the transaction. Proceeds in excess of the historical value will be accounted for as a dividend from Rose Rock to SemGroup.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
4.
ROSE ROCK MIDSTREAM, L.P., Continued
On February 17, 2015, certain targets specified in Rose Rock’s partnership agreement were achieved and all 8,389,709 subordinated units held by the Company were converted to common units. The conversion did not impact the total number of Rose Rock’s outstanding units representing limited partner interests.
5.
EQUITY METHOD INVESTMENTS
Our equity method investments consist of the following (in thousands):
Our earnings from equity method investments consist of the following (in thousands):
* Excluding gains on issuance of common units of $29.0 million and $26.9 million for the years ended December 31, 2014 and 2013, respectively.
Cash distributions received from equity method investments consist of the following (in thousands):
White Cliffs
Certain summarized balance sheet information of White Cliffs is shown below (in thousands):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
5.
EQUITY METHOD INVESTMENTS, Continued
Certain summarized income statement information of White Cliffs for the years ended December 31, 2014, 2013 and 2012 is shown below (in thousands):
The equity in earnings of White Cliffs for the years ended December 31, 2014, 2013 and 2012 reported in our consolidated statements of operations is less than 51% of the net income of White Cliffs for the same period. This is due to certain general and administrative expenses we incur in managing the operations of White Cliffs that the other members are not obligated to share. Such expenses are recorded by White Cliffs, and are allocated to our membership interests. White Cliffs recorded $1.6 million, $1.8 million and $2.0 million of such general and administrative expense for the years ended December 31, 2014, 2013 and 2012, respectively.
The members of White Cliffs are required to fund capital contribution requirements for White Cliffs related to an expansion project adding approximately 65,000 barrels per day of capacity. We expect to contribute $40.0 million for this project. The project is expected to be complete in late 2015.
In August 2014, White Cliffs completed an expansion project adding a parallel 12" pipeline from Platteville, Colorado to Cushing, Oklahoma. For the years ended December 31, 2014, 2013 and 2012, we contributed $53.3 million, $95.5 million and $2.3 million, respectively, for project funding. This expansion increased White Cliffs’ capacity to about 150,000 barrels per day and became fully operational in the third quarter of 2014.
Our membership interest in White Cliffs is significant as defined by Securities and Exchange Commission’s Regulation S-X Rule 1-02(w). Accordingly, as required by Regulation S-X Rule 3-09, we have included the audited financial statements of White Cliffs as of December 31, 2014 and 2013 and for each of the three years in the period ended December 31, 2014 as an exhibit to this Form 10-K.
NGL Energy
At December 31, 2014, we owned 6,652,101 common units representing limited partner interests in NGL Energy, which represents approximately 7.5% of the limited partner units of NGL Energy outstanding at September 30, 2014, and an 11.78% interest in the general partner of NGL Energy.
On October 27, 2014, we agreed to terminate our right to appoint two representatives to the Board of Directors of NGL Energy Holdings LLC, the general partner of NGL Energy, and our current representatives resigned. We no longer have significant influence over NGL Energy Holdings, LLC or NGL Energy. However, in accordance with ASC 323-30-S99-1, we have continued to account for these investments under the equity method as our ownership is above the 3 to 5 percent interest which is generally considered to be more than minor.
At December 31, 2014, the fair market value of our 6,652,101 common unit investment in NGL Energy was $186.2 million, based on a December 31, 2014 closing price of $27.99 per common unit. This does not reflect our 11.78% interest in the general partner of NGL Energy. The fair value of our limited partner investment in NGL Energy is categorized as a Level 1 measurement, as it is based on quoted market prices.
Our policy is to record our equity in earnings of NGL Energy on a one-quarter lag, as we do not expect information on the earnings of NGL Energy to always be available in time to consistently record the earnings in the quarter in which they are generated. Accordingly, the equity in earnings from NGL Energy, which is reflected in our consolidated statements of operations and comprehensive income for the years ended December 31, 2014, 2013 and 2012 relates to the earnings of NGL Energy for the twelve months ended September 30, 2014, 2013 and 2012 respectively.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
5.
EQUITY METHOD INVESTMENTS, Continued
Certain unaudited summarized balance sheet information of NGL Energy is shown below (in thousands):
Certain unaudited summarized income statement information of NGL Energy for the twelve months ended September 30, 2014 and 2013 is shown below (in thousands):
Our limited partnership interest was diluted in connection with NGL Energy equity offerings and equity issued as consideration for acquisitions in 2014 and 2013. Accordingly, we recorded non-cash gains of $29.0 million and $26.9 million for the years ended December 31, 2014 and 2013, respectively, related to these transactions, which are included in "gain on issuance of common units by equity method investee" in our consolidated statements of operations and comprehensive income.
During the year ended December 31, 2014, we sold 2,481,308 of our NGL Energy common units for $88.8 million, net of related costs of $3.1 million. We recorded a net gain of approximately $34.2 million in "other expense (income), net" in our consolidated statement of operations and comprehensive income.
Subsequent to December 31, 2014, we sold 999,533 of our NGL Energy common units for $29.0 million, net of related costs of $0.4 million. We realized a net gain of approximately $7.5 million as a result of these transactions.
Our ownership interest in NGL Energy is significant as defined by Securities and Exchange Commission’s Regulation S-X Rule 1-02(w). Accordingly, as required by Regulation S-X Rule 3-09, we will amend this Form 10-K to include the audited financial statements of NGL Energy as of March 31, 2015 and 2014 and for each of the three years in the period ended March 31, 2015 as an exhibit, when available.
Glass Mountain
We hold a 50% interest in Glass Mountain which we account for under the equity method. Glass Mountain began operations in the first quarter of 2014. We invested $16.2 million and $57.8 million in Glass Mountain for the years ended December 31, 2014 and 2013, respectively, including our capital contributions, amounts paid to acquire additional ownership interests, and capitalized interest.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
5.
EQUITY METHOD INVESTMENTS, Continued
The excess of the recorded amount of our investment over the book value of our share of the underlying net assets represents equity method goodwill and capitalized interest of $31.0 million and $4.1 million, respectively, at December 31, 2014. Capitalized interest is amortized as a reduction of earnings from equity method investments.
The equity in earnings of Glass Mountain for the year ended December 31, 2014 reported in our consolidated statement of operations and comprehensive income is less than 50% of the net income of Glass Mountain for the same period due to amortization of capitalized interest for the period.
Certain summarized balance sheet information of Glass Mountain is shown below (in thousands):
Certain unaudited summarized income statement information of Glass Mountain for the year ended December 31, 2014 is shown below (in thousands):
Our ownership interest in Glass Mountain is not significant as defined by Securities and Exchange Commission's Regulation S-X Rule 1-02(w). Accordingly, no audited financial statements of Glass Mountain pursuant to Regulation S-X 3-09 have been included as an exhibit to this Form 10-K.
6.
ACQUISITIONS
Crude oil trucking assets
On June 24, 2014, our consolidated subsidiary, Rose Rock, acquired crude oil trucking assets from a subsidiary of Chesapeake Energy Corporation ("Chesapeake") (NYSE: CHK) for $44.0 million in cash. Highlights of the transaction include:
•
124 trucks, 122 trailers and miscellaneous equipment; and
•
a long-term transportation agreement with Chesapeake Energy Marketing, Inc.
The results of operations of these assets from June 24, 2014 through December 31, 2014 have been included in our Crude segment in our consolidated statements of operations and comprehensive income and balance sheet as of December 31, 2014. During the year ended December 31, 2014, our consolidated statements of operation and comprehensive income did not include material amounts of revenue or operating income related to these assets. The proforma impact to comparative prior year periods, had the acquisition occurred at the beginning of the comparative prior year period, is not significant.
Fair values of the acquired assets were determined based on the cost, income and market approach methodologies. The trucks and equipment acquired were valued based on the cost approach, which considers the replacement cost of the assets adjusted for depreciation and physical deterioration, and the market approach, which considers the value of
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
6.
ACQUISITIONS, Continued
transactions for comparable assets. The value of the customer contract was determined based on the income approach using the excess earnings method over the remaining life of the contract and assuming a 95% probability of renewal.
We have recorded the fair value of the assets acquired as follows (in thousands):
The above finalized purchase price allocation resulted in adjustments to previously reported estimates. Our preliminary estimate of the value of the acquired property, plant and equipment was reduced by $2.6 million and our estimate of the value of the intangible asset was increased by $12.6 million which resulted in a decrease in the value of the associated goodwill of $10.0 million.
Goodwill represents the excess of the estimated consideration paid for the acquired business over the fair value of the individual assets acquired. Goodwill primarily represents the value of the acquired business as a platform for growth and the acquired assembled workforce.
Mid-America Midstream Gas Services, L.L.C.
On August 1, 2013, our SemGas segment acquired the equity interest of Mid-America Midstream Gas Services, L.L.C. ("MMGS"), a wholly owned subsidiary of Chesapeake, which is the owner of gas gathering and processing assets in the Mississippi Lime play for approximately $314.0 million in cash. We incurred approximately $3.6 million in transaction related general and administrative expenses. The transaction was funded through the combination of a portion of the net proceeds from the sale of $300 million of 7.50% senior unsecured notes (Note 16) and a borrowing under the revolving credit facility under SemGroup's corporate credit agreement. Highlights of the acquisition include the following:
•
200 miles of gathering pipeline;
•
Rose Valley I plant - A 200 mmcf/d (million cubic feet per day) cryogenic processing plant, placed in operation in the first quarter of 2014;
•
Rose Valley II plant - A 200 mmcf/d cryogenic processing plant, expected to be in operation in mid-2015;
•
Approximately 540,000 net acre dedication in the core of the Mississippi Lime play, supported by a joint venture between Chesapeake and Sinopec International Petroleum Exploration and Production Corporation ("Sinopec"); and
•
A 20-year, 100% fee based, gas gathering and processing agreement with certain affiliates of Chesapeake and Sinopec.
Fair values of the acquired assets were determined based on the cost, income and market approach methodologies. The property, plant and equipment acquired were valued based on the cost approach, which considers the replacement cost of the assets adjusted for depreciation and physical deterioration, and the market approach, which considers the value of transactions for comparable assets. The value of the customer contract was determined based on the income approach using the excess earnings method over the remaining life of the contract and assuming no renewal.
We have recorded the fair value of the assets acquired as follows (in thousands):
Based on the final purchase price allocation, the amounts above were adjusted from those reported at December 31, 2013 by a non-cash adjustment which decreased goodwill and customer contract intangible by $10.8 million and $2.3 million, respectively, with a corresponding increase to property, plant and equipment. In addition, we recorded $0.5 million of incremental payments for property, plant and equipment, which related to the period prior to close of the transaction.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
6.
ACQUISITIONS, Continued
Goodwill represents the excess of the estimated consideration paid for the acquired business over the fair value of the individual assets acquired. Goodwill primarily represents the value of operational efficiencies between the acquired entity and the Company's existing assets in the area and the opportunity to use the acquired business as a platform for growth.
Barcas Field Services, LLC
On September 1, 2013, our consolidated subsidiary, Rose Rock, completed the acquisition of the assets of Barcas Field Services, LLC ("Barcas") for $49.0 million in cash. Highlights of the acquisition include the following:
•
114 trucks, 120 trailers and miscellaneous equipment; and
•
a long-term take-or-pay customer transportation agreement.
Fair values of the acquired assets were determined based on the cost, income and market approach methodologies. The trucks and equipment acquired were valued based on the cost approach which considers the replacement cost of the assets adjusted for depreciation and physical deterioration. The value of the customer contract was determined based on the income approach using the excess earnings method over the remaining life of the contract and assuming a 50% probability of renewal. The market approach which considers the value of comparable transactions was used to value the acquired land.
We have recorded the following acquisition date fair values for the assets acquired (in thousands):
Based on the final purchase price allocation, the amounts above differ from those reported at December 31, 2013 by a non-cash adjustment which decreased goodwill and other intangible assets and increased property, plant and equipment by $0.1 million.
Goodwill represents the excess of the consideration paid for the acquired business over the fair value of the individual assets acquired. Goodwill primarily represents cost savings due to the ability to transport using the acquired trucks rather than third-party trucks, the ability to bring more volume from the field into our pipelines, the opportunity to use the acquired business as a platform for growth and the acquired assembled workforce.
NGL Energy
On August 6, 2013, we completed the acquisition of approximately 5.36% of the general partner of NGL Energy, which increased our ownership of NGL Energy's general partner to 11.78%.
Glass Mountain
In September 2012, we acquired an additional 25% ownership interest in Glass Mountain, bringing our total ownership percentage in Glass Mountain to 50%. See Note 5 for additional information related to our equity method investment in Glass Mountain.
7.
DISPOSALS OR IMPAIRMENTS OF LONG-LIVED ASSETS
Year Ended December 31, 2014
On June 1, 2014, our SemGas segment sold certain natural gas gathering assets in Eastern Oklahoma resulting in a $20.1 million pre-tax loss on a cash sales price of $2.4 million. The assets sold were made up of property, plant and equipment with a net book value of $22.5 million. The loss on the sale was reported in "loss (gain) on disposal or impairment of long-lived assets, net" in the consolidated statement of operations and comprehensive income. The operations of the gas gathering assets were not material to SemGroup.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
7.
DISPOSALS AND IMPAIRMENTS OF LONG-LIVED ASSETS, Continued
During the year ended December 31, 2014, we recorded an impairment charge of $11.9 million related to leaseholds of unproved oil and gas properties located in Kansas. These assets were written off when due to the downturn in crude oil prices and the remaining life of the leaseholds, it became apparent that these properties would not be developed. These assets were held by a subsidiary included in Corporate and Other in our segment disclosures (Note 9).
Year Ended December 31, 2013
There were no significant gains (losses) recorded during the year ended December 31, 2013 related to the disposal of long-lived assets.
Year Ended December 31, 2012
Gains (losses) recorded during the year ended December 31, 2012 related to the disposal of long-lived assets including the following (in thousands):
(a)
We sold a portion of our ownership interest in White Cliffs during September 2010. At the time, we recorded a loss of $6.8 million on disposal of that asset. In September 2012, we reached a settlement in a dispute concerning the selling price of that ownership interest and reduced the loss by $3.5 million. This $3.5 million gain is reported in "gain on disposal or impairment of long-lived assets, net" in the consolidated statements of operations and comprehensive income.
(b)
On September 12, 2012, we entered into a definitive agreement to sell the assets and liabilities of SemStream’s Arizona residential business which was subject to regulatory approval by the Arizona Corporation Commission (the "ACC"). In early December 2012, the ACC granted SemStream regulatory approval to proceed with the sale. The sale closed on December 31, 2012 and resulted in a gain of $3.1 million on a cash sales price of $12.3 million. The $3.1 million gain is reported in "income (loss) from discontinued operations, net of income taxes" in the consolidated statements of operations and comprehensive income. Property, plant, and equipment with a carrying value of $9.4 million represented the majority of assets included in the sale.
8.
DISCONTINUED OPERATIONS
On December 31, 2012, we completed the sale of SemStream's Arizona residential business which was classified as a discontinued operation. The sale resulted in a gain of $3.1 million. There continues to be an insignificant amount of activity related to ongoing bankruptcy matters which is reflected in the results below and is related to operations discontinued during bankruptcy.
Certain summarized information on the results of discontinued operations is shown below (in thousands):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
9.
SEGMENTS
As described in Note 1, our businesses are organized based on the nature and location of the services they provide. Certain summarized information related to our reportable segments is shown in the tables below. None of the operating segments have been aggregated, other than Rose Rock and Glass Mountain, which have been included within the Crude segment and were aggregated based on similarity of operations, customer base and other considerations. Our equity investment 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 were allocated to the segments, based on our allocation policies in effect at the time.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
9.
SEGMENTS, Continued
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
9.
SEGMENTS, Continued
Income tax expense (benefit) relates to the following segments (in thousands):
10.
INVENTORIES
Inventories consist of the following (in thousands):
During the year ended December 31, 2014, our Crude segment recorded non-cash charges of $5.7 million to write-down crude oil inventory to the lower of cost or market.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
11.
OTHER ASSETS
Other current assets consist of the following (in thousands):
Other noncurrent assets consist of the following (in thousands):
* See Note 16 for discussion of debt issuance costs.
12.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
We recorded depreciation expense of $82.5 million, $60.4 million and $46.2 million for the years ended December 31, 2014, 2013 and 2012, respectively.
We include within the cost of property, plant and equipment interest costs incurred while an asset is being constructed. We capitalized $1.5 million and $4.3 million of interest costs during the years ended December 31, 2014 and 2013, respectively.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
13.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill relates to the following segments (in thousands):
In addition to the amounts in the table above, approximately $71.4 million of our investment in NGL Energy and $31.0 million of our investment in Glass Mountain represents equity method goodwill. Equity method goodwill is not amortized and is tested for impairment with the equity method investment in accordance with ASC 323.
We assess our goodwill for impairment at least annually as of October 1. Our goodwill impairment analysis performed as of October 1, 2014, did not result in an impairment charge nor did our analysis reflect any reporting units at risk, and subsequent to that date, no event has occurred indicating that the implied fair value of each of our reporting units (including its inherent goodwill) is less than the carrying value of its net assets.
Changes in goodwill balances during the period from December 31, 2011 to December 31, 2014 are shown below (in thousands):
For U.S. federal income tax purposes, goodwill is amortized on a straight-line basis over 15 years.
Other intangible assets
Other intangible assets relate to the following segments (in thousands):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
13.
GOODWILL AND OTHER INTANGIBLE ASSETS, Continued
Changes in other intangible asset balances are shown below (in thousands):
Our other intangible assets consist primarily of customer relationships at our Crude, SemGas and SemMexico segments and unpatented technology of our SemMexico segment, which represented $171.6 million and $1.3 million, respectively, of the balance at December 31, 2014. These assets may be subject to impairments in the future if we are unable to maintain the relationships with the customers to which the assets relate.
For the year ended December 31, 2014, we recorded a $17.0 million customer contract intangible asset related to the crude oil trucking asset acquisition. The intangible is being amortized in proportion with the expected revenues associated with the contract over 20 years.
We estimate that future amortization of other intangible assets will be as follows (in thousands):
14.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK
Fair value of financial instruments
We record certain financial assets and liabilities at fair value at each balance sheet date. The tables below summarize the balances of commodity derivative assets and liabilities at December 31, 2014 and 2013 (in thousands):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
14.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK, Continued
*
Relates primarily to exchange traded futures. Gain and loss positions on multiple contracts are settled net on a daily basis with the exchange.
“Level 1” measurements are based on inputs consisting of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. These include commodity futures contracts that are traded on an exchange. The valuation of our common stock warrants which were traded on the New York Stock Exchange was also classified as Level 1.
“Level 2” measurements are based on inputs consisting of market observable and corroborated prices for similar commodity derivative contracts. Assets and liabilities classified as Level 2 include over-the-counter ("OTC") traded forwards contracts and swaps.
“Level 3” measurements are obtained using 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.
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 2 or Level 3 during the years ended December 31, 2014, 2013 and 2012, as such no rollforward of activity has been presented.
Commodity derivative contracts
Our consolidated results of operations and cash flows are impacted by changes in market prices for petroleum products. This exposure to commodity price risk is managed, in part, by entering into various commodity derivatives.
We seek to manage the price risk associated with our marketing operations by limiting our net open positions through (i) the concurrent purchase and sale of like quantities of petroleum products to create back-to-back transactions that are intended to lock in positive margins based on the timing, location or quality of the petroleum products purchased and delivered or (ii) derivative contracts. Our storage and transportation assets can also be used to mitigate location and time basis risk. All marketing activities are subject to our Comprehensive Risk Management Policy, which establishes limits in order to manage risk and mitigate financial exposure.
Our commodity derivatives can be comprised of swaps, futures contracts and forward contracts of crude oil and natural gas liquids. These are defined as follows:
Swaps - OTC transactions where a floating price, basis or index is exchanged for a fixed (or a different floating) price, basis or index at a preset schedule in the future, according to an agreed-upon formula.
Futures contracts - Exchange traded contracts to buy or sell a commodity. These contracts are standardized by the exchange in terms of quality, quantity, delivery period and location for each commodity.
Forward contracts - OTC contracts to buy or sell a commodity at an agreed upon future date. The buyer and seller agree on specific terms (price, quantity, delivery period and location) and conditions at the inception of the contract.
The following table sets forth the notional quantities for derivative instruments entered into (in thousands of barrels):
We have not designated any of our commodity derivative instruments as accounting hedges. We have recorded the fair value of our commodity derivative instruments on our consolidated balance sheets in "other current assets" and "other current liabilities" in the following amounts (in thousands):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
14.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK, Continued
We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. Our margin deposit balances were $0.8 million and $0.8 million at December 31, 2014 and 2013, respectively. These margin account balances have not been offset against our net commodity derivative instrument (contract) positions. Had these margin account balances been netted against our net commodity derivative instrument (contract) positions as of December 31, 2014 and 2013, we would have had net asset positions of $2.5 million and $0.8 million, respectively.
Realized and unrealized gains (losses) from our commodity derivatives were recorded to product revenue in the following amounts (in thousands):
Warrants
In addition to the commodity derivatives above, we had $58.1 million of derivative liabilities related to common stock warrants at December 31, 2013, which are not subject to netting arrangements. The warrants were issued upon emergence from bankruptcy and were recorded at fair value on the consolidated balance sheets with changes in the fair value recorded to "other expense (income), net" in our consolidated statements of operations and comprehensive income. For the years ended December 31, 2014, 2013, and 2012, we recorded expense related to the change in fair value of $13.4 million, $46.4 million and $21.3 million, respectively. The warrants expired on November 30, 2014. See Note 18 for additional information.
Concentrations of risk
During the year ended December 31, 2014, one customer of our Crude segment accounted for more than 10% of our consolidated revenue at approximately 36%. We purchased approximately $469 million of product from one third-party supplier of our Crude segment, which represented approximately 29% of our costs of products sold. At December 31, 2014, two customers of our Crude segment accounted for approximately 34% of our consolidated accounts receivable.
Assets and liabilities of subsidiaries outside the United States
The following table summarizes the assets and liabilities (excluding affiliate balances) at December 31, 2014 of our subsidiaries outside the United States (in thousands):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
14.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK, Continued
Employees
At December 31, 2014, we had approximately 1,080 employees, including approximately 540 employees outside the U.S. Approximately 130 of the employees in Canada and Mexico are represented by labor unions and are subject to collective bargaining agreements governing their employment with us. Of these employees, approximately 70 are subject to collective bargaining agreements that renew annually and 60 have collective bargaining agreements that expire in January 2016. We have never had a labor related work stoppage and believe our employee relations are good.
15.
INCOME TAXES
Income tax expense (benefit)
Our consolidated income from continuing operations before income taxes was generated in the following jurisdictions (in thousands):
The following table summarizes income tax provision (benefit) from continuing operations by jurisdiction (in thousands):
The following table reconciles income tax provision at the U.S. federal statutory rate to the consolidated provision (benefit) for income taxes (in thousands):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
15.
INCOME TAXES, Continued
For the years ended December 31, 2014, 2013, and 2012, , the foreign subsidiaries are disregarded entities for U.S. federal income tax purposes. The foreign earnings are taxed in foreign jurisdictions as well as in the U.S. Foreign tax credits, subject to limitations, are available to reduce U.S. taxes. The rate for 2014 is impacted by disallowance of a foreign loss on cross jurisdictional intercompany debt waivers which had no net impact to U.S. taxes and by the disallowance of an intercompany foreign gain on subsidiary dissolution. We have recorded foreign tax benefit in 2014 primarily related to the closure of a tax audit by Canada Revenue Agency with respect to 2009. Canadian withholding taxes of $5.1 million were incurred on the settlement of certain historical cross border intercompany balances during the year.
Deferred tax positions
Deferred income taxes reflect the effects of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. Significant components of deferred tax assets and liabilities are as follows at December 31, 2014 and 2013 (in thousands):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
15.
INCOME TAXES, Continued
At December 31, 2014, we had a cumulative U.S. federal net operating loss of approximately $82.2 million that can be carried forward to apply against taxable income generated in future years. This carry forward begins to expire in 2031. We had cumulative U.S. state net operating losses of approximately $67.2 million available for carryforward, which begin to expire in 2016. We had a foreign net operating loss of $23.9 million available for indefinite carryforward. We had foreign tax credits of approximately $55.0 million available for carry forward, which begin to expire in 2020.
Due to our emergence from bankruptcy and overall restructuring, we recorded a full valuation allowance on all U.S. federal and state deferred tax assets in all periods prior to March 31, 2013. Deferred tax assets are reduced by a valuation allowance when a determination is made that it is more likely than not that some, or all, of the deferred tax assets will not be realized based on the weight of all available evidence. Evidence which is objectively verifiable carries a higher weight in the analysis. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income of the appropriate character within the carryback and carryforward period available under the tax law. Sources of taxable income include future reversals of existing taxable temporary differences, future earnings and available tax planning strategies.
In 2013, we recorded a discrete tax benefit for the partial release of our valuation allowance. Gain recognition, for tax purposes, on the contribution of a one-third interest in SCPL to Rose Rock had a material impact to the available positive and objectively verifiable evidence and combined with other factors, resulted in the change in our assessment of recoverability of the deferred tax assets. We did not release the valuation allowance attributable to a small portion of our state net operating loss carryovers which have shorter carryover periods. We have not released the valuation allowance on the foreign tax credits due to the foreign tax credit limitation and the relative subjectivity of forecasts of the relational magnitude of U.S. and foreign taxable income in future periods, as well as the shorter carryover period available for the credits.
The valuation allowance increased by $7.3 million during 2014. The change related to a net increase of $6.8 million for Foreign tax credits and offset to branch deferreds and an increase of $0.5 million to offset certain state net operating losses with shorter carryover periods.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
15.
INCOME TAXES, Continued
We have analyzed filing positions in all of the federal, state and foreign jurisdictions where we are required to file income tax returns and determined that no accruals related to uncertainty in tax positions are required. All income tax years of the Company ending after the emergence from bankruptcy remain open for examination in U.S. jurisdictions under general operation of the statute of limitations, including special provisions with regard to net operating loss carryovers. In foreign jurisdictions, all tax periods prior to the emergence from bankruptcy are closed. The statute of limitations has not been waived with respect to any foreign jurisdictions post emergence and tax periods are open for examination in accordance with the general statutes of each foreign jurisdiction. The Canada Revenue Agency audit of 2009 was closed during the year. Currently, there are no examinations in progress for our federal, state or foreign jurisdictions.
16.
LONG-TERM DEBT
Our long-term debt consisted of the following (in thousands):
SemGroup senior unsecured notes
On June 14, 2013, we completed an offering of $300 million of 7.50% senior unsecured notes due 2021 (the “Notes”). The Notes are guaranteed by certain of our subsidiaries: SemGas, L.P., SemCanada, L.P., SemCanada II, L.P., SemMaterials, L.P., SemGroup Europe Holding, L.L.C., SemOperating G.P., L.L.C., SemMexico, L.L.C., SemDevelopment, L.L.C., Rose Rock Midstream Holdings, LLC, Wattenberg Holding, LLC, Glass Mountain Holding, LLC and Mid-America Midstream Gas Services, L.L.C. (collectively, the "Guarantors"). The guarantees of the Notes are full and unconditional and constitute the joint and several obligations of the Guarantors.
The net proceeds from the offering were $294.0 million, after underwriters' fees. We used the net proceeds from the offering to (i) fund a portion of our acquisition on August 1, 2013, of all the outstanding equity interests in Mid-America Midstream Gas Services, L.L.C., a subsidiary of Chesapeake Energy Corporation, and (ii) during the second quarter of 2013, repay amounts borrowed under our revolving credit facility.
The Notes are governed by an indenture, as supplemented, between the Company and its subsidiary Guarantors and Wilmington Trust, N.A., as trustee (the “Indenture”). The Indenture includes customary covenants, including limitations on our ability to incur additional indebtedness or issue certain preferred shares; pay dividends and make certain distributions, investments and other restricted payments; create certain liens; sell assets; enter into transactions with affiliates; enter into sale and lease-back transactions; merge, consolidate, sell or otherwise dispose of all or substantially all of our assets; and designate our subsidiaries as unrestricted under the Indenture.
The Indenture includes customary events of default, including events of default relating to non-payment of principal and other amounts owing from time to time, failure to provide required reports, failure to comply with agreements in the indenture, cross payment-defaults to any material indebtedness, bankruptcy and insolvency events, certain unsatisfied judgments, and invalidation or cessation of the subsidiary guarantee of a significant subsidiary. A default would permit holders to declare the Notes and accrued interest due and payable.
The Notes are effectively subordinated in right of payment to any of our, and the Guarantors', existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness and are structurally subordinated to the obligations of any subsidiary that is not a guarantor of the Notes.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
16.
LONG-TERM DEBT, Continued
The Company may issue additional Notes under the Indenture from time to time, subject to the terms of the Indenture.
Except as described below, the Notes are not redeemable at the Company's option prior to June 15, 2016. From and after June 15, 2016, the Company may redeem the Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if redeemed during the twelve-month period beginning on June 15 of each of the years indicated below:
Prior to June 15, 2016, the Company may, at its option, on one or more occasions, redeem up to 35% of the sum of the original aggregate principal amount of the Notes at a redemption price equal to 107.500% of the aggregate principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings of the Company, subject to certain conditions.
Prior to June 15, 2016, the Company may also redeem all or part of the Notes at a price equal to the principal plus a premium equal to the greater of 1% of the principal or the excess of the present value of the June 15, 2016 redemption price from the table above plus all required interest payments due through June 15, 2016, computed using a discount rate based on a published United States Treasury Rate plus 50 basis points, over the principal value of such Note.
In the event of a change of control, the Company is required to offer to repurchase the Notes at an amount equal to 101% of the principal plus accrued and unpaid interest.
Interest on the Notes is payable in arrears on June 15th and December 15th to holders of record on June 1st and December 1st each year until maturity. For the year ended December 31, 2014 and 2013, we incurred $23.3 million and $12.7 million, respectively, of interest expense related to the Notes including the amortization of debt issuance costs. At December 31, 2014, we had $5.4 million of unamortized debt issuance costs related to the Notes included in other noncurrent assets on our consolidated balance sheet.
At December 31, 2014, we were in compliance with the terms of the Notes.
SemGroup corporate credit agreement
Our revolving credit facility has a capacity of $500 million at December 31, 2014. This capacity may be used either for cash borrowings or letters of credit, although the maximum letter of credit capacity is $250 million. The credit agreement allows for the increase of the revolving commitments under the credit agreement by an aggregate amount of $300 million subject to the satisfaction of certain conditions. The agreement matures on December 11, 2018. Earlier principal payments may be required if we enter into certain transactions to sell assets or obtain new borrowings. We have the right to make additional principal payments without incurring any penalties for early repayment.
Interest on revolving credit cash borrowings is charged at either a Eurodollar rate or an alternate base rate ("ABR"), at our election, plus, in each case an applicable margin. The applicable margin will range from 2.0% to 3.25% in the case of a Eurodollar loan, and from 1.0% to 2.25% in the case of an ABR loan, in each case, based on a leverage ratio specified in the agreement.
At December 31, 2014, there were $35.0 million of outstanding revolving cash borrowings of which $15.0 million incurred interest at the ABR and $20.0 million incurred interest at the Eurodollar rate. The interest rate in effect at December 31, 2014 on alternate base rate borrowings was 4.25%. The interest rate in effect at December 31, 2014 on Eurodollar rate borrowings was 2.23%.
Fees are charged on any outstanding letters of credit at a rate that ranges from 2.0% to 3.25%, depending on a leverage ratio specified in the credit agreement. At December 31, 2014, we had $3.8 million of outstanding letters of credit for which the rate in effect was 2.0%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
16.
LONG-TERM DEBT, Continued
A commitment fee that ranges from 0.375% to 0.5%, depending on a leverage ratio defined in the credit agreement, is charged on any unused capacity on the revolving credit facility. In addition, we are charged an annual administrative fee of $0.1 million.
At December 31, 2014, we had unamortized capitalized loan fees of $5.0 million net of accumulated amortization, which was recorded in other noncurrent assets and is being amortized over the life of the agreement.
We recorded interest expense related to the revolving credit facility of $6.3 million, $7.7 million and $6.9 million for the years ended December 31, 2014, 2013 and 2012, respectively, including amortization of capitalized loan fees.
The credit agreement includes customary affirmative and negative covenants, including limitations on the creation of new indebtedness, liens, sale and lease-back transactions, new investments, making fundamental changes including mergers and consolidations, making of dividends and other distributions, making material changes in our business, modifying certain documents and maintenance of a consolidated leverage ratio and an interest coverage ratio. In addition, the credit agreement prohibits any commodity transactions that are not permitted by our comprehensive risk management policy.
The credit agreement includes customary events of default, including events of default relating to non-payment of principal and other amounts owing under the credit agreement from time to time, including in respect of letter of credit disbursement obligations, inaccuracy of representations and warranties in any material respect when made or when deemed made, violation of covenants, cross payment-defaults to any material indebtedness, cross acceleration to any material indebtedness, bankruptcy and insolvency events, the occurrence of a change of control, certain unsatisfied judgments, certain ERISA events, certain environmental matters and certain assertions of or actual invalidity of certain loan documents. A default under the credit agreement would permit the participating banks to terminate commitments, require immediate repayment of any outstanding loans with interest and any unpaid accrued fees, and require the cash collateralization of outstanding letter of credit obligations.
The terms of our current credit facility restrict, to some extent, the payment of cash dividends on our common stock. The credit agreement is guaranteed by all of our material domestic subsidiaries (except for Rose Rock and its general partner and subsidiaries) and secured by a lien on substantially all of our property and assets, subject to customary exceptions.
At December 31, 2014, we were in compliance with the terms of the credit agreement.
Rose Rock senior unsecured notes
On July 2, 2014, Rose Rock and its wholly-owned subsidiary, Rose Rock Finance Corporation ("Finance Corp."), as co-issuer, sold $400 million of 5.625% senior unsecured notes due 2022 (the “Rose Rock Notes”) to certain initial purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons outside the United States pursuant to Regulation S of the Securities Act. The Rose Rock Notes are guaranteed by all of Rose Rock's existing subsidiaries other than Finance Corp.
The net proceeds from the offering of $391.9 million, after underwriters' fees and offering expenses, were used to repay amounts borrowed under Rose Rock's revolving credit facility and for general partnership purposes.
The Rose Rock Notes are governed by an indenture between Rose Rock, its subsidiary guarantors, Finance Corp. and Wilmington Trust, National Association, as trustee (the “Rose Rock Indenture”). The Rose Rock Indenture includes customary covenants, including limitations on Rose Rock's ability to incur additional indebtedness or issue certain preferred shares; pay dividends and make certain distributions, investments and other restricted payments; create certain liens; sell assets; enter into transactions with affiliates; merge, consolidate, sell or otherwise dispose of all or substantially all of its assets; and designate its subsidiaries as unrestricted under the Rose Rock Indenture.
The Rose Rock Indenture includes customary events of default. A default would permit the trustee or holders of at least 25% in aggregate principal amounts of the Rose Rock Notes then outstanding to declare all amounts owing under the Rose Rock Notes to be due and payable.
The Rose Rock Notes are effectively subordinated in right of payment to any of Rose Rock's, and the subsidiary guarantors', existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness.
Rose Rock may issue additional Rose Rock Notes under the Rose Rock Indenture from time to time, subject to the terms of the Rose Rock Indenture.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
16.
LONG-TERM DEBT, Continued
Except as described below, the Rose Rock Notes are not redeemable at Rose Rock's option prior to July 15, 2017. From and after July 15, 2017, Rose Rock may redeem the Rose Rock Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if redeemed during the twelve-month period beginning on July 15 of each of the years indicated below:
Prior to July 15, 2017, Rose Rock may, at its option, on one or more occasions, redeem up to 35% of the sum of the original aggregate principal amount of the Rose Rock Notes at a redemption price equal to 105.625% of the aggregate principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings of Rose Rock, or the parent of Rose Rock to the extent such net proceeds are contributed to Rose Rock, subject to certain conditions.
Prior to July 15, 2017, Rose Rock may also redeem all or part of the Rose Rock Notes at a price equal to the principal plus a premium equal to the greater of 1% of the principal or the excess of the present value of the July 15, 2017 redemption price from the table above plus all required interest payments due through July 15, 2017, computed using a discount rate based on a published United States Treasury Rate plus 50 basis points, over the principal value of such Note.
In the event of a change of control, Rose Rock is required to offer to repurchase the Rose Rock Notes at an amount equal to 101% of the principal plus accrued and unpaid interest.
In accordance with a Registration Rights Agreement, in September 2014 Rose Rock filed a registration statement with the SEC, which was declared effective by the SEC on September 23, 2014, enabling holders of the Rose Rock Notes to exchange the Rose Rock Notes and related guarantees for registered notes (the "Exchange Notes") and guarantees that have substantially identical terms as the Rose Rock Notes and related guarantees. The exchange offer expired on October 22, 2014. All of the Notes were exchanged. The guarantees of the Exchange Notes are full and unconditional and constitute the joint and several obligations of Rose Rock and its subsidiary guarantors.
Interest on the Rose Rock Notes is payable in arrears on January 15th and July 15th to holders of record on January 1st and July 1st each year until maturity. For the year ended December 31, 2014, we incurred $11.7 million of interest expense related to the Rose Rock Notes including amortization of debt issuance costs. At December 31, 2014, we had $8.0 million of unamortized debt issuance costs related to the Notes included in other noncurrent assets on our consolidated balance sheet.
At December 31, 2014, we were in compliance with the terms of the Rose Rock Indenture.
Rose Rock credit facility
Our Rose Rock senior secured revolving credit facility agreement provides for a revolving credit facility of $585 million and includes a $150 million sub-limit for letters of credit. The credit agreement was amended to extend the agreement to September 20, 2018 and permit the increase of the facility by not more than $200 million, subject to certain conditions. The agreement allows Rose Rock to incur unsecured or subordinated debt without limitation, subject to certain conditions, and provides alternative financial performance covenants at Rose Rock's election after the issuance of $200 million or more unsecured or subordinated debt, in aggregate. Subsequent to the issuance of the Rose Rock Notes, Rose Rock elected to adhere to the alternative financial performance covenants.
At Rose Rock’s option, amounts borrowed under the credit agreement will bear interest at either the Eurodollar rate or an ABR, plus, in each case, an applicable margin. The applicable margin will range from 1.75% to 3.00% in the case of a Eurodollar rate loan, and from 0.75% to 2.00% in the case of an ABR loan, in each case, based on a leverage ratio specified in the credit agreement. At December 31, 2014, we had outstanding cash borrowings of $32.0 million, of which $20.0 million incurred interest at the Eurodollar rate plus an applicable margin and $12.0 million incurred interest at the ABR plus an applicable margin. The interest rates at December 31, 2014 were 2.74% for Eurodollar borrowings and 4.75% for ABR borrowings.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
16.
LONG-TERM DEBT, Continued
Fees are charged on any outstanding letters of credit at a rate that ranges from 1.75% to 3.00%, depending on a leverage ratio specified in the credit agreement. At December 31, 2014, there were $17.5 million in outstanding letters of credit, and the rate in effect was 2.50%. 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. In addition, we are charged an annual administrative fee of $0.1 million. The credit facility also allows for the use of Secured Bilateral Letters of Credit, which are issued external to the credit facility and do not reduce revolver availability. At December 31, 2014, we had $67.6 million of Bilateral Letters of Credit outstanding and the interest rate in effect was 1.75%.
At December 31, 2014, we had $3.8 million in capitalized loan fees, net of accumulated amortization, which is recorded in other noncurrent assets and is being amortized over the life of the agreement.
We recorded interest expense related to this facility of $9.0 million, $8.7 million and $1.9 million for the years ended December 31, 2014, 2013 and 2012, respectively, including amortization of debt issuance costs and interest on bilateral letters of credit.
The credit agreement includes customary representations and warranties and affirmative and negative covenants. The covenants in the agreement include limitations on creation of new indebtedness and liens, entry into sale and lease-back transactions, investments, and fundamental changes including mergers and consolidations, dividends and other distributions, material changes in Rose Rock’s business and modifying certain documents. In addition, the agreement prohibits any commodity transactions that are not permitted by Rose Rock’s comprehensive risk management policy.
The agreement, subsequent to Rose Rock's election to adhere to the alternative financial performance covenants requires Rose Rock to maintain a minimum ratio of consolidated EBITDA to consolidated cash interest expense at the end of any fiscal quarter, for the immediately preceding four quarter period, of 2.50 to 1.00 and a maximum ratio of consolidated net debt to consolidated EBITDA at the end of any fiscal quarter, for the immediately preceding four quarter period, of 5.50 to 1.00, and a maximum ratio of senior secured debt to consolidated EBITDA of 3.50 to 1.00.
The credit agreement includes customary events of default, including events of default relating to non-payment of principal and other amounts owing under the agreement from time to time, including in respect of letter of credit disbursement obligations, inaccuracy of representations and warranties in any material respect when made or when deemed made, violation of covenants, cross payment-defaults of Rose Rock and its restricted subsidiaries to any material indebtedness, cross acceleration to any material indebtedness, bankruptcy and insolvency events, the occurrence of a change of control, certain unsatisfied judgments, certain ERISA events, certain environmental matters and certain assertions of or actual invalidity of certain loan documents. A default under the Rose Rock credit agreement would permit the participating banks to terminate commitments, require immediate repayment of any outstanding loans with interest and any unpaid accrued fees, and require the cash collateralization of outstanding letter of credit obligations.
The credit agreement restricts Rose Rock’s ability to make certain types of payments relating to its units, including the declaration or payment of cash distributions; provided that Rose Rock may make quarterly distributions of available cash so long as no default under the agreement then exists or would result therefrom. The agreement is guaranteed by all of Rose Rock’s material domestic subsidiaries and secured by a lien on substantially all of the property and assets of Rose Rock and the guarantors, subject to customary exceptions.
At December 31, 2014, we were in compliance with the terms of the credit agreement.
SemMexico facilities
At December 31, 2014, SemMexico had no outstanding borrowings on its 44 million Mexican pesos (U.S. $3.0 million at the December 31, 2014 exchange rate) credit facility, which matures in May 2015. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.5%.
At December 31, 2014, SemMexico had no outstanding borrowings on its 56 million Mexican pesos (U.S. $3.8 million at the December 31, 2014 exchange rate) credit facility, which matures in July 2015. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.5%.
At December 31, 2014, SemMexico had outstanding letters of credit of 292.8 million Mexican pesos (U.S. $19.8 million) and a $3.0 million USD letter of credit. Fees charged on outstanding letters of credit generally range from 0.4% to 0.7%.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
16.
LONG-TERM DEBT, Continued
SemMexico recorded interest expense of $0.2 million, $0.2 million and $0.4 million during the years ended December 31, 2014, 2013 and 2012, respectively.
At December 31, 2014, we were in compliance with the terms of these facilities.
Scheduled principal payments
The following table summarizes the scheduled principal payments as of December 31, 2014 (in thousands). As described above, our debt agreements require accelerated principal payments under certain circumstances. As a result, principal payments may occur earlier than shown in the table below.
Fair value
We estimate the fair value of the Notes to be $299 million and the fair value of the Rose Rock Notes to be $368 million at December 31, 2014, based on unadjusted, transacted market prices, which is categorized as a Level 1 measurement. We estimate that the fair value of our other long-term debt was not materially different than the recorded values at December 31, 2014. It is our belief that neither the market interest rates nor our credit profile have changed significantly enough to have had a material impact on the fair value of our other debt outstanding at December 31, 2014. This estimate is categorized as a Level 2 measurement.
17.
COMMITMENTS AND CONTINGENCIES
Bankruptcy matters
On July 22, 2008 (the "Petition Date"), SemGroup, L.P. and certain subsidiaries filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Also on July 22, 2008, SemGroup, L.P.'s Canadian subsidiaries filed for creditor protection in Canada. Later during 2008, certain other U.S. subsidiaries filed petitions for reorganization. While in bankruptcy, SemGroup, L.P. filed a plan of reorganization with the court, which was confirmed on October 28, 2009 (the "Plan of Reorganization"). The Plan of Reorganization determined, among other things, how pre-Petition Date obligations would be settled, the equity structure of the reorganized company upon emergence, and the financing arrangements upon emergence. SemGroup Corporation emerged from bankruptcy protection on November 30, 2009 (the "Emergence Date").
Claims reconciliation process
A large number of parties made claims against us for obligations alleged to have been incurred prior to our predecessor's bankruptcy filing. We have resolved or settled all of these outstanding claims and have made all required distributions. The Plan of Reorganization has therefore been fully administered.
On November 7, 2014, SemGroup Corporation and the other reorganized debtors moved for a final decree from the bankruptcy court closing the debtors’ bankruptcy cases. The United States Bankruptcy Court for the District of Delaware granted the request and entered its Order Granting Motion of Remaining Debtors for Entry of Final Decree on December 18, 2014. Accordingly, the bankruptcy cases for SemCrude, L.P., Eaglwing, L.P., SemCanada II, L.P., SemCanada L.P., SemGas, L.P., SemGroup, L.P., SemMaterials, L.P., and SemStream, L.P.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
17.
COMMITMENTS AND CONTINGENCIES, Continued
have been closed. As part of its decree, the Court retained jurisdiction over certain on-going adversary proceedings, but the debtors have estimated and paid the claims associated with these remaining adversaries, leaving the non-debtor parties to the adversaries to resolve their remaining claims amongst themselves.
On January 2, 2015, Bettina M. Whyte, the duly appointed Trustee of the SemGroup Litigation Trust (the “Litigation Trustee”), filed a notice of appeal of the Bankruptcy Court’s December 18, 2014 order closing the aforementioned bankruptcy cases. However, the Bankruptcy Court’s order of final decree was effective upon entry, and the appeal does not stay the effect of the order. The Litigation Trustee’s appeal to the United States District Court for the District of Delaware is currently pending and will be opposed by SemGroup Corporation and the other remaining reorganized debtors.
Dimmit County, TX claims
An employee of Rose Rock Midstream Field Services, LLC was involved in a tractor trailer accident on January 15, 2015 in Dimmit County, Texas. A second accident followed resulting in six fatalities and multiple injuries. At this time, the following lawsuits have been filed in either the District Court of Zavala County, Texas or the District Court of Dimmit County, Texas, Olga D. Rubio and Carlos Rubio, Individually and on Behalf of All Statutory Wrongful Death Beneficiaries of Carlos Rubio, Jr., Deceased vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; David Rodriguez and Maribel Rodriguez vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; David Rodriguez and Maribel Rodrigues, Plaintiffs and Alejandra Abigail Ortega, Individually and as next friend of K.A.P., a minor, and as Representative of the Estate of Eduardo Pena, and Julian Pena and Nelva G. Suifuentes Pena Intervenors vs. Rose Rock Midstream Field Services, LLC, Jesus Riojas, and Roberto Rivera; Derek Muhlenbruch vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; and Agustin Lara, Sr., Individually, and Elsa Zamarripa, Individually and As Representative of the Estate of Justin Lara, Deceased vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas. It is anticipated that additional lawsuits will be brought on behalf of the other deceased and injured parties. We are currently working with counsel for the interested parties to investigate the accident, and no determination of liability has been made. We will continue to defend our position and believe that any liability that may arise from this incident will be covered by our insurance; however, we cannot predict the outcome.
Blueknight claim
Blueknight Energy Partners, L.P. ("Blueknight"), which was formerly a subsidiary of SemGroup, together with other entities related to Blueknight, entered into a Shared Services Agreement on April 7, 2009, with SemCrude, L.P., now known as Rose Rock Midstream Crude, L.P. ("SemCrude") and SemManagement, L.L.C. (which are currently subsidiaries of SemGroup). The services provided by SemCrude to Blueknight under this agreement included assisting Blueknight with movement of crude oil belonging to Blueknight’s customers and with the operation of Blueknight’s Oklahoma pipeline system and its Cushing, Oklahoma terminal. Under the subsequent amendments to the agreements beginning in May 2010, certain of these services were phased out, and Blueknight began to perform all services necessary for the movement of its crude oil and the operation of its Cushing terminal without SemCrude’s assistance.
In a letter dated August 18, 2011, Blueknight claimed that SemCrude owes Blueknight approximately 141,000 barrels of crude oil. We responded to Blueknight’s letter denying their charges and requesting documentation from Blueknight of its claim. On February 14, 2012, after months of interaction between the parties through which Blueknight was requested to substantiate its claim, Blueknight filed suit against SemCrude and other related companies in the District Court of Oklahoma County, Oklahoma. On May 1, 2012, the case was transferred to Tulsa County, Oklahoma. On July 2, 2012, the Tulsa County District Court appointed a Special Master to review terminal operations accounting records and determine whether 141,000 barrels of crude oil owned by Blueknight is missing after three months of operations in April through June, 2010. On June 11, 2013, the Special Master’s Report was filed with the District Court finding a shortage in Blueknight’s Cushing terminal and Oklahoma pipeline system of 148,000 barrels. However, after a review of all records created during that three month time period, the Special Master was unable to determine how the shortage might have occurred and was unable to determine the ownership of the potential shortage.
We are currently seeking discovery in the District Court of documentation and testimony on the potential cause and the impact, if any, of the shortage found by the Special Master. We believe Blueknight’s causes of action to be without merit and will continue to defend our position; however, we cannot predict the outcome.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
17.
COMMITMENTS AND CONTINGENCIES, Continued
Environmental
We may from time to time experience leaks of petroleum products from our facilities and, as a result of which, we may incur remediation obligations or property damage claims. In addition, we are subject to numerous environmental regulations. Failure to comply with these regulations could result in the assessment of fines or penalties by regulatory authorities.
The Kansas Department of Health and Environment ("the KDHE") initiated discussions during our bankruptcy proceeding regarding six of our sites in Kansas (five owned by Crude and one owned by SemGas) that KDHE believes, based on their historical use, may have soil or groundwater contamination in excess of state standards. KDHE sought our agreement to undertake assessments of these sites to determine whether they are contaminated. We reached an agreement with KDHE on this matter and entered into a Consent Agreement and Final Order with KDHE to conduct environmental assessments on the sites and to pay KDHE’s costs associated with their oversight of this matter. We have conducted Phase II investigations at all sites. Four of the sites have limited amounts of soil contamination that will be excavated and/or remediated on site. Four of the sites appeared to have ground water contamination requiring further delineation and/or ongoing monitoring. Work plans have been submitted to, and approved by, the KDHE. One site was closed and we anticipate closure in 2015 for three of the remaining five sites. We do not anticipate any penalties or fines for these historical sites.
Other matters
We are party to various other claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of our management, the ultimate resolution of these claims, legal actions, and complaints, after consideration of amounts accrued, insurance coverage, and other arrangements, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, the outcome of such matters is inherently uncertain, and estimates of our consolidated liabilities may change materially as circumstances develop.
Asset retirement obligations
We will be required to incur significant removal and restoration costs when we retire our natural gas gathering and processing facilities in Canada. We have recorded a liability associated with these obligations, which is reported within other noncurrent liabilities on the consolidated balance sheets. The following table summarizes the changes in this liability from December 31, 2011 through December 31, 2014 (in thousands):
The December 31, 2014 liability was calculated using the $93.4 million cost we estimate we would incur to retire these facilities, discounted based on our risk-adjusted cost of borrowing and the estimated timing of remediation.
The calculation of the liability for an asset retirement obligation requires the use of significant estimates, including those related to the length of time before the assets will be retired, cost inflation over the assumed life of the assets, actual remediation activities to be required, and the rate at which such obligations should be discounted. Future changes in
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
17.
COMMITMENTS AND CONTINGENCIES, Continued
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. The $93.4 million estimated cost represents only our proportionate share of the obligations associated with these facilities. An additional $37.7 million of estimated costs are attributable to third-party owners’ proportionate share of the obligations. If an owner fails to perform on its obligations, the other owners (including SemGroup) could be obligated to bear that party’s share of the remediation costs.
Our other segments may also be subject to removal and restoration costs upon retirement of their facilities. However, we are unable to predict when, or if, our pipelines, storage tanks and other facilities would become completely obsolete and require decommissioning. Accordingly, we have not recorded a liability or corresponding asset, as both the amount and timing of such potential future costs are indeterminable.
Operating leases
We have entered into operating lease agreements for office space, office equipment, land and trucks. Future minimum payments required under operating leases that have initial or remaining non-cancellable lease terms in excess of one year at December 31, 2014 are as follows (in thousands):
We recorded lease and rental expenses of $16.2 million, $11.4 million and $8.4 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Purchase and sale commitments
We routinely enter into agreements to purchase and sell petroleum products at specified future dates. We account for these commitments as normal purchases and sales, and therefore we do not record assets or liabilities related to these agreements until the product is purchased or sold. At December 31, 2014, such commitments included the following (in thousands):
Certain of the commitments shown in the table above relate to agreements to purchase product from a counterparty and to sell a similar amount of product (in a different location) to the same counterparty. Many of the commitments shown in the table above are cancellable by either party, as long as notice is given within the time frame specified in the agreement (generally 30 to 120 days).
Our SemGas segment has a take or pay contractual obligation related to the fractionation of natural gas liquids. This obligation continues through June 2023, subsequent to the extension of the agreement in the second quarter of 2013. At December 31, 2014, approximately $25.8 thousand was due under the contract. The approximate amount of future obligation is as follows (in thousands):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
17.
COMMITMENTS AND CONTINGENCIES, Continued
SemGas further has a take or pay contractual obligation related to pipeline transportation. This obligation began in April 2014 and continues through October 2015. The amount of future obligation is approximately $2.6 million. SemGas also enters into contracts under which we are responsible for marketing the majority of the gas and natural gas liquids produced by the counterparties to the agreements. The majority of SemGas’ revenues were generated from such contracts.
Capital contribution requirements
See Note 5 for commitments related to the White Cliffs expansion project.
18.
EQUITY
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 December 31, 2014, we have issued all of the shares of this stock. The par value of common stock reflected on the consolidated balance sheet at December 31, 2014 is summarized below:
* These shares include 169,340 shares which vested during the year ended December 31, 2014. Of these vested shares, recipients sold back to the Company 11,120 shares to satisfy tax withholding obligations which are being recognized at cost as treasury stock on the consolidated balance sheet.
** These shares include 904,231 shares issued during the year ended December 31, 2014.
*** In addition to the shares in the table above, there are shares of unvested restricted stock outstanding at December 31, 2014. The par value of these shares has not yet been reflected in common stock on the 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 consolidated balance sheet, as no accounting recognition is given to forfeited shares. Certain unvested restricted stock is considered legally issued and outstanding and is included in the number of shares presented on the consolidated balance sheets.
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. On June 17, 2014, all Class B stock was converted to Class A. The total common stock outstanding at December 31, 2013 includes 28,235 shares of Class B stock. 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.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
18.
EQUITY, Continued
Warrants
Upon emergence from bankruptcy protection, 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 December 31, 2014, we have issued all of the warrants. The warrants expired on November 30, 2014.
Each warrant entitled 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 could elect a cashless exercise, whereby the number of shares to be issued to the holder was reduced, in lieu of a cash payment. For the year ended December 31, 2014, 1,271,983 warrants were exercised and 904,231 shares of common stock were issued.
Dividends
We began paying a quarterly cash dividend in the second quarter of 2013. The following table sets forth the quarterly dividends per share declared and paid to shareholders for the periods indicated:
19.
EARNINGS PER SHARE
Earnings per share is calculated based on income from continuing and discontinued operations less any income attributable to noncontrolling interests. Income attributable to noncontrolling interests represents third-party limited partner unitholders' interests in the earnings of our consolidated subsidiary, Rose Rock. Rose Rock allocates net income to its limited partners based on the distributions pertaining to the current period's available cash as defined by Rose Rock's partnership agreement. After adjusting for the appropriate period's distributions, the remaining undistributed earnings or excess distributions over earnings, if any, are allocated to Rose Rock's general partner, limited partners and participating securities in accordance with the contractual terms of Rose Rock's partnership agreement and as further prescribed under the two-class method. Incentive distribution rights do not participate in undistributed earnings.
Basic earnings (loss) per share is calculated based on the weighted average shares outstanding during the period. Diluted earnings (loss) per share includes the dilutive effect of warrants and unvested equity compensation awards.
The following summarizes the calculation of basic earnings per share for the years ended December 31, 2014, 2013 and 2012 (in thousands, except per share amounts):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
19.
EARNINGS PER SHARE, Continued
The following summarizes the calculation of diluted earnings per share for the years ended December 31, 2014, 2013 and 2012 (in thousands, except per share amounts):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
19.
EARNINGS PER SHARE, Continued
All outstanding warrants expired on November 30, 2014 and therefore have no dilutive effect for the year ended December 31, 2014. For the years ended December 31, 2013 and 2012, we recorded a loss on the change in the fair value of the warrants; because of this, the warrants did not cause any dilution for that period.
20. EQUITY-BASED COMPENSATION
SemGroup Corporation equity awards
We have reserved a total of 2,781,635 shares of common stock for issuance pursuant to employee and director compensation programs. These awards give the recipients the right to receive shares of common stock, once specified service, performance or market related vesting conditions are met. The awards typically have one year vesting period for non-management directors and three years for employees. The awards may be subject to accelerated vesting in the event of involuntary terminations. We record expense for these awards (and corresponding increases to additional paid-in capital) based on the grant date fair value of the awards over the vesting period. We use authorized but unissued shares to satisfy our equity-based payment obligations. Although these awards are to be settled in shares, we may elect to give participants the option of settling a portion of the awards in cash, to meet statutory minimum tax withholding requirements. The activity related to these awards during the period from December 31, 2011 to December 31, 2014 is summarized below:
For certain of the awards granted in 2014, 2013 and 2012, the number of shares that will vest is contingent upon our achievement of certain specified targets. Awards with performance conditions are valued based on the grant date closing price on the New York Stock Exchange assuming that 100% of the awards will vest. Awards with market conditions are valued using Monte Carlo simulations. The following table sets forth the assumptions used in the valuations of these awards granted in 2014, 2013 and 2012:
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
20.
EQUITY-BASED COMPENSATION, Continued
Volatility assumptions related to 2014 awards containing a market condition were based on historical volatility using a simple average calculation of volatility over a period equal to the vesting period of the awards. We do not expect future volatility over the term of the awards to be significantly different from historical volatility. Volatility assumptions related to 2013 awards containing a market condition were comprised of 50% historical volatility and 50% implied volatility. We intend to use only historical volatility going forward. The change in assumption basis from 2014 to 2013 did not have a significant impact. The 2012 awards with a market condition were not material and were valued based on the grant date fair value and an estimate of the expected achievement of the market condition.
If we meet the specified maximum targets, approximately 54 thousand, 49 thousand and 25 thousand additional shares could vest related to the 2014, 2013 and 2012 awards, respectively.
During the month of January 2015, 102,103 awards vested. Of these vested awards, 36,564 shares were withheld to satisfy minimum tax withholding requirements.
The holders of certain restricted stock awards granted prior to 2013 are entitled to equivalent dividends (“UDs”) to be received upon vesting of the restricted stock awards. The dividends will be settled in common shares based on the market price of our Class A shares as of the close of business on the vesting date. The UDs are subject to the same forfeiture and acceleration conditions as the associated restricted stock awards. For the year ended December 31, 2014, 593 units were issued upon the vesting of these restricted units. For the year ended December 31, 2013, no units were issued upon the vesting of these restricted units. At December 31, 2014, the value of the UDs related to unvested restricted stock awards was approximately $155 thousand. This is equivalent to 2,263 Class A shares based on the year end close of business market price of our Class A shares of $68.39 per share. Dividends related to the 2013 and 2014 restricted stock awards will be settled in cash upon vesting. At December 31, 2014, the value of UDs to be settled in cash related to unvested restricted stock awards was approximately $244 thousand.
In January 2015, the 2012 restricted stock awards vested and 1,793 UD shares were issued.
Compensation costs expensed for the years ended December 31, 2014, 2013 and 2012 were $7.3 million, $6.5 million and $6.2 million, respectively. As of December 31, 2014, there was $14.2 million of total unrecognized compensation cost related to our non-vested awards, which is expected to be recognized over a weighted-average period of 18 months.
Employee stock purchase plan
Our employee stock purchase plan ("ESPP") allows eligible employees to contribute up to 10% of their base earnings toward the semi annual purchase of our common stock, subject to an annual maximum dollar amount. The purchase price is 85% of the closing price on the last business day of the offering period. We have reserved a total of 1,000,000 shares of common stock for issuance under the ESPP. During the year ended December 31, 2014, we issued 6,999 shares under our ESPP.
Rose Rock Midstream L.P. equity-based compensation
Certain of our employees who support Rose Rock participate in Rose Rock's equity-based compensation program. Awards under this program generally represent awards of restricted common units representing limited partner interests of Rose Rock. Generally, the awards vest three years after the date of grant for employees and one year after the date of grant for non-management directors, contingent upon the continued service of the recipients and may be subject to accelerated vesting in the event of involuntary terminations. Awards are valued based on the grant date closing price listed on the New York Stock Exchange. Compensation expense is recognized over the vesting period and is discounted for estimated forfeitures. Vesting of these awards dilutes our ownership interest and requires additional equity contributions to Rose Rock to maintain our 2% general partner interest. The activity related to these awards is summarized below:
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
20.
EQUITY-BASED COMPENSATION, Continued
During the month of January 2015, 25,745 of these awards vested. Of these vested awards, 10,537 units were withheld to satisfy minimum tax requirements.
Compensation cost expensed for the years ended December 31, 2014, 2013 and 2012 was $0.9 million, $0.8 million and $0.3 million, respectively, and represents an increase in noncontrolling interests in consolidated subsidiaries. As of December 31, 2014, there was $1.8 million of total unrecognized compensation cost related to the non-vested awards, which is expected to be recognized over a weighted-average period of 19 months.
The holders of certain of these restricted unit awards granted prior to 2013 are entitled to equivalent distributions (“Unvested Unit Distributions” or “UUD’s”) to be received upon vesting of the restricted unit awards. The distributions will be settled in common units based on the market price of Rose Rock's limited partner common units as of the close of business on the vesting date. The UUD’s are subject to the same forfeiture and acceleration conditions as the associated restricted units. For the year ended December 31, 2014, no UUDs were issued upon the vesting of these restricted units. For the year ended December 31, 2013, 406 UUDs were issued upon the vesting of these restricted units. At December 31, 2014, the value of the UUD’s was approximately $129 thousand. This is equivalent to approximately 2,835 common units based on the year end close of business market price of Rose Rock's common units of $45.45 per unit. During the month of January 2015, 3,335 units were issued upon the vesting of restricted units noted above. Distributions related to the restricted unit awards granted subsequent to 2012 will be settled in cash upon vesting. At December 31, 2014, the value of these UUDs related to cash settled unvested restricted units was approximately $177 thousand.
21.
EMPLOYEE BENEFIT PLANS
Defined contribution plans
We sponsor defined contribution retirement plans in which the majority of employees are eligible to participate. Our contributions to the defined contribution plans were $1.9 million, $1.1 million, and $0.9 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Pension plans
We sponsor a defined benefit pension plan and a supplemental defined benefit pension plan (collectively, the “Pension Plans”) for certain employees of the SemCAMS segment hired before June 30, 2001. The following table shows the projected benefit obligations and plan assets of the Pension Plans (in thousands):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
21.
EMPLOYEE BENEFIT PLANS, Continued
The following table sets forth the assumptions used to determine the projected benefit obligation of the Pension Plans for the periods indicated:
We recorded other noncurrent liabilities of $2.9 million at December 31, 2014, and other noncurrent assets of $1.5 million at December 31, 2013, to reflect the funded status of the Pension Plans. We recorded changes in the funded status of the Pension Plans to other comprehensive income (loss), net of income taxes. These amounts were a loss of $3.7 million for the year ended December 31, 2014, a gain of $4.8 million for the year ended December 31, 2013 and a loss of $0.4 million for the year ended December 31, 2012.
The following table summarizes the components of the net periodic benefit cost related to the Pension Plans (in thousands):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
21.
EMPLOYEE BENEFIT PLANS, Continued
The following table sets forth the assumptions used to determine net periodic benefit cost related to the Pension Plans for the periods indicated:
The expected return on plan assets is determined annually based upon a review of the historical returns experienced for each of the various classes of assets held within the plan, combined with the general economic industry outlook.
We estimate that benefit payments from the Pension Plans will be as follows for the years 2015 - 2024 (in thousands):
We estimate that we will make contributions of $0.6 million to the Pension Plans during the year ended December 31, 2015.
Substantially all of the plan’s assets are invested in pooled funds that hold highly-liquid securities. The value of each share of a pooled fund is calculated based on the quoted market prices of the assets held by the fund. The following table shows the value of each category of plan assets at December 31, 2014 and 2013 and the target investment allocation under our investment policy at December 31, 2014:
Our investment policy for plan assets permits investments in a wide variety of assets, including certain types of derivatives. Our policy prohibits investments of plan assets in certain types of assets, including commodities, mineral rights and collectibles. Our investment policy requires us to maintain an investment allocation within the ranges shown in the table above, and also contains more specific requirements that are designed to achieve an appropriate level of diversification.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
21.
EMPLOYEE BENEFIT PLANS, Continued
The following information discloses the fair values of our Pension Plan assets, by asset category, for the periods indicated (in thousands):
(a) Mutual funds are valued daily in actively traded markets by an independent custodian for the investment manager. For purposes of calculating the value, portfolio securities and other assets for which market quotes are readily available are valued at market value. Market value is generally determined on a basis of last reported sales prices, or if no sales are reported, based on quotes obtained from a quotation reporting system, established market makers, or pricing services. Investments initially valued in currencies other than the U.S. dollar are converted to the U.S. dollar using exchange rates obtained from pricing services.
Retiree medical plan
We sponsor an unfunded, post-employment health benefit plan (the “Health Plan”) for certain employees of the SemCAMS segment. The projected benefit obligation related to the Health Plan was $1.7 million at December 31, 2014 and $1.6 million at December 31, 2013, and is reported within other noncurrent liabilities on the consolidated balance sheets.
22. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents changes in the components of accumulated other comprehensive income (loss) (in thousands):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
23. SUPPLEMENTAL CASH FLOW INFORMATION
Operating assets and liabilities
The following table summarizes the changes in the components of operating assets and liabilities, net of the effects of acquisitions (in thousands):
Non-cash transactions
During the years ended December 31, 2014 and 2013, we recorded reductions of $85.2 million and $180.2 million, respectively, to noncontrolling interests in consolidated subsidiaries and offsetting increases to additional paid-in capital of $53.2 million and $112.9 million, respectively, (net of tax impacts of $31.9 million and $67.3 million, respectively). These non-cash entries represent the portion of proceeds in excess of historical cost which were attributed to Rose Rock's third-party unitholders related to Rose Rock's purchases of interests in SCPL (Note 4).
During the years ended December 31, 2014 and 2013, we issued 904,231 and 425,618 shares of Class A common stock, respectively, related to the exercise of warrants. These issuances resulted in the non-cash reclassifications for the years ended December 31, 2014 and 2013 of $73.0 million and $21.4 million, respectively, from other noncurrent liabilities to common stock and additional paid-in capital. Cash proceeds of $1.5 million and $0.2 million were received in connection with the warrant exercises for the years ended December 31, 2014 and 2013, respectively.
Other supplemental disclosures
We paid cash for interest totaling $36.7 million, $23.9 million and $8.0 million for the years ended December 31, 2014, 2013 and 2012, respectively.
We paid cash for income taxes (net of refunds received) in the amount of $23.5 million, $13.9 million and $11.4 million during the years ended December 31, 2014, 2013 and 2012, respectively.
We accrued $7.0 million, $10.1 million and $1.6 million at December 31, 2014, 2013 and 2012, respectively, for purchases of property, plant and equipment.
We sold common units of NGL Energy for proceeds of $88.8 million during the year ended December 31, 2014 (Note 5). At December 31, 2014, only $79.7 million of proceeds from the sales had been received and the remaining amount is a non-cash accrual at December 31, 2014.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
24. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized information on our consolidated results of operations for the quarters during the year ended December 31, 2014 is shown below (in thousands, except per share amounts):
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
24.
QUARTERLY FINANCIAL DATA (UNAUDITED), Continued
Summarized information on our consolidated results of operations for the quarters during the year ended December 31, 2013 is shown below (in thousands, except per share amounts):
25. RELATED PARTY TRANSACTIONS
NGL Energy Partners LP and subsidiaries (Gavilon, LLC and High Sierra Crude Oil and Marketing, LLC)
As described in Note 5, we own interests in NGL Energy, which we account for under the equity method.
During the years ended December 31, 2014, 2013 and 2012, we generated the following transactions with NGL Energy and its subsidiaries (in thousands):
White Cliffs
We generated approximately $2.9 million, $2.9 million and $2.5 million of revenue from services we provided to White Cliffs during the years ended December 31, 2014, 2013 and 2012, respectively. We incurred $3.9 million of cost for the year ended December 31, 2014 related to transportation fees for shipments on White Cliffs.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
25.
RELATED PARTY TRANSACTIONS, Continued
Glass Mountain
We incurred $0.8 million of cost for the year ended December 31, 2014 related to transportation fees for shipments on the Glass Mountain Pipeline. We received $0.7 million in fees from Glass Mountain for the year ended December 31, 2014, respectively, related to support and administrative services associated with pipeline operations.
Legal Services
The law firm of Conner & Winters, LLP, of which Mark D. Berman is a partner, performs legal services for us. Mr. Berman is the spouse of Candice L. Cheeseman, General Counsel and Secretary. Mr. Berman does not perform any legal services for us. SemGroup paid $1.3 million, $1.9 million and $1.7 million in legal fees and related expenses to this law firm during the years ended December 31, 2014, 2013 and 2012, respectively (of which $0.1 million, $0.2 million and $0.1 million was paid by White Cliffs, respectively).
26.
CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS
We have outstanding $300 million of 7.50% senior unsecured notes due 2021 (the “Notes”). The Notes are guaranteed by certain of our subsidiaries as follows: SemGas, L.P., SemCanada, L.P., SemCanada II, L.P., SemMaterials, L.P., SemGroup Europe Holding, L.L.C., SemOperating G.P., L.L.C., SemMexico, L.L.C., SemDevelopment, L.L.C., Rose Rock Midstream Holdings, LLC, Wattenberg Holding, LLC, Glass Mountain Holding, LLC and Mid-America Midstream Gas Services, L.L.C. (collectively, the "Guarantors").
The guarantees of the Notes are full and unconditional and constitute the joint and several obligations of the Guarantors. Each of the Guarantors is 100% owned by SemGroup Corporation (the "Parent"). There are no significant restrictions upon the ability of the Parent or any of the Guarantors to obtain funds from its respective subsidiaries by dividend or loan. None of the assets of the Guarantors represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act.
Condensed consolidating financial statements for the Parent, the Guarantors and non-guarantors as of December 31, 2014 and 2013 and for the years ended December 31, 2014, 2013 and 2012 are presented on an equity method basis in the tables below (in thousands).
Intercompany receivable and payable balances, including notes receivable and payable, are capital transactions primarily to facilitate the capital needs of our subsidiaries. As such, subsidiary intercompany balances have been reported as a reduction to equity on the condensed consolidating Guarantor balance sheets. The Parent's net intercompany balance, including note receivable, and investments in subsidiaries have been reported in equity method investments on the condensed consolidating Guarantor balance sheets. Intercompany transactions, such as daily cash management activities, have been reported as financing activities within the condensed consolidating Guarantor statements of cash flows. Quarterly cash distributions from Rose Rock representing a return on capital have been included in the Parent's cash flows from operations. Dispositions of the Parent's investments in subsidiaries have been treated as investing activities in the cash flow statement, consistent with the presentation of investments in subsidiaries as equity method investments. These balances are eliminated through consolidating adjustments below.
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
26. CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued
Condensed Consolidating Guarantor Balance Sheets
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
26. CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
26. CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued
Condensed Consolidating Guarantor Statements of Operations
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
26. CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
26. CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
26. CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued
Condensed Consolidating Guarantor Statements of Cash Flows
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
26. CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued
SEMGROUP CORPORATION
Notes to Consolidated Financial Statements
26. CONDENSED CONSOLIDATING GUARANTOR FINANCIAL STATEMENTS, Continued
Index to Exhibits
The following documents are included as exhibits to this Form 10-K. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, such exhibit is filed herewith.
*
Management contract or compensatory plan or arrangement