SEMGROUP CORP, 10-Q filed on 11/9/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
Oct. 31, 2017
Common Class A [Member]
Oct. 31, 2017
Class B
Document Type
10-Q 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Sep. 30, 2017 
 
 
Document Fiscal Period Focus
Q3 
 
 
Document Fiscal Year Focus
2017 
 
 
Entity Registrant Name
SemGroup Corp 
 
 
Entity Central Index Key
0001489136 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
78,684,831 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 68,013 
$ 74,216 
Accounts receivable (net of allowance of $3,277 and $2,322, respectively)
474,795 
418,339 
Receivable from affiliates
5,531 
25,455 
Inventories
128,633 
99,234 
Other current assets
21,922 
18,630 
Total current assets
698,894 
635,874 
Property, plant and equipment (net of accumulated depreciation of $486,969 and $393,635, respectively)
3,394,035 
1,762,072 
Equity method investments
433,805 
434,289 
Goodwill
262,059 
34,230 
Other intangible assets (net of accumulated amortization of $51,469 and $39,018, respectively)
413,730 
150,978 
Other noncurrent assets
162,402 
57,529 
Total assets
5,364,925 
3,074,972 
Current liabilities:
 
 
Accounts payable
435,592 
367,307 
Payable to affiliates
4,877 
26,508 
Accrued liabilities
106,045 
81,104 
Deferred revenue
9,230 
10,571 
Other current liabilities
4,242 
2,839 
Long-term debt, net
5,529 
26 
Total current liabilities
565,515 
488,355 
Long-term debt, net
3,009,429 
1,050,918 
Deferred income taxes
57,476 
64,501 
Other noncurrent liabilities
38,614 
25,233 
Commitments and contingencies (Note 10)
   
   
SemGroup owners’ equity:
 
 
Preferred stock, $0.01 par value (authorized - 4,000 shares; issued - none)
Common stock, $0.01 par value (authorized - 100,000 shares; issued - 79,679 and 67,079 shares, respectively)
785 
659 
Additional paid-in capital
1,804,277 
1,561,695 
Treasury stock, at cost (1,018 and 980 shares, respectively)
(7,919)
(6,558)
Accumulated deficit
(53,553)
(35,917)
Accumulated other comprehensive loss
(49,699)
(73,914)
Total SemGroup Corporation owners’ equity
1,693,891 
1,445,965 
Total liabilities and owners’ equity
$ 5,364,925 
$ 3,074,972 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Allowance for Doubtful Accounts Receivable, Current
$ 3,277 
$ 2,322 
Accumulated depreciation
486,969 
393,635 
Accumulated amortization
51,469 
39,018 
Preferred Stock, Par or Stated Value Per Share
$ 0.01 
$ 0 
Preferred Stock, Shares Authorized
4,000 
Preferred Stock, Shares Issued
Accounts Payable
435,592 
367,307 
Accrued Liabilities
106,045 
81,104 
Other Liabilities, Current
$ 4,242 
$ 2,839 
Common stock, $0.01 par value
$ 0.01 
$ 0.01 
Common stock shares authorized
100,000 
100,000 
Common stock shares issued
79,679 
67,079 
Treasury Stock, Common, Shares
1,018 
980 
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Revenues:
 
 
 
 
Product
$ 423,531 
$ 245,920 
$ 1,164,898 
$ 692,942 
Service
105,287 
66,074 
261,967 
192,347 
Lease
2,646 
2,646 
Other
14,458 
15,770 
45,600 
44,703 
Total revenues
545,922 
327,764 
1,475,111 
929,992 
Expenses:
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
398,252 
218,503 
1,087,357 
592,292 
Operating
62,666 
52,636 
188,095 
157,537 
General and administrative
35,210 
20,583 
83,606 
62,419 
Depreciation and amortization
50,135 
24,922 
100,336 
74,028 
Loss on disposal or impairment, net
41,625 
1,018 
43,801 
16,010 
Total expenses
587,888 
317,662 
1,503,195 
902,286 
Earnings from equity method investments
17,367 
15,845 
52,211 
55,994 
Loss on issuance of common units by equity method investee
(41)
Operating income (loss)
(24,599)
25,947 
24,127 
83,659 
Other expenses (income), net:
 
 
 
 
Interest expense
32,711 
18,517 
60,055 
54,105 
Loss on early extinguishment of debt
19,930 
Foreign currency transaction loss (gain)
(747)
659 
(1,758)
3,671 
Loss on sale or impairment of equity method investment
30,644 
Other income, net
(211)
(492)
(802)
(1,170)
Total other expenses, net
31,753 
18,684 
77,425 
87,250 
Income (loss) from continuing operations before income taxes
(56,352)
7,263 
(53,298)
(3,591)
Income tax expense (benefit)
(37,249)
11,898 
(33,529)
(4,851)
Income (loss) from continuing operations
(19,103)
(4,635)
(19,769)
1,260 
Loss from discontinued operations, net of income taxes
(1)
Net income (loss)
(19,103)
(4,635)
(19,769)
1,259 
Less: net income attributable to noncontrolling interests
225 
11,167 
Net loss attributable to SemGroup
(19,103)
(4,860)
(19,769)
(9,908)
Other comprehensive income (loss), net of income taxes
9,230 
(7,051)
24,215 
(4,569)
Comprehensive income (loss)
(9,873)
(11,686)
4,446 
(3,310)
Less: comprehensive income attributable to noncontrolling interests
225 
11,167 
Comprehensive income (loss) attributable to SemGroup
$ (9,873)
$ (11,911)
$ 4,446 
$ (14,477)
Net loss attributable to SemGroup per common share (Note 12):
 
 
 
 
Basic
$ (0.25)
$ (0.09)
$ (0.29)
$ (0.21)
Diluted
$ (0.25)
$ (0.09)
$ (0.29)
$ (0.21)
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Cash flows from operating activities:
 
 
Net income (loss)
$ (19,769,000)
$ 1,259,000 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
Depreciation and amortization
100,336,000 
74,028,000 
Loss on disposal or impairment, net
43,801,000 
16,010,000 
Earnings from equity method investments
(52,211,000)
(55,994,000)
Loss on issuance of common units by equity method investee
41,000 
Loss on sale or impairment of equity method investment
30,644,000 
Distributions from equity method investments
51,606,000 
58,674,000 
Amortization of debt issuance costs and discount
4,449,000 
6,189,000 
Loss on early extinguishment of debt
19,930,000 
Deferred tax benefit
(37,824,000)
(7,810,000)
Non-cash equity compensation
8,517,000 
7,046,000 
Provision for uncollectible accounts receivable, net of recoveries
761,000 
(551,000)
Foreign currency transaction loss (gain)
(1,758,000)
3,671,000 
Gain on pension curtailment
(3,008,000)
Inventory valuation adjustment
455,000 
Changes in operating assets and liabilities, net of the effect of acquisitions (Note 13)
(22,868,000)
6,897,000 
Net cash provided by operating activities
92,417,000 
140,104,000 
Capital expenditures
346,204,000 
203,776,000 
Proceeds from sale of long-lived assets
16,638,000 
98,000 
Contributions to equity method investments
18,808,000 
3,756,000 
Payments to acquire business, net of cash acquired
293,039,000 
Proceeds from sale of common units of equity method investee
60,483,000 
Distributions in excess of equity in earnings of affiliates
19,296,000 
22,792,000 
Net cash used in investing activities
(622,117,000)
(124,159,000)
Debt issuance costs
(10,839,000)
(7,459,000)
Borrowings on credit facilities and issuance of senior notes, net of discount
1,353,377,000 
362,500,000 
Principal payments on credit facilities and other obligations
(711,941,000)
(393,994,000)
Debt extinguishment costs
(16,293,000)
Proceeds from issuance of common shares, net of offering costs
223,739,000 
Distributions to noncontrolling interests
(32,133,000)
Repurchase of common stock for payment of statutory taxes due on equity-based compensation
(1,361,000)
(945,000)
Dividends paid
(94,714,000)
(63,338,000)
Proceeds from issuance of common stock under employee stock purchase plan
796,000 
774,000 
Net cash provided by financing activities
519,025,000 
89,144,000 
Effect of exchange rate changes on cash and cash equivalents
4,472,000 
563,000 
Change in cash and cash equivalents
(6,203,000)
105,652,000 
Cash and cash equivalents at beginning of period
74,216,000 
58,096,000 
Cash and cash equivalents at end of period
$ 68,013,000 
$ 163,748,000 
Overview
OVERVIEW
OVERVIEW
SemGroup Corporation is a Delaware corporation headquartered in Tulsa, Oklahoma. The terms “we,” “our,” “us,” “SemGroup,” “the Company” and similar language used in these notes to the unaudited condensed consolidated financial statements refer to SemGroup Corporation and its subsidiaries.
Basis of presentation
The accompanying condensed consolidated balance sheet at December 31, 2016, which is derived from audited financial statements, and the unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”). These financial statements include all normal and recurring adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company and the results of its operations and its cash flows.
Our condensed consolidated financial statements include the accounts of our controlled subsidiaries. All significant transactions between our consolidated subsidiaries have been eliminated.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements. Although management believes these estimates are reasonable, actual results could differ materially from these estimates. The results of operations for the three months and nine months ended September 30, 2017, are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.
Pursuant to the rules and regulations of the SEC, the accompanying condensed consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with U.S. GAAP. Certain reclassifications have been made to conform previously reported balances to the current presentation. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016, which are included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC.
Our significant accounting policies are consistent with those described in our Annual Report on Form 10-K for the year ended December 31, 2016.
Prior year amounts have been recast from the amounts originally reported to correct for an immaterial error identified by management in the fourth quarter of 2016 related to an under capitalization of interest on certain capital projects. Previously reported interest expense has been decreased by $1.4 million, $0.9 million and $2.5 million for the quarters ended March 31, June 30 and September 30, 2016, respectively, with a corresponding increase to net income before tax. Earnings per basic share was increased by $0.03, $0.02 and $0.05 per share for the quarters ended March 31, June 30, and September 30, 2016, respectively.
Recent accounting pronouncements
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting”, to provide clarity and reduce diversity in practice in determining which changes to terms or conditions of a share-based payment award require an entity to apply modification accounting under Accounting Standards Codification Topic 718. For public entities, this ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those years. We will adopt this guidance in the first quarter of 2018. The impact is not expected to be material.
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost”, which requires that an employer disaggregate the service cost component from other components of net benefit cost. This ASU also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization. For public entities, this ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those years. We will adopt this guidance in the first quarter of 2018. The impact is not expected to be material.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which removes Step 2 from the goodwill impairment test. Under the amended guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit
with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. For public entities, this ASU is effective for annual periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this guidance in the third quarter of 2017 in conjunction with the impairment test of our Field Services business unit. See Note 4 for information related to the impairment of Field Services goodwill and intangible assets.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. For public entities, this ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those years and early adoption is permitted in the year prior to the effective date. We will adopt this guidance in the first quarter of 2018. The impact is not expected to be material.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)”, to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The update addresses eight different transaction types and clarifies how to classify each in the statement of cash flows, where previously there was unclear or no specific guidance. For public entities, this ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those years and early adoption is permitted in the year prior to the effective date. We will adopt this guidance in the first quarter of 2018. The impact is not expected to be material.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which introduces new guidance for estimating credit losses on certain types of financial instruments based on expected losses and the timing of the recognition of such losses. For public entities, this ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those years and early adoption is permitted in the year prior to the effective date. We will adopt this guidance in the first quarter of 2020. The impact is not expected to be material.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting’’, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public entities, this ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those years and early adoption is permitted. We adopted this guidance in the first quarter of 2017. We recorded adjustments of $2.1 million and $1.7 million to “accumulated deficit” and “additional paid-in capital”, respectively, upon adoption offset by changes to our income tax liabilities.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which amends the existing lease guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by operating and finance leases and to disclose additional quantitative and qualitative information about leasing arrangements. This ASU also provides clarifications surrounding the presentation of the effects of leases in the income statement and statement of cash flows. For public entities, this ASU will be effective for annual periods beginning after December 15, 2018, and interim periods within those years. The new guidance will be applied using a modified retrospective approach and early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements, but are not yet able to quantify the impact. We continue to monitor FASB activity related to this ASU and have engaged with various peer groups to assess certain interpretive issues related to this ASU. We will adopt this guidance in the first quarter of 2019.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”, which requires all deferred tax assets and liabilities to be classified as noncurrent in the statement of financial position. For public entities, this ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those years. The new guidance may be applied prospectively or retrospectively and early adoption is permitted. We adopted this guidance in the first quarter of 2017. Prior periods were not retrospectively adjusted and the impact was not material.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”, which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value rather than the lower of cost or market. The standard will be effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The new guidance shall be applied prospectively and early adoption is permitted. We adopted this guidance in the first quarter of 2017. The impact was not material.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, as amended, 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 permits 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 continue to evaluate the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements. We have completed the first phase of our implementation process which included a review of contracts and transaction types from each significant revenue stream across all of our business segments. In addition, we are currently evaluating the methods of adoption and analyzing the impact of the standard on our internal controls, accounting policies and financial statements and disclosures and are nearing completion of the overall project. We expect to use a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption.
Based on the current phase of our implementation process, we have identified certain potential areas of impact, such as non-cash consideration and “take-or-pay” arrangements.
We have certain contractual arrangements where we retain commodities as consideration for processing of customer product. These arrangements could be impacted by the non-cash consideration guidance under ASU 2014-09. Currently revenue related to non-cash consideration is recognized when we sell the commodity. Under ASU 2014-09, we could recognize revenue when the commodity is received, rather than when it is sold.
In addition, certain contractual arrangements include “take-or-pay” provisions. The fixed fees to which we have an unconditional right under these contracts could be subject to certain recognition changes and additional disclosure under ASU 2014-09. Under our current policies, revenues related to certain “take-or-pay” deficiency payments received from customers are deferred until the contractual right to make up volumetric deficiencies has expired. Under ASU 2014-09, these revenues are expected to be recognized when make up of the volumetric deficiencies is no longer considered probable. Deferred revenues related to these agreements at December 31, 2017, which will then be recognized through retained earnings at adoption, are not expected to be material.
During the fourth quarter of 2017, we will complete the remainder of our implementation process, which will include quantification of impact and final development of policies. We will adopt this guidance in the first quarter of 2018.
Acquisition
Business Combination Disclosure [Text Block]
ACQUISITION

On July 17, 2017, we acquired Houston Fuel Oil Terminal Company (“HFOTCO”), one of the largest oil terminals in the U.S., for a purchase price paid, or to be paid, in two payments. This acquisition establishes our position in the premier energy market, the Houston Ship Channel, and provides a strategic platform to refinery-facing growth. The first payment consisted of $297 million in cash, (which is net of an estimated $4.2 million preliminary adjustment for working capital, net indebtedness and capital expenditures), funded from our revolving credit facility, issuance of approximately 12.4 million shares of our Class A common stock and the assumption of existing HFOTCO debt of approximately $766 million. The second payment requires us to pay the sellers $600 million in cash, if paid on December 31, 2018 (the “Second Payment”). If paid prior to December 31, 2018, the amount payable will be discounted by 5% per annum. If not paid by December 31, 2018, the amount payable increases to $680 million and is due by December 31, 2019, or earlier if requested by the sellers. The Second Payment is reflected on the balance sheet as the present value of cash flows based on a weighted average of the expected timing of payment under various scenarios and using an 8% discount rate.
We are in the process of finalizing the determination of the fair value of consideration exchanged and assets and liabilities acquired at the acquisition date to record the business combination. The acquisition date fair value of the common shares issued is approximately $330 million, based on $26.68 per common share market price at issuance. The determination of the estimated fair values of the Second Payment, assets acquired and liabilities assumed, including HFOTCO net debt, is not yet complete and adjustments to preliminary amounts could be material. We expect to finalize the amounts in the fourth quarter of 2017.
As of September 30, 2017, we have recorded the preliminary purchase price allocation as follows (in thousands):

Assets acquired
 
Cash
$
3,583

Accounts receivable
11,028

Other current assets
5,277

Property, plant and equipment
1,327,145

Intangible assets subject to amortization
 
   Customer contracts
1,000

   Customer relationships
260,000

   Non-compete agreement
30,000

Goodwill
253,935

Other noncurrent assets
72,603

Total assets acquired
$
1,964,571

 
 
Consideration

Cash
$
296,622

Common shares
330,341

Second Payment
549,900

Liabilities assumed
 
Accounts payable and accrued liabilities
7,824

Current portion of long-term debt
5,500

Long-term debt
760,500

Other noncurrent liabilities
13,884

Total liabilities assumed
787,708

Total consideration
$
1,964,571


Finite-lived intangibles are amortized over their estimated useful lives. The non-compete agreement is effective for two years from the acquisition date and will be amortized straight-line over the two-year period. Customer relationships are being amortized over 20 years on an accelerated basis which matches the incremental cash flow models used to value the intangible assets and in consideration of a historical customer attrition rate of 5%. Customer contracts are being amortized over three years on an accelerated basis. Goodwill primarily relates to the location of the business and potential for future growth. Goodwill is amortizable over 15 years for income tax purposes. Acquired property, plant and equipment has been assigned useful lives consistent with our accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.
From the acquisition date through September 30, 2017, HFOTCO contributed $34.7 million of revenue and $0.6 million of net income to our consolidated financial results. Our results for the nine months ended September 30, 2017, include $19.1 million of acquisition related expenses. Included in the results of HFOTCO for the post acquisition period is a gain of $3.0 million related to the curtailment of HFOTCO’s defined benefit pension plan. Subsequent to the acquisition, SemGroup closed the plan to new members and stopped the accrual of future benefits under the plan to better align HFOTCO with SemGroup’s compensation strategy. Accordingly, the pension liability assumed at acquisition of $10.0 million was reduced to $7.0 million as of September 30, 2017.
The information necessary to prepare pro forma financial disclosures for the nine months ended September 30, 2016 is not available. Therefore, only pro forma financial information for the nine months ended September 30, 2017 has been disclosed below (in thousands):
 
Pro forma (unaudited)
 
Nine Months Ended September 30, 2017
Revenue
$
1,561,782

Net loss
$
(35,007
)
Basic and diluted loss per share
$
(0.45
)

These pro forma amounts have been calculated after applying our accounting policies and adjusting the results of HFOTCO to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant, and equipment, and intangible assets had been applied from January 1, 2017. Additionally, incremental interest expense has been added related to the Second Payment assuming an 8% interest rate and cash consideration paid assuming a 5.5% interest rate. The income tax impact of these adjustments has been included in pro forma net income using our historical blended statutory rate of 37.7%. This unaudited pro forma consolidated financial information is provided for illustrative purposes only and does not purport to represent what our actual results would have been if the acquisition had occurred on the date assumed, nor is it necessarily indicative of our future operating results. However, the pro forma adjustments reflected in this unaudited pro forma consolidated financial information are based on estimates and assumptions that we believe to be reasonable.
The assets and credit of the acquired entities and their holding companies, all of which are included in the HFOTCO segment, are not available to satisfy the debts and obligations of other SemGroup entities. HFOTCO is not a subsidiary guarantor of SemGroup’s senior unsecured notes or revolving credit facility.
Equity Method Investments
EQUITY METHOD INVESTMENTS
EQUITY METHOD INVESTMENTS

Our equity method investments consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
White Cliffs Pipeline, L.L.C.
$
269,938

 
$
281,734

Glass Mountain Pipeline, LLC
144,930

 
133,622

NGL Energy Partners LP
18,937

 
18,933

Total equity method investments
$
433,805

 
$
434,289


Our earnings from equity method investments consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
White Cliffs Pipeline, L.L.C.
$
15,636

 
$
15,555

 
$
46,805

 
$
51,763

Glass Mountain Pipeline, LLC
1,736

 
328

 
5,402

 
2,037

NGL Energy Partners LP(1)
(5
)
 
(38
)
 
4

 
2,194

Total earnings from equity method investments
$
17,367

 
$
15,845

 
$
52,211

 
$
55,994

(1) Excluding loss on issuance of common units of $41.0 thousand for the nine months ended September 30, 2016.
Cash distributions received from equity method investments consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
White Cliffs Pipeline, L.L.C.
$
19,847

 
$
22,733

 
$
60,552

 
$
68,495

Glass Mountain Pipeline, LLC
3,410

 
2,164

 
10,350

 
8,096

NGL Energy Partners LP

 

 

 
4,873

Total cash distributions received from equity method investments
$
23,257

 
$
24,897

 
$
70,902

 
$
81,464


White Cliffs Pipeline, L.L.C.
We own a 51% interest in White Cliffs Pipeline, L.L.C. (“White Cliffs”), which we account for under the equity method. Certain unaudited summarized income statement information of White Cliffs for the three months and nine months ended September 30, 2017 and 2016, is shown below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
45,445

 
$
48,331

 
$
145,288

 
$
161,973

Cost of products sold, exclusive of depreciation and amortization shown below
$
(360
)
 
$
(368
)
 
$
8,091

 
$
2,685

Operating, general and administrative expenses
$
5,723

 
$
7,529

 
$
17,849

 
$
27,256

Depreciation and amortization expense
$
9,154

 
$
10,367

 
$
27,619

 
$
29,414

Net income
$
30,928

 
$
30,801

 
$
91,688

 
$
102,623


Our equity in earnings of White Cliffs for the three months and nine months ended September 30, 2017 and 2016, is less than 51% of the net income of White Cliffs for the same periods. This is due to certain general and administrative expenses we incur in managing the operations of White Cliffs that the other owners are not obligated to share. In addition, our equity in earnings is also impacted by the elimination of earnings on commodity sales with White Cliffs. Revenue related to inventory transactions with White Cliffs is deferred until a sale of the inventory has been made with a third party.
The members of White Cliffs are required to contribute capital to White Cliffs to fund various projects. For the nine months ended September 30, 2017, we contributed $1.4 million to White Cliffs related to capital projects.
Glass Mountain Pipeline, LLC
We own a 50% interest in Glass Mountain Pipeline, LLC (“Glass Mountain”), which we account for under the equity method. 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 at September 30, 2017. Capitalized interest is amortized as a reduction of earnings from equity method investments.
Certain unaudited summarized income statement information of Glass Mountain for the three months and nine months ended September 30, 2017 and 2016, is shown below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
10,079

 
$
6,793

 
$
31,593

 
$
22,263

Cost of products sold, exclusive of depreciation and amortization shown below
$
(85
)
 
$
(145
)
 
$
1,941

 
$
300

Operating, general and administrative expenses
$
2,576

 
$
2,184

 
$
6,533

 
$
5,647

Depreciation and amortization expense
$
4,008

 
$
3,992

 
$
11,995

 
$
11,917

Net income
$
3,579

 
$
761

 
$
11,123

 
$
4,393


Our equity in earnings of Glass Mountain for the three months and nine months ended September 30, 2017 and 2016, is less than 50% of the net income of Glass Mountain for the same period due to amortization of capitalized interest for the period.
For the nine months ended September 30, 2017, we contributed $16.3 million to Glass Mountain related to capital projects.
See Note 16 for subsequent event related to the sale of our interest in Glass Mountain.
NGL Energy Partners LP
We own an 11.78% interest in the general partner of NGL Energy Partners LP (NYSE: NGL) (“NGL Energy”) which is being accounted for under the equity method in accordance ASC 323-30-S99-1, as our ownership is in excess of the 3 to 5 percent interest which is generally considered to be more than minor. The general partner of NGL Energy is not a publicly traded company.
Our policy is to record our equity in earnings of NGL Energy on a one-quarter lag, as we do not expect information on the earnings of NGL Energy to always be available in time to consistently record the earnings in the quarter in which they are generated. Accordingly, the equity in earnings from NGL Energy, which is reflected in our condensed consolidated statements of operations and comprehensive income (loss) for the three months and nine months ended September 30, 2017 and 2016, relates to the earnings of NGL Energy for the three months and nine months ended June 30, 2017 and 2016, respectively.
Impairment Impairment
Asset Impairment Charges [Text Block]
IMPAIRMENT

Based on current market conditions, management has lowered the long range forecast for our Field Services business unit, which provides truck transportation services as part of our Crude Transportation segment. The decrease in the long range forecast for Field Services is primarily due to the on-going challenging business environment. We viewed the decrease in the forecast as a triggering event that indicated a potential impairment and performed an interim impairment analysis on the business unit’s assets including goodwill and intangible assets.
We performed a recoverability test of our definite lived assets under ASC 360 whereby we compared the undiscounted cash flows of the asset group, which was determined to be the entire Field Services reporting unit and included goodwill, to the carrying value of the assets at September 30, 2017. This test indicated that the assets were not fully recoverable. Therefore, we estimated the fair value of the definite lived assets using an income approach, supplemented by a market approach to measure impairment. We also performed an interim impairment test of our goodwill associated with the Field Services reporting unit and determined the estimated fair value was less than the adjusted carrying value of the reporting unit resulting in impairment of goodwill. The cash flow models used to determine recoverability of our assets and to measure impairment expense involved using significant judgments and assumptions, which included the discount rate, anticipated revenue and volume growth rates, estimated operating expenses and capital expenditures, which were based on our operating and capital budgets as well as our strategic plans. We considered the market approach by comparing the revenue and earnings multiples implied by our income approach to those of comparable companies for reasonableness and for estimating the fair value of certain assets of our reporting unit.
At September 30, 2017, we have recorded a $26.6 million impairment of Field Services’ goodwill and a $12.1 million impairment of intangible assets, which are reflected in “loss on disposal or impairment, net” in our condensed consolidated statements of operations and comprehensive income (loss).
Segments
SEGMENTS
SEGMENTS
Our businesses are organized based on the nature and location of the services they provide. Certain summarized information related to our reportable segments is shown in the tables below. None of the operating segments have been aggregated. The results of HFOTCO subsequent to the acquisition date are shown as a separate segment below. 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 expenses incurred at the corporate level were allocated to the segments based on our allocation policies in effect at the time.
Our results by segment are presented in the tables below (in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
   Crude Transportation
 
 
 
 
 
 
 
External
$
18,824

 
$
15,947

 
$
46,822

 
$
48,786

Intersegment
8,988

 
6,993

 
22,443

 
19,334

   Crude Facilities
 
 
 
 
 
 
 
External
9,053

 
9,939

 
28,513

 
30,372

Intersegment
2,567

 
2,801

 
7,563

 
8,073

   Crude Supply and Logistics
 
 
 
 
 
 
 
External
339,874

 
165,523

 
928,664

 
485,346

HFOTCO
 
 
 
 
 
 
 
External
34,675

 

 
34,675

 

   SemGas
 
 
 
 
 
 
 
External
54,095

 
57,824

 
167,605

 
149,544

Intersegment
2,152

 
2,266

 
8,693

 
7,533

   SemCAMS
 
 
 
 
 
 
 
External
39,500

 
36,111

 
136,412

 
100,792

   SemLogistics
 
 
 
 
 
 
 
External
7,009

 
5,668

 
21,505

 
17,980

   SemMexico
 
 
 
 
 
 
 
External
42,893

 
36,752

 
110,916

 
97,172

   Corporate and Other
 
 
 
 
 
 
 
Intersegment
(13,708
)
 
(12,060
)

(38,700
)

(34,940
)
Total Revenues
$
545,922


$
327,764


$
1,475,111


$
929,992

 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Earnings from equity method investments:
 
 
 
 
 
 
 
   Crude Transportation
$
17,372

 
$
15,883

 
$
52,207

 
$
53,800

   Corporate and Other(1)
(5
)
 
(38
)
 
4

 
2,153

Total earnings from equity method investments
$
17,367

 
$
15,845


$
52,211


$
55,953

(1) Includes historical earnings from equity method investments including gain (loss) on issuance of common units by equity method investee related to our investment in NGL Energy.
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Depreciation and amortization:
 
 
 
 
 
 
 
   Crude Transportation
$
11,170

 
$
6,309

 
$
23,595

 
$
18,343

   Crude Facilities
2,058

 
1,982

 
6,024

 
5,785

   Crude Supply and Logistics
103

 
46

 
243

 
126

HFOTCO
19,300

 

 
19,300

 

   SemGas
9,114

 
9,079

 
27,140

 
27,204

   SemCAMS
4,727

 
4,239

 
13,657

 
12,484

   SemLogistics
1,967

 
1,880

 
5,683

 
5,823

   SemMexico
1,070

 
932

 
3,029

 
2,822

   Corporate and Other
626

 
455

 
1,665

 
1,441

Total depreciation and amortization
$
50,135


$
24,922


$
100,336


$
74,028

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Income tax expense (benefit):
 
 
 
 
 
 
 
HFOTCO
$
166

 
$

 
$
166

 
$

SemCAMS
1,270

 
1,573

 
4,961

 
2,989

SemLogistics
(96
)
 
(601
)
 
657

 
(815
)
SemMexico
360

 
349

 
1,102

 
1,150

Corporate and Other(1)
(38,949
)
 
10,577

 
(40,415
)
 
(8,175
)
Total income tax expense (benefit)
$
(37,249
)

$
11,898


$
(33,529
)

$
(4,851
)
(1) Corporate and Other includes the impact of intra-period tax allocation.
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Segment profit (loss)(1):
 
 
 
 
 
 
 
   Crude Transportation(2)
$
(14,829
)
 
$
19,511

 
$
20,581

 
$
63,090

   Crude Facilities
8,497

 
9,679

 
26,336

 
28,637

   Crude Supply and Logistics
(2,368
)
 
3,151

 
(9,447
)
 
22,313

HFOTCO
25,751

 

 
25,751

 

   SemGas
12,915

 
16,196

 
45,318

 
27,508

   SemCAMS
11,859

 
13,067

 
38,907

 
31,971

   SemLogistics
2,569

 
3,312

 
9,273

 
7,973

   SemMexico
2,075

 
2,517

 
5,462

 
6,859

   Corporate and Other
(19,100
)
 
(10,397
)
 
(36,786
)
 
(24,568
)
Total segment profit
$
27,369


$
57,036


$
125,395


$
163,783

(1) Segment profit (loss) represents revenues excluding unrealized gains (losses) related to commodity derivative instruments plus earnings from equity method investments less cost of sales excluding depreciation and amortization and less operating and general and administrative expenses, including gains or losses on disposals or impairments.
(2) The nine months ended September 30, 2017, includes a $4.5 million out of period loss on the disposal of right-of-way related to immaterial prior period errors.
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Reconciliation of segment profit to net income (loss):
 
 
 
 
 
 
 
   Total segment profit
$
27,369


$
57,036


$
125,395


$
163,783

     Less:
 
 
 
 
 
 
 
Net unrealized loss related to commodity derivative instruments
1,833

 
6,167

 
932

 
6,096

Depreciation and amortization
50,135


24,922


100,336


74,028

Loss on debt extinguishment

 

 
19,930

 

Interest expense
32,711

 
18,517

 
60,055

 
54,105

Foreign currency transaction loss (gain)
(747
)
 
659

 
(1,758
)
 
3,671

Loss on sale or impairment of equity method investment

 

 

 
30,644

Other income, net
(211
)
 
(492
)
 
(802
)
 
(1,170
)
Income tax expense (benefit)
(37,249
)
 
11,898

 
(33,529
)
 
(4,851
)
Loss from discontinued operations, net of income taxes

 

 

 
1

   Net income (loss)
$
(19,103
)

$
(4,635
)

$
(19,769
)

$
1,259

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2017
 
December 31,
2016
Total assets (excluding intersegment receivables):
 
 
 
 
 
 
 
   Crude Transportation
 
 
 
 
$
1,181,139

 
$
1,042,327

   Crude Facilities
 
 
 
 
150,526

 
156,907

   Crude Supply and Logistics
 
 
 
 
506,486

 
484,475

   HFOTCO
 
 
 
 
1,967,294

 

   SemGas
 
 
 
 
722,804

 
683,952

   SemCAMS
 
 
 
 
461,469

 
379,785

   SemLogistics
 
 
 
 
151,083

 
135,387

   SemMexico
 
 
 
 
88,383

 
75,440

   Corporate and Other
 
 
 
 
135,741

 
116,699

Total
 
 
 
 
$
5,364,925


$
3,074,972

 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30,
2017
 
December 31,
2016
Equity investments:
 
 
 
 
 
 
 
   Crude Transportation
 
 
 
 
$
414,868

 
$
415,356

   Corporate and Other
 
 
 
 
18,937

 
18,933

Total equity investments
 
 
 
 
$
433,805


$
434,289

Inventories
Inventories
INVENTORIES
Inventories consist of the following (in thousands):
 
September 30,
2017
 
December 31,
2016
Crude oil
$
118,577

 
$
89,683

Asphalt and other
10,056

 
9,551

Total inventories
$
128,633

 
$
99,234



During the nine months ended September 30, 2017, our Crude Supply and Logistics segment recorded non-cash charges of $0.5 million to write-down crude oil inventory to lower of cost or market. There were no inventory write-downs during the nine months ended September 30, 2016.
Financial Instruments
FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS
Fair value of financial instruments
We record certain financial assets and liabilities at fair value at each balance sheet date. The tables below summarize the balances of derivative assets and liabilities at September 30, 2017 and December 31, 2016 (in thousands):

 
September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Total - Net
Assets:
 
 
 
 
 
 
 
 
 
Commodity derivatives (2)
$
1,397

 
$

 
$

 
$
(1,397
)
 
$

Total assets
$
1,397

 
$

 
$

 
$
(1,397
)
 
$

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity derivatives
$
3,657

 
$

 
$

 
$
(1,397
)
 
$
2,260

Interest rate swaps

 

 
2,657

 

 
2,657

Total liabilities
$
3,657

 
$

 
$
2,657

 
$
(1,397
)
 
$
4,917

Net assets (liabilities) at fair value
$
(2,260
)
 
$

 
$
(2,657
)
 
$

 
$
(4,917
)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Total - Net
Assets:
 
 
 
 
 
 
 
 
 
Commodity derivatives (2)
$
68

 
$

 
$

 
$
(68
)
 
$

Total assets
$
68

 
$

 
$

 
$
(68
)
 
$

Liabilities:


 


 


 


 


Commodity derivatives
$
1,396

 
$

 
$

 
$
(68
)
 
$
1,328

Interest rate swaps

 

 

 

 

Total liabilities
$
1,396

 
$

 
$

 
$
(68
)
 
$
1,328

Net assets (liabilities) at fair value
$
(1,328
)
 
$

 
$

 
$

 
$
(1,328
)
(1) Relates primarily to exchange traded futures. Gain and loss positions on multiple contracts are settled net on a daily basis with the exchange.
(2) Commodity derivatives are subject to netting arrangements.
“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.
“Level 2” measurements are based on inputs consisting of market observable and corroborated prices for similar derivative contracts. Assets and liabilities classified as Level 2 include over the counter (“OTC”) traded physical fixed priced purchases and sales forward contracts.
“Level 3” measurements are based on inputs from a pricing service and/or internal valuation models incorporating observable and unobservable market data. These could 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 and interest rate swaps for which certain unobservable inputs are used in the valuation.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value levels. At September 30, 2017, all of our physical fixed price forward purchases and sales contracts were being accounted for as normal purchases and normal sales.
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. The following table summarizes changes in the fair value of our net financial liabilities classified as Level 3 in the fair value hierarchy (in thousands):
 
Three and Nine Months Ended September 30, 2017
Net liabilities - beginning balance
$

Interest rate swaps acquired through acquisition (Note 2)
3,275

Transfers out of Level 3

Total gain (realized and unrealized) included in earnings*
(618
)
Settlements

Net liabilities - ending balance
$
2,657

*Gains and losses related to interest rate swaps are recorded in interest expense in the condensed consolidated statements of operations and comprehensive income (loss).
There were no financial assets or liabilities recorded at fair value which were classified as Level 3 during the three months and nine months ended September 30, 2016.
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 time and location basis risks, respectively. All marketing activities are subject to our Comprehensive Risk Management Policy, a Delegation of Authority policy and their supporting policies and procedures, which establish 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, natural gas and natural gas liquids. These are defined as follows:
Swaps – OTC transactions where a floating price, basis or index is exchanged for a fixed (or a different floating) price, basis or index at a preset schedule in the future, according to an agreed-upon formula.
Futures contracts – Exchange traded contracts to buy or sell a commodity. These contracts are standardized by the exchange in terms of quality, quantity, delivery period and location for each commodity.
Forward contracts – OTC contracts to buy or sell a commodity at an agreed upon future date. The buyer and seller agree on specific terms (price, quantity, delivery period and location) and conditions at the inception of the contract.
The following table sets forth the notional quantities for commodity derivative instruments entered into (in thousands of barrels):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Sales
3,386

 
7,508

 
9,980

 
23,818

Purchases
2,820

 
7,448

 
9,772

 
23,701


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 condensed consolidated balance sheets in “other current assets” and “other current liabilities” in the following amounts (in thousands):
 
September 30, 2017
 
December 31, 2016
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
$

 
$
2,260

 
$

 
$
1,328


We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. At September 30, 2017 and December 31, 2016, our margin deposit balances were in net asset positions of $4.4 million and $3.6 million, respectively. These margin account balances have not been offset against our net commodity derivative instrument (contract) positions. Had these margin deposits been netted against our net commodity derivative instrument (contract) positions as of September 30, 2017 and December 31, 2016, we would have had asset positions of $2.2 million and $2.3 million, respectively.
Realized and unrealized gains (losses) from our commodity derivatives were recorded to product revenue in the following amounts (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Commodity contracts
$
(3,897
)
 
$
2,777

 
$
4,886

 
$
(996
)

Interest rate swaps
In conjunction with the HFOTCO acquisition (Note 2), we acquired HFOTCO’s interest rate swaps. The swaps allow us to limit exposure to interest rate fluctuations. The swaps only apply to a portion of our outstanding debt and provide only partial mitigation of interest rate fluctuations. We have not designated the swaps as hedges, as such changes in the fair value of the swaps are recorded through current period earnings as a component of interest expense. At September 30, 2017, we had interest rate swaps with notional values of $491.8 million. At September 30, 2017, the fair value of our interest rate swaps was $2.7 million which was reported within “other liabilities” in our condensed consolidated balance sheet. For the three and nine months ended September 30, 2017, we recognized unrealized gains of $0.6 million related to interest rate swaps.
Concentrations of risk
During the three months ended September 30, 2017, one customer, primarily of our Crude Supply and Logistics segment, accounted for more than 10% of our consolidated revenue with revenues of $89.9 million. No suppliers accounted for more than 10% of our consolidated costs of products sold.
During the nine months ended September 30, 2017, one customer, primarily of our Crude Supply and Logistics segment, accounted for more than 10% of our consolidated revenue with revenues of $345.3 million. No suppliers accounted for more than 10% of our consolidated costs of products sold.
At September 30, 2017, one third-party customer primarily of our Crude Supply and Logistics segment accounted for approximately 19% of our consolidated accounts receivable.
Income Taxes
INCOME TAXES
INCOME TAXES
The effective tax rate was 66% and 164% for the three months ended September 30, 2017 and 2016, respectively. The effective tax rate was 63% and 135% for the nine months ended September 30, 2017 and 2016, respectively. The rate for the nine months ended September 30, 2017, is impacted by a discrete tax expense of $1.4 million related to the vesting of restricted stock during the period and a discrete tax benefit of $31.6 million related to a change of position to deduct foreign taxes in lieu of claiming a foreign tax credit for the tax years 2013 through 2016. The foreign tax credit for these years was previously offset by a full valuation allowance and accordingly, there is no net tax expense or balance sheet impact from their reversal. The discrete benefit arises from recognition of the increase in our net operating loss carryforward resulting from the deduction of foreign taxes. The decision to deduct foreign taxes or claim the foreign tax credit is made with respect to each tax period. The rate for the nine months ended September 30, 2016, is impacted by a non-controlling interest in Rose Rock Midstream, L.P. (“Rose Rock”) for which taxes are not provided. Significant items that impacted the effective tax rate for each period, as compared to the U.S. federal statutory rate of 35%, include earnings in foreign jurisdictions taxed at lower rates and foreign earnings taxed in foreign jurisdictions as well as in the U.S., since they are disregarded entities for U.S. federal income tax purposes. These combined factors, and the magnitude of the permanent items impacting the tax rate relative to income from continuing operations before income taxes, result in rates that are not comparable between the periods.
We have a valuation allowance on a small portion of our state net operating loss carryovers with shorter carryover periods and our remaining foreign tax credit carryover generated in tax years prior to 2013. 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. 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.
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. Currently, there are no examinations in progress for our federal and state jurisdictions. Canada Revenue Agency has initiated an income tax audit of SemCAMS ULC for the tax years 2013 through 2015. No other foreign jurisdictions are currently under audit.
Long-Term Debt
Long-Term Debt
LONG-TERM DEBT
Our long-term debt consisted of the following (dollars in thousands):
 
Interest rate at September 30, 2017
 
September 30,
2017
 
December 31,
2016
Senior unsecured notes due 2021
7.500%
 
$

 
$
300,000

Senior unsecured notes due 2022
5.625%
 
400,000

 
400,000

Senior unsecured notes due 2023
5.625%
 
350,000

 
350,000

Senior unsecured notes due 2025
6.375%
 
325,000

 

Senior unsecured notes due 2026
7.250%
 
300,000

 

SemGroup $1.0 billion corporate revolving credit facility (1)
 
 


 


Alternate base rate borrowings
5.500%
 
222,000

 
20,000

Eurodollar borrowings
3.567%
 
110,000

 

Second Payment (2)
8.000%
 
555,644

 

HFOTCO term loan B (3)
4.800%
 
533,500

 

HFOTCO tax exempt notes payable due 2050
2.266%
 
225,000

 

HFOTCO $75 million revolving credit facility (4)
6.500%
 
25,000

 

SemMexico revolving credit facility (5)
8.879%
 

 

Capital leases
 
 
32

 
51

Unamortized premium (discount) and debt issuance costs, net
 
 
(31,218
)
 
(19,107
)
Total long-term debt, net
 
 
3,014,958

 
1,050,944

Less: current portion of long-term debt
 
 
5,529

 
26

Noncurrent portion of long-term debt, net
 
 
$
3,009,429

 
$
1,050,918


(1)
SemGroup $1.0 billion corporate revolving credit facility matures on May 15, 2021.
(2)
Second Payment was discounted to $549.9 million fair value at the HFOTCO acquisition date based on expected timing of payments and an 8% discount rate. See Note 2 for additional information.
(3)
HFOTCO term loan B is due in quarterly installments of $1.4 million with a final payment due on August 19, 2021.
(4)
HFOTCO $75 million revolving credit facility matures on August 19, 2019.
(5)
SemMexico revolving credit facility has a borrowing capacity of $70 million pesos ($3.8 million USD at September 30, 2017 exchange rate).
Early extinguishment of senior unsecured notes due 2021
On March 15, 2017, we purchased $290 million of our outstanding $300 million, 7.50% senior unsecured notes due 2021 (the “2021 Notes”) through a tender offer. The purchase price included a premium and interest to the purchase date. On March 17, 2017, a notice of redemption was issued for the remaining $10 million of 2021 Notes which were not purchased through the tender offer pursuant to the redemption and satisfaction and discharge provisions of the indenture governing the 2021 Notes. These remaining 2021 Notes were redeemed on June 15, 2017, including a redemption premium and accrued unpaid interest to the redemption date. We recorded a loss on early extinguishment of $19.9 million for the above transactions, which included premiums totaling $15.9 million and the write off of $3.6 million of associated unamortized debt issuance costs.
Issuance of senior unsecured notes due 2025 and 2026
On March 15, 2017, we sold $325 million of 6.375% senior unsecured notes due 2025 (the “2025 Notes”). The 2025 Notes were sold at 98.467% of par, a discount of $5.0 million. The discount is reported as a reduction to the face value of the 2025 Notes on our condensed consolidated balance sheets and is being amortized over the life of the 2025 Notes using the interest method.
The net proceeds from the offering of $315.2 million, after the discount and $4.9 million of initial purchasers’ fees and offering expenses, together with cash on hand, were used to purchase and redeem the 2021 Notes.
On September 20, 2017, we sold $300 million of 7.25% senior unsecured notes due 2026 (the “2026 Notes”). The 2026 Notes were sold at 98.453% of par, a discount of $4.6 million. The discount is reported as a reduction to the face value of the 2026 Notes on our condensed consolidated balance sheets and is being amortized over the life of the 2026 Notes using the interest method.
The net proceeds from the offering of $290.6 million, after the discount and $4.8 million of initial purchasers’ fees and offering expenses, were used to repay amounts borrowed under our revolving credit facility.
The 2025 Notes and 2026 Notes (collectively, the “Notes”) were each issued under an indenture (the “Indenture”) by and among the Company, the Guarantors and Wilmington Trust, National Association, as trustee (the “Trustee”). The Notes are fully and unconditionally guaranteed on a senior unsecured basis by our existing subsidiaries that guarantee our revolving credit facility. Interest on the 2025 Notes accrues at a rate of 6.375% per annum and is payable in cash semi-annually on March 15 and September 15 of each year, commencing on September 15, 2017. The 2025 Notes will mature on March 15, 2025. Interest on the 2026 Notes accrues at a rate of 7.25% per annum and is payable in cash semi-annually on March 15 and September 15 of each year, commencing on March 15, 2018. The Notes will mature on March 15, 2026.
Prior to March 15, 2020, for the 2025 Notes, or prior to March 15, 2021, for the 2026 Notes, we may redeem the Notes, in whole or in part, at any time at a price equal to the principal amount of the such notes redeemed plus accrued and unpaid interest to, but not including, the redemption date and a “make-whole premium.” Additionally, from time to time before March 15, 2020, for the 2025 Notes, or prior to September 15, 2020, for the 2026 Notes, we may choose to redeem up to 35% of the original principal amount of such notes at a redemption price equal to 106.375% of the face amount thereof, for the 2025 Notes, or 107.25%, for the 2026 Notes, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds that we raise in one or more equity offerings. On or after March 15, 2020, for the 2025 Notes, or on or after March 15, 2021, for the 2026 Notes, we may redeem such notes, in whole or in part, at the following redemption prices (expressed as a percentage of principal amount), plus accrued and unpaid interest thereon to, but not including, the redemption date if redeemed during the twelve month period beginning on March 15 of the years indicated below:
2025 Notes
Year
 
Percentage
2020
 
103.188%
2021
 
101.594%
2022 and thereafter
 
100.000%
 
 
 
2026 Notes
Year
 
Percentage
2021
 
103.625%
2022
 
101.813%
2023 and thereafter
 
100.000%

Upon the occurrence of a change of control triggering event, as defined in the Indenture, each holder of the Notes will have the right to require the Company to repurchase some or all of such holder’s Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the repurchase date.
The Indenture contains customary covenants restricting our ability and the ability of our restricted subsidiaries to: (i) incur additional indebtedness or issue certain preferred shares; (ii) pay dividends and make certain distributions, investments and other restricted payments; (iii) create certain liens; (iv) sell assets; (v) enter into transactions with affiliates; (vi) enter into sale and lease-back transactions; (vii) merge, consolidate, sell or otherwise dispose of all or substantially all of our assets; and (viii) designate our subsidiaries as unrestricted subsidiaries under the Indenture. These covenants are subject to a number of important limitations and exceptions, including certain provisions permitting us, subject to the satisfaction of certain conditions, to transfer assets to certain of our unrestricted subsidiaries.
The Indenture also contains customary events of default. Upon an event of default under the Indenture, the Trustee or the holders of at least 25% in aggregate principal amount of such notes then outstanding may declare all amounts owing under such notes to be due and payable.
Registration rights agreements
In connection with the closing of the offerings of the Notes, the Company and the Guarantors entered into registration rights agreements (the “Registration Rights Agreements”). Under the Registration Rights Agreements, the Company and the Guarantors have agreed to file registration statements with the Securities and Exchange Commission so that holders of the Notes can exchange the Notes and the related guarantees for registered notes and guarantees that have substantially identical terms as the Notes and related guarantees, within 365 days after the original issuance. In certain circumstances, the Company and the Guarantors may be required to file shelf registration statements to cover resales of the Notes. We are required to pay additional interest on the Notes if we fail to comply with our obligations to register the Notes and related guarantees, within the specified time periods.
Pledges and guarantees
Our senior unsecured notes are guaranteed by certain subsidiaries. See Note 15 for additional information.
Our $1.0 billion corporate revolving credit facility is guaranteed by all of SemGroup’s material domestic subsidiaries, with the exception of Maurepas Pipeline LLC and HFOTCO, and secured by a lien on substantially all of the property and assets of SemGroup Corporation and the other loan parties, subject to customary exceptions.
The HFOTCO term loan B, HFOTCO tax exempt notes payable and HFOTCO $75 million revolving credit facility are secured by substantially all of the assets of HFOTCO and its immediate parent, Buffalo Gulf Coast Terminals LLC. The HFOTCO tax exempt notes payable have a priority position over the HFOTCO term loan B and HFOTCO revolving credit facility.
Letters of credit
We had the following outstanding letters of credit at September 30, 2017 (dollars in thousands):
SemGroup $1.0 billion revolving credit facility
2.25%
$
39,385

Secured bi-lateral (1)
1.75%
$
51,142

SemMexico (2)
0.28%
$
16,000

(1) Secured bi-lateral letters of credit are external to the SemGroup $1.0 billion revolving credit facility and do not reduce availability for borrowing on the credit facility.
(2) $292.8 million Mexican pesos at the September 30, 2017 exchange rate.
Capitalized interest
During the nine months ended September 30, 2017 and 2016, we capitalized interest of $15.4 million and $6.8 million, respectively. As described in Note 1, capitalized interest for the prior year has been recast.
Fair value
We estimate the fair value of our consolidated long-term debt, including current maturities, to be approximately $3.0 billion at September 30, 2017, based on unadjusted, transacted market prices near the measurement date, which are categorized as Level 2 measurements.
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
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 Transportation and one owned by SemGas) that KDHE believed, based on their historical use, may have had 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 sites are in various stages of follow up investigation, remediation, monitoring, or closure under KDHE oversight.  The environmental work at these sites is being completed under consent orders between Rose Rock Midstream Crude, L.P. and the KDHE. Two of the remaining sites have limited impacts to shallow soil and groundwater and the groundwater is currently being monitored on a semi-annual basis until such time that closure can be granted by the KDHE.  No active remediation is anticipated for these two sites.  The final two sites have required additional investigation and soil and groundwater remediation may be necessary to achieve KDHE closure. 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. At September 30, 2017, we have an asset retirement obligation liability of $21.8 million, which is included within other noncurrent liabilities on our condensed consolidated balance sheets. This amount was calculated using the $131.5 million cost we estimate we would incur to retire these facilities, discounted based on our risk-adjusted cost of borrowing and the estimated timing of remediation.
The calculation of the liability for an asset retirement obligation requires the use of significant estimates, including those related to the length of time before the assets will be retired, cost inflation over the assumed life of the assets, actual remediation activities to be required, and the rate at which such obligations should be discounted. Future changes in these estimates could result in material changes in the value of the recorded liability. In addition, future changes in laws or regulations could require us to record additional asset retirement obligations.
Our other segments may also be subject to removal and restoration costs upon retirement of their facilities. However, we are unable to predict when, or if, our pipelines, storage tanks and other facilities would become completely obsolete and require decommissioning. Accordingly, we have not recorded a liability or corresponding asset, as both the amount and timing of such potential future costs are indeterminable.
Purchase and sale commitments
We routinely enter into agreements to purchase and sell petroleum products at specified future dates. We account for derivatives at fair value with the exception of commitments which have been designated as normal purchases and sales for which we do not record assets or liabilities related to these agreements until the product is purchased or sold. At September 30, 2017, such commitments included the following (in thousands):
 
Volume
(Barrels)
 
Value
Fixed price purchases
4,908

 
$
239,789

Fixed price sales
6,312

 
$
308,997

Floating price purchases
11,788

 
$
589,050

Floating price sales
17,052

 
$
698,652


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 through June 2023. The approximate amount of future obligation is as follows (in thousands):
For year ending:
 
December 31, 2017
$
3,156

December 31, 2018
10,552

December 31, 2019
9,567

December 31, 2020
8,864

December 31, 2021
7,175

Thereafter
9,544

Total expected future payments
$
48,858


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.
Our Crude Supply and Logistics segment has a take-or-pay obligation with our equity method investee, White Cliffs, for approximately 5,000 barrels per day of space on White Cliffs’ pipeline. The agreement became effective in October 2015 and has a term of five years. Annual payments to White Cliffs under the agreement are expected to be $9.4 million. In addition, we have a throughput commitment for 5,000 barrels per day on a third-party pipeline. The agreement, effective June 1, 2017, has a seven year term. The approximate amount of annual payments is as follows (in thousands):

For year ending:
 
December 31, 2017
$
12,100

December 31, 2018
12,337

December 31, 2019
12,593

December 31, 2020
12,848

December 31, 2021
13,103

Thereafter
26,992

Total expected future payments
$
89,973


Capital expenditures
We expect to spend approximately $80 million and $155 million in 2017 and 2018, respectively, related to construction of the Wapiti Sour Gas Plant.
Equity
EQUITY
EQUITY
Unaudited condensed consolidated statement of changes in owners’ equity
The following table shows the changes in our consolidated owners’ equity accounts from December 31, 2016 to September 30, 2017 (in thousands):
 
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Owners’
Equity
Balance at December 31, 2016
$
659

$
1,561,695

$
(6,558
)
$
(35,917
)
$
(73,914
)
$
1,445,965

Adoption of ASU 2016-09

(1,650
)

2,133


483

Net loss



(19,769
)

(19,769
)
Other comprehensive income, net of income taxes




24,215

24,215

Dividends paid

(94,714
)



(94,714
)
Unvested dividend equivalent rights

(818
)



(818
)
Non-cash equity compensation

8,377




8,377

Issuance of common stock
124

330,217




330,341

Issuance of common stock under compensation plans
2

1,170




1,172

Repurchase of common stock


(1,361
)


(1,361
)
Balance at September 30, 2017
$
785

$
1,804,277

$
(7,919
)
$
(53,553
)
$
(49,699
)
$
1,693,891


Accumulated other comprehensive loss
The following table presents the changes in the components of accumulated other comprehensive loss from December 31, 2016 to September 30, 2017 (in thousands):
 
Currency
Translation
 
Employee
Benefit
Plans
 
Total
Balance at December 31, 2016
$
(71,425
)
 
$
(2,489
)
 
$
(73,914
)
Currency translation adjustment, net of income tax expense of $14,735
24,170

 

 
24,170

Changes related to benefit plans, net of income tax expense of $17

 
45

 
45

Balance at September 30, 2017
$
(47,255
)
 
$
(2,444
)
 
$
(49,699
)

There were no significant items reclassified out of accumulated other comprehensive loss to net income for the three months and nine months ended September 30, 2017.
Equity issuances
During the nine months ended September 30, 2017, 39,545 shares under the Employee Stock Purchase Plan were issued and 132,031 shares related to our equity based compensation awards vested. See Note 2 for shares issued as consideration to acquire HFOTCO.
Equity-based compensation
At September 30, 2017, there were 1,117,138 unvested shares that have been granted under our director and employee compensation programs. The par value of these shares is not reflected in common stock on the condensed consolidated balance sheets, as these shares have not yet vested. For certain of the awards, the number of shares that will vest is contingent upon our achievement of certain specified targets. If we meet the specified maximum targets, approximately 521,000 additional shares could vest.
The holders of certain restricted stock awards are entitled to equivalent dividends (“UDs”) to be received upon vesting of the related restricted stock awards and will be settled in cash. At September 30, 2017, the value of the UDs to be settled in cash related to unvested restricted stock awards was approximately $1.7 million.
During the nine months ended September 30, 2017, we granted 377,766 restricted stock awards with a weighted average grant date fair value of $35.22 per award.
Dividends
The following table sets forth the quarterly dividends per share declared and/or paid to shareholders for the periods indicated:
Quarter Ending
 
Dividend Per Share
 
Date of Record
 
Date Paid
March 31, 2016
 
$
0.45

 
March 7, 2016
 
March 17, 2016
June 30, 2016
 
$
0.45

 
May 16, 2016
 
May 26, 2016
September 30, 2016
 
$
0.45

 
August 15, 2016
 
August 25, 2016
December 31, 2016
 
$
0.45

 
November 18, 2016
 
November 28, 2016
 
 
 
 
 
 
 
March 31, 2017
 
$
0.45

 
March 7, 2017
 
March 17, 2017
June 30, 2017
 
$
0.45

 
May 15, 2017
 
May 26, 2017
September 30, 2017
 
$
0.45

 
August 18, 2017
 
August 28, 2017
December 31, 2107
 
$
0.45

 
November 20, 2017
 
December 1, 2017
Earnings Per Share
EARNINGS PER SHARE
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 represented third-party limited partner unitholders’ interests in the earnings of our consolidated subsidiary, Rose Rock, prior to completion of our purchase of the noncontrolling interests in the third quarter of 2016 (the “Merger”).  Rose Rock allocated 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, were 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 did not participate in undistributed earnings. Subsequent to the Merger, there is no longer a noncontrolling interest.
Basic earnings per share is calculated based on the weighted average shares outstanding during the period. Diluted earnings per share include the dilutive effect of unvested equity compensation awards.
The following summarizes the calculation of basic earnings per share for the three months and nine months ended September 30, 2017 and 2016 (in thousands, except per share amounts):
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
Continuing
Operations
 
Discontinued
Operations
 
Net
 
Continuing
Operations
 
Discontinued
Operations
 
Net
Income (loss)
$
(19,103
)
 
$

 
$
(19,103
)
 
$
(4,635
)
 
$

 
$
(4,635
)
less: Income attributable to noncontrolling interests

 

 

 
225

 

 
225

Net loss attributable to SemGroup
$
(19,103
)
 
$

 
$
(19,103
)
 
$
(4,860
)
 
$

 
$
(4,860
)
Weighted average common stock outstanding
75,974

 
75,974

 
75,974

 
52,642

 
52,642

 
52,642

Basic loss per share
$
(0.25
)
 
$

 
$
(0.25
)
 
$
(0.09
)
 
$

 
$
(0.09
)
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
Continuing
Operations
 
Discontinued
Operations
 
Net
 
Continuing
Operations
 
Discontinued
Operations
 
Net
Income (loss)
$
(19,769
)
 
$

 
$
(19,769
)
 
$
1,260

 
$
(1
)
 
$
1,259

less: Income attributable to noncontrolling interests

 

 

 
11,167

 

 
11,167

Net loss attributable to SemGroup
$
(19,769
)
 
$

 
$
(19,769
)
 
$
(9,907
)
 
$
(1
)
 
$
(9,908
)
Weighted average common stock outstanding
69,149

 
69,149

 
69,149

 
47,269

 
47,269

 
47,269

Basic loss per share
$
(0.29
)
 
$

 
$
(0.29
)
 
$
(0.21
)
 
$

 
$
(0.21
)
The following summarizes the calculation of diluted earnings per share for the three months and nine months ended September 30, 2017 and 2016 (in thousands, except per share amounts):
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
Continuing
Operations
 
Discontinued
Operations
 
Net
 
Continuing
Operations
 
Discontinued
Operations