SEMGROUP CORP, 10-Q filed on 8/7/2017
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2017
Jul. 31, 2017
Common Class A [Member]
Jul. 31, 2017
Class B
Document Type
10-Q 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Jun. 30, 2017 
 
 
Document Fiscal Period Focus
Q2 
 
 
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
 
78,665,675 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 56,535 
$ 74,216 
Accounts receivable (net of allowance of $2,783 and $2,322, respectively)
381,345 
418,339 
Receivable from affiliates
8,650 
25,455 
Inventories
80,446 
99,234 
Other current assets
16,150 
18,630 
Total current assets
543,126 
635,874 
Property, plant and equipment (net of accumulated depreciation of $443,872 and $393,635, respectively)
1,948,787 
1,762,072 
Equity method investments
430,514 
434,289 
Goodwill
34,802 
34,230 
Other intangible assets (net of accumulated amortization of $45,684 and $39,018, respectively)
145,639 
150,978 
Other noncurrent assets
63,350 
57,529 
Total assets
3,166,218 
3,074,972 
Current liabilities:
 
 
Accounts payable
326,810 
367,307 
Payable to affiliates
3,508 
26,508 
Accrued liabilities
113,783 
81,104 
Deferred revenue
9,425 
10,571 
Other current liabilities
1,920 
2,839 
Long-term debt, net
28 
26 
Total current liabilities
455,474 
488,355 
Long-term debt, net
1,215,244 
1,050,918 
Deferred income taxes
63,323 
64,501 
Other noncurrent liabilities
26,778 
25,233 
Commitments and contingencies (Note 8)
   
   
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 - 67,285 and 67,079 shares, respectively)
661 
659 
Additional paid-in capital
1,505,941 
1,561,695 
Treasury stock, at cost (1,013 and 980 shares, respectively)
(7,824)
(6,558)
Accumulated deficit
(34,450)
(35,917)
Accumulated other comprehensive loss
(58,929)
(73,914)
Total SemGroup Corporation owners’ equity
1,405,399 
1,445,965 
Total liabilities and owners’ equity
$ 3,166,218 
$ 3,074,972 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data, unless otherwise specified
Jun. 30, 2017
Dec. 31, 2016
Allowance for Doubtful Accounts Receivable, Current
$ 2,783 
$ 2,322 
Accumulated depreciation
443,872 
393,635 
Accumulated amortization
45,684 
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
326,810 
367,307 
Accrued Liabilities
113,783 
81,104 
Other Liabilities, Current
$ 1,920 
$ 2,839 
Common stock, $0.01 par value
$ 0.01 
$ 0.01 
Common stock shares authorized
100,000 
100,000 
Common stock shares issued
67,285 
67,079 
Treasury Stock, Common, Shares
1,013 
980 
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Revenues:
 
 
 
 
Sales Revenue, Goods, Net
$ 368,006 
$ 210,126 
$ 741,367 
$ 447,022 
Sales Revenue, Services, Net
88,487 
62,200 
156,680 
126,273 
Other
16,596 
15,051 
31,142 
28,933 
Revenue, Net
473,089 
287,377 
929,189 
602,228 
Expenses:
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization shown below
340,107 
176,842 
689,105 
373,789 
Operating
73,346 
54,707 
125,429 
104,899 
General and administrative
26,752 
20,775 
48,396 
41,835 
Depreciation and amortization
25,602 
25,055 
50,201 
49,106 
Loss (gain) on disposal or impairment, net
(234)
1,685 
2,176 
14,992 
Total expenses
465,573 
279,064 
915,307 
584,621 
Earnings from equity method investments
17,753 
17,078 
34,844 
40,149 
Loss on issuance of common units by equity method investee
(41)
Operating income
25,269 
25,391 
48,726 
57,715 
Other expenses (income), net:
 
 
 
 
Interest expense
13,477 
18,011 
27,344 
35,588 
Loss on early extinguishment of debt
19,900 
Foreign currency transaction loss (gain)
(1,011)
1,543 
(1,011)
3,012 
Loss (gain) on sale or impairment of equity method investment
(9,120)
30,644 
Other income, net
(441)
(490)
(591)
(678)
Total other expenses, net
12,033 
9,944 
45,672 
68,566 
Income (loss) from continuing operations before income taxes
13,236 
15,447 
3,054 
(10,851)
Income tax expense (benefit)
3,625 
4,658 
3,720 
(16,749)
Income (loss) from continuing operations
9,611 
10,789 
(666)
5,898 
Loss from discontinued operations, net of income taxes
(2)
(4)
Net income (loss)
9,611 
10,787 
(666)
5,894 
Less: net income attributable to noncontrolling interests
1,922 
10,942 
Net income (loss) attributable to SemGroup
9,611 
8,865 
(666)
(5,048)
Other comprehensive income, net of income tax
8,952 
6,591 
14,985 
2,482 
Comprehensive income
18,563 
17,378 
14,319 
8,376 
Less: comprehensive income attributable to noncontrolling interests
1,922 
10,942 
Comprehensive income (loss) attributable to SemGroup
$ 18,563 
$ 15,456 
$ 14,319 
$ (2,566)
Net income (loss) attributable to SemGroup per common share (Note 10):
 
 
 
 
Basic
$ 0.15 
$ 0.20 
$ (0.01)
$ (0.11)
Diluted
$ 0.15 
$ 0.19 
$ (0.01)
$ (0.11)
Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Cash flows from operating activities:
 
 
Net income (loss)
$ (666)
$ 5,894 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
Depreciation and amortization
50,201 
49,106 
Loss on disposal or impairment, net
2,176 
14,992 
Earnings from equity method investments
(34,844)
(40,149)
Loss on issuance of common units by equity method investee
41 
Loss (gain) on sale or impairment of equity method investment
30,644 
Distributions from equity method investments
34,234 
42,790 
Amortization of debt issuance costs and discount
2,888 
2,790 
Loss on early extinguishment of debt
19,900 
Deferred tax expense (benefit)
472 
(18,486)
Non-cash equity compensation
5,560 
5,509 
Provision for uncollectible accounts receivable, net of recoveries
300 
(589)
Foreign currency transaction loss (gain)
(1,011)
3,012 
Inventory valuation adjustment
455 
Changes in operating assets and liabilities (Note 11)
12,599 
(19,417)
Net cash provided by operating activities
92,294 
76,137 
Capital expenditures
211,098 
128,934 
Proceeds from sale of long-lived assets
16,163 
114 
Contributions to equity method investments
9,627 
3,448 
Proceeds from sale of common units of equity method investee
60,483 
Distributions in excess of equity in earnings of affiliates
13,410 
13,778 
Net cash used in investing activities
(191,152)
(58,007)
Debt issuance costs
(6,019)
Borrowings on credit facilities and issuance of senior notes, net of discount
550,018 
283,500 
Principal payments on credit facilities and other obligations
(388,730)
(272,881)
Debt extinguishment costs
(16,293)
Proceeds from issuance of common shares, net of offering costs
228,546 
Distributions to noncontrolling interests
(21,485)
Repurchase of common stock for payment of statutory taxes due on equity-based compensation
(1,266)
(904)
Dividends paid
(59,493)
(39,720)
Proceeds from issuance of common stock under employee stock purchase plan
542 
555 
Net cash provided by financing activities
78,759 
177,611 
Effect of exchange rate changes on cash and cash equivalents
2,418 
1,943 
Change in cash and cash equivalents
(17,681)
197,684 
Cash and cash equivalents at beginning of period
74,216 
58,096 
Cash and cash equivalents at end of period
$ 56,535 
$ 255,780 
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 six months ended June 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 and $0.9 million for the quarters ended March 31 and June 30, 2016, respectively, with a corresponding increase to net income before tax. Earnings per basic share was increased by $0.03 and $0.02 per share for the quarters ended March 31 and June 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 Postretirement 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 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 are currently evaluating 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. 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 initial 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.
As we are in the process of evaluating the impact of the standard, we have not yet quantified the impact of adoption. During 2017, we will perform the remainder of our implementation process, which will include quantification of impact and development of policies. We will adopt this guidance in the first quarter of 2018.
Equity Method Investments
EQUITY METHOD INVESTMENTS
EQUITY METHOD INVESTMENTS

Our equity method investments consisted of the following (in thousands):
 
June 30, 2017
 
December 31, 2016
White Cliffs Pipeline, L.L.C.
$
273,868

 
$
281,734

Glass Mountain Pipeline, LLC
137,704

 
133,622

NGL Energy Partners LP
18,942

 
18,933

Total equity method investments
$
430,514

 
$
434,289


Our earnings from equity method investments consisted of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
White Cliffs Pipeline, L.L.C.
$
15,976

 
$
16,428

 
$
31,169

 
$
36,208

Glass Mountain Pipeline, LLC
1,771

 
650

 
3,666

 
1,709

NGL Energy Partners LP(1)
6

 

 
9

 
2,232

Total earnings from equity method investments
$
17,753

 
$
17,078

 
$
34,844

 
$
40,149

(1) Excluding loss on issuance of common units of $41.0 thousand for the six months ended June 30, 2016.
Cash distributions received from equity method investments consisted of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
White Cliffs Pipeline, L.L.C.
$
22,514

 
$
21,664

 
$
40,704

 
$
45,762

Glass Mountain Pipeline, LLC
3,437

 
3,118

 
6,940

 
5,933

NGL Energy Partners LP

 

 

 
4,873

Total cash distributions received from equity method investments
$
25,951

 
$
24,782

 
$
47,644

 
$
56,568


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 six months ended June 30, 2017 and 2016, is shown below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
49,659

 
$
55,586

 
$
99,843

 
$
113,642

Cost of products sold, exclusive of depreciation and amortization shown below
$
4,338

 
$
2,803

 
$
8,451

 
$
3,053

Operating, general and administrative expenses
$
5,886

 
$
10,125

 
$
12,126

 
$
19,727

Depreciation and amortization expense
$
9,209

 
$
10,084

 
$
18,465

 
$
19,047

Net income
$
30,185

 
$
32,575

 
$
60,760

 
$
71,822


Our equity in earnings of White Cliffs for the three months and six months ended June 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 six months ended June 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 June 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 six months ended June 30, 2017 and 2016, is shown below (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
9,822

 
$
6,898

 
$
21,514

 
$
15,470

Cost of products sold, exclusive of depreciation and amortization shown below
$
128

 
$
(120
)
 
$
2,026

 
$
445

Operating, general and administrative expenses
$
2,042

 
$
1,618

 
$
3,957

 
$
3,463

Depreciation and amortization expense
$
4,005

 
$
3,989

 
$
7,987

 
$
7,925

Net income
$
3,648

 
$
1,407

 
$
7,544

 
$
3,632


Our equity in earnings of Glass Mountain for the three months and six months ended June 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 six months ended June 30, 2017, we contributed $7.4 million to Glass Mountain related to capital projects.
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 six months ended June 30, 2017 and 2016, relates to the earnings of NGL Energy for the three months and six months ended March 31, 2017 and 2016, respectively.
During the three months ended December 31, 2015, NGL issued common units which diluted our limited partnership interest, which we have since divested. As we record activity on a one-quarter lag, we recognized a non-cash loss of $41.0 thousand associated with these issuances for the six months ended June 30, 2016.
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. 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
   Crude Transportation
 
 
 
 
 
 
 
External
$
14,019

 
$
15,643

 
$
27,998

 
$
32,839

Intersegment
6,901

 
5,128

 
13,455

 
12,341

   Crude Facilities
 
 
 
 
 
 
 
External
9,825

 
10,300

 
19,460

 
20,433

Intersegment
2,490

 
2,526

 
4,996

 
5,272

   Crude Supply and Logistics
 
 
 
 
 
 
 
External
291,319

 
143,201

 
588,790

 
319,823

   SemGas
 
 
 
 
 
 
 
External
55,758

 
48,200

 
113,510

 
91,720

Intersegment
2,630

 
2,521

 
6,541

 
5,267

 
 
 
 
 
 
 
 
   SemCAMS
 
 
 
 
 
 
 
External
60,114

 
33,815

 
96,912

 
64,681

   SemLogistics
 
 
 
 
 
 
 
External
6,968

 
5,932

 
14,496

 
12,312

   SemMexico
 
 
 
 
 
 
 
External
35,086

 
30,286

 
68,023

 
60,420

   Corporate and Other
 
 
 
 
 
 
 
External

 

 

 

Intersegment
(12,021
)
 
(10,175
)

(24,992
)

(22,880
)
Total Revenues
$
473,089


$
287,377


$
929,189


$
602,228

 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Earnings from equity method investments:
 
 
 
 
 
 
 
   Crude Transportation
$
17,747

 
$
17,078

 
$
34,835

 
$
37,917

   Corporate and Other(1)
6

 

 
9

 
2,191

Total earnings from equity method investments
$
17,753

 
$
17,078


$
34,844


$
40,108

(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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Depreciation and amortization:
 
 
 
 
 
 
 
   Crude Transportation
$
6,498

 
$
6,174

 
$
12,425

 
$
12,034

   Crude Facilities
2,022

 
1,921

 
3,966

 
3,803

   Crude Supply and Logistics
78

 
40

 
140

 
80

   SemGas
9,099

 
9,198

 
18,026

 
18,125

   SemCAMS
4,434

 
4,294

 
8,930

 
8,245

   SemLogistics
1,901

 
1,983

 
3,716

 
3,943

   SemMexico
1,022

 
949

 
1,959

 
1,890

   Corporate and Other
548

 
496

 
1,039

 
986

Total depreciation and amortization
$
25,602


$
25,055


$
50,201


$
49,106

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Income tax expense (benefit):
 
 
 
 
 
 
 
SemCAMS
$
2,267

 
$
451

 
$
3,691

 
$
1,416

SemLogistics
372

 
(273
)
 
753

 
(214
)
SemMexico
525

 
194

 
742

 
801

Corporate and Other(1)
461

 
4,286

 
(1,466
)
 
(18,752
)
Total income tax expense (benefit)
$
3,625


$
4,658


$
3,720


$
(16,749
)
(1) Corporate and Other includes the impact of intra-period tax allocation.
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Segment profit (loss)(1):
 
 
 
 
 
 
 
   Crude Transportation(2)
$
18,548

 
$
18,161

 
$
35,410

 
$
43,579

   Crude Facilities
8,877

 
9,371

 
17,839

 
18,958

   Crude Supply and Logistics
(3,464
)
 
10,069

 
(7,079
)
 
19,162

   SemGas
16,654

 
12,304

 
32,403

 
11,312

   SemCAMS
15,452

 
9,000

 
27,048

 
18,904

   SemLogistics
2,960

 
2,002

 
6,704

 
4,661

   SemMexico
1,708

 
2,024

 
3,387

 
4,342

   Corporate and Other
(10,792
)
 
(8,008
)
 
(17,686
)
 
(14,168
)
Total segment profit
$
49,943


$
54,923


$
98,026


$
106,750

(1) Segment profit (loss) represents revenues excluding unrealized gains (losses) related to 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 six months ended June 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Reconciliation of segment profit to net income (loss):
 
 
 
 
 
 
 
   Total segment profit
$
49,943


$
54,923


$
98,026


$
106,750

     Less:
 
 
 
 
 
 
 
Net unrealized loss (gain) related to derivative instruments
(928
)
 
4,477

 
(901
)
 
(71
)
Depreciation and amortization
25,602


25,055


50,201


49,106

Loss on debt extinguishment
8

 

 
19,930

 

Interest expense
13,477

 
18,011

 
27,344

 
35,588

Foreign currency transaction loss (gain)
(1,011
)
 
1,543

 
(1,011
)
 
3,012

Loss (gain) on sale or impairment of equity method investment

 
(9,120
)
 

 
30,644

Other income, net
(441
)
 
(490
)
 
(591
)
 
(678
)
Income tax expense (benefit)
3,625

 
4,658

 
3,720

 
(16,749
)
Loss from discontinued operations, net of income taxes

 
2

 

 
4

   Net income (loss)
$
9,611


$
10,787


$
(666
)

$
5,894

 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
2017
 
December 31,
2016
Total assets (excluding intersegment receivables):
 
 
 
 
 
 
 
   Crude Transportation
 
 
 
 
$
1,161,673

 
$
1,042,327

   Crude Facilities
 
 
 
 
149,653

 
156,907

   Crude Supply and Logistics
 
 
 
 
394,124

 
484,475

   SemGas
 
 
 
 
703,094

 
683,952

   SemCAMS
 
 
 
 
423,262

 
379,785

   SemLogistics
 
 
 
 
145,317

 
135,387

   SemMexico
 
 
 
 
85,102

 
75,440

   Corporate and Other
 
 
 
 
103,993

 
116,699

Total
 
 
 
 
$
3,166,218


$
3,074,972

 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30,
2017
 
December 31,
2016
Equity investments:
 
 
 
 
 
 
 
   Crude Transportation
 
 
 
 
$
411,572

 
$
415,356

   Corporate and Other
 
 
 
 
18,942

 
18,933

Total equity investments
 
 
 
 
$
430,514


$
434,289

 
Inventories
Inventories
INVENTORIES
Inventories consist of the following (in thousands):
 
June 30,
2017
 
December 31,
2016
Crude oil
$
70,526

 
$
89,683

Asphalt and other
9,920

 
9,551

Total inventories
$
80,446

 
$
99,234



During the six months ended June 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 six months ended June 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 commodity derivative assets and liabilities at June 30, 2017 and December 31, 2016 (in thousands):

 
June 30, 2017
 
December 31, 2016
Derivatives subject to netting arrangements:
Level 1
 
Netting*
 
Total
 
Level 1
 
Netting*
 
Total
Commodity derivatives:
 
 
 
 

 
 
 
 
 

Assets
$
117

 
$
(117
)
 
$

 
$
68

 
$
(68
)
 
$

Liabilities
$
544

 
$
(117
)
 
$
427

 
$
1,396

 
$
(68
)
 
$
1,328

*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.
“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 include commodity derivatives, such as forwards and swaps for which there is not a highly liquid market and therefore are not included in Level 2 above.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value levels. At June 30, 2017, all of our physical fixed price forward purchases and sales contracts were being accounted for as normal purchases and normal sales.
There were no financial assets or liabilities recorded at fair value which were classified as Level 2 or Level 3 during the three months and six months ended June 30, 2017 and 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Sales
2,282

 
5,890

 
6,594

 
16,310

Purchases
2,821

 
5,743

 
6,952

 
16,253


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):
 
June 30, 2017
 
December 31, 2016
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
$

 
$
427

 
$

 
$
1,328


We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. At June 30, 2017 and December 31, 2016, our margin deposit balances were in net asset positions of $1.0 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 June 30, 2017 and December 31, 2016, we would have had net asset positions of $0.6 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Commodity contracts
$
4,122

 
$
(7,127
)
 
$
8,783

 
$
(3,773
)

Concentrations of risk
During the three months ended June 30, 2017, one customer, primarily of our Crude Supply and Logistics segment, accounted for more than 10% of our consolidated revenue with revenues of $132.1 million. One third-party supplier of our Crude Supply and Logistics segment accounted for more than 10% of our consolidated costs of products sold with purchases of $60.3 million.
During the six months ended June 30, 2017, one customer, primarily of our Crude Supply and Logistics segment, accounted for more than 10% of our consolidated revenue with revenues of $255.4 million. One third-party supplier of our Crude Supply and Logistics segment accounted for more than 10% of our consolidated costs of products sold with purchases of $95.7 million.
At June 30, 2017, one third-party customer of our Crude Supply and Logistics segment accounted for approximately 23% of our consolidated accounts receivable.
Income Taxes
INCOME TAXES
INCOME TAXES
The effective tax rate was 27% and 30% for the three months ended June 30, 2017 and 2016, respectively. The effective tax rate was 122% and 154% for the six months ended June 30, 2017 and 2016, respectively. The rate for the six months ended June 30, 2017, is impacted by a discrete tax expense of $1.4 million related to the vesting of restricted stock during the period. The rate for the six months ended June 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 foreign tax credit carryover. 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 (in thousands):

 
June 30,
2017
 
December 31,
2016
7.50% senior unsecured notes due 2021
$

 
$
300,000

Unamortized debt issuance costs on 2021 notes

 
(3,708
)
7.50% senior unsecured notes due 2021, net

 
296,292




 


5.625% senior unsecured notes due 2022
400,000

 
400,000

Unamortized debt issuance costs on 2022 notes
(5,376
)
 
(5,909
)
5.625% senior unsecured notes due 2022, net
394,624

 
394,091

 
 
 
 
5.625% senior unsecured notes due 2023
350,000

 
350,000

Unamortized discount on 2023 notes
(4,599
)
 
(4,894
)
Unamortized debt issuance costs on 2023 notes
(4,262
)
 
(4,596
)
5.625% senior unsecured notes due 2023, net
341,139

 
340,510

 
 
 
 
6.375% senior unsecured notes due 2025
325,000

 

Unamortized discount on 2025 notes
(4,843
)
 

Unamortized debt issuance costs on 2025 notes
(4,687
)
 

6.375% senior unsecured notes due 2025, net
315,470

 

 
 
 
 
SemGroup corporate revolving credit facility
164,000

 
20,000

SemMexico revolving credit facility

 

Capital leases
39

 
51

Total long-term debt, net
1,215,272

 
1,050,944

Less: current portion of long-term debt
28

 
26

Noncurrent portion of long-term debt, net
$
1,215,244

 
$
1,050,918


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.
No interest was incurred related to the 2021 Notes for the three months ended June 30, 2017. For the three months ended June 30, 2016, we incurred $5.8 million of interest expense related to the 2021 Notes including amortization of debt issuance costs. For the six months ended June 30, 2017 and 2016, we incurred $5.0 million and $11.7 million, respectively, of interest expense related to the 2021 Notes including amortization of debt issuance costs.
Senior unsecured notes due 2022
At June 30, 2017, we had outstanding $400 million of 5.625% senior unsecured notes due 2022 (the “2022 Notes”). For the three months ended June 30, 2017 and 2016, we incurred $5.9 million and $5.9 million, respectively, of interest expense related to the 2022 Notes including amortization of debt issuance costs. For the six months ended June 30, 2017 and 2016, we incurred $11.8 million and $11.7 million, respectively, of interest expense related to the 2022 Notes including amortization of debt issuance costs.
Senior unsecured notes due 2023
At June 30, 2017, we had outstanding $350 million of 5.625% senior unsecured notes due 2023 (the “2023 Notes”). For the three months ended June 30, 2017 and 2016, we incurred $5.2 million and $5.2 million, respectively, of interest expense related to the 2023 Notes including amortization of debt issuance costs and discount. For the six months ended June 30, 2017 and 2016, we incurred $10.4 million and $10.4 million, respectively, of interest expense related to the 2023 Notes including amortization of debt issuance costs.
Senior unsecured notes due 2025
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 $315.5 million, after the discount and $4.5 million of initial purchasers’ fees and offering expenses, together with cash on hand, were used to purchase and redeem the 2021 Notes.
The 2025 Notes were issued under an indenture (the “Indenture”) entered into on March 15, 2017, by and among the Company, the Guarantors and Wilmington Trust, National Association, as trustee (the “Trustee”). The 2025 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.
Prior to March 15, 2020, we may redeem the 2025 Notes, in whole or in part, at any time at a price equal the principal amount of the 2025 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, we may choose to redeem up to 35% of the original principal amount of the 2025 Notes at a redemption price equal to 106.375% of the face amount thereof 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, we may redeem the 2025 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:
Year
 
Percentage
2020
 
103.188%
2021
 
101.594%
2022 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 2025 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 the 2025 Notes then outstanding may declare all amounts owing under the 2025 Notes to be due and payable.
For the three and six months ended June 30, 2017, we incurred $5.4 million and $6.4 million, respectively, of interest expense related to the 2025 Notes, including amortization of debt issuance costs and discount.
Registration rights agreement
In connection with the closing of the offering of the 2025 Notes on March 15, 2017, the Company and the Guarantors entered into a registration rights agreement (the “Registration Rights Agreement”). Under the Registration Rights Agreement, the Company and the Guarantors have agreed to file a registration statement with the Securities and Exchange Commission so that holders of the 2025 Notes can exchange the 2025 Notes and the related guarantees for registered notes and guarantees that have substantially identical terms as the 2025 Notes and related guarantees within 365 days after the original issuance of the 2025 Notes. In certain circumstances, the Company and the Guarantors may be required to file a shelf registration statement to cover resales of the 2025 Notes. We are required to pay additional interest on the 2025 Notes if we fail to comply with our obligations to register the 2025 Notes and related guarantees within the specified time periods.
Corporate revolving credit facility
At June 30, 2017, we had $164.0 million of outstanding cash borrowings on our $1.0 billion revolving credit facility, of which $34.0 million incurred interest at the Alternate Base Rate (“ABR”) and $130.0 million incurred interest at the Eurodollar rate. At June 30, 2017, the ABR rate in effect was 5.50% and the Eurodollar rate in effect was 3.47%. The facility matures on March 15, 2021.
The corporate revolving credit facility is guaranteed by all of SemGroup’s material domestic subsidiaries, with the exception of Maurepas Pipeline LLC, and secured by a lien on substantially all of the property and assets of SemGroup and the other loan parties, subject to customary exceptions.
At June 30, 2017, we had outstanding letters of credit under the facility of $33.8 million, for which the rate in effect was 2.25%, and outstanding secured bi-lateral letters of credit of $50.3 million, for which the rate in effect was 1.75%. Secured bi-lateral letters of credit are external to the facility and do not reduce availability for borrowing on the credit facility.
We incurred interest expense related to the corporate revolving credit facility of $3.2 million and $1.2 million for the three months ended June 30, 2017 and 2016, respectively, including letters of credit and amortization of debt issuance costs. We incurred interest expense related to the corporate revolving credit facility of $5.6 million and $2.6 million for the six months ended June 30, 2017 and 2016, respectively, including letters of credit and amortization of debt issuance costs.
SemMexico revolving credit facility
At June 30, 2017, SemMexico had a $70 million Mexican pesos (U.S. $3.9 million at the June 30, 2017 exchange rate) revolving credit facility, which matures in May 2018. There were no outstanding borrowings on the facility at June 30, 2017. Borrowings are unsecured and bear interest at the bank prime rate in Mexico plus 1.50%.
At June 30, 2017, SemMexico had an outstanding letter of credit of $292.8 million Mexican pesos (U.S. $16.2 million at the June 30, 2017 exchange rate). The letter of credit was issued for a fee of 0.28%.
Capitalized interest
During the six months ended June 30, 2017 and 2016, we capitalized interest of $12.0 million and $3.9 million, respectively. As described in Note 1, capitalized interest for the prior year has been recast.
Fair value
We estimate the fair value of the 2022 Notes, the 2023 Notes and the 2025 Notes to be $385 million, $343 million and $316 million, respectively, at June 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 June 30, 2017, we have an asset retirement obligation liability of $20.4 million, which is included within other noncurrent liabilities on our condensed consolidated balance sheets. This amount was calculated using the $126.4 million cost we estimate we would incur to retire these facilities, discounted based on our risk-adjusted cost of borrowing and the estimated timing of remediation.
The calculation of the liability for an asset retirement obligation requires the use of significant estimates, including those related to the length of time before the assets will be retired, cost inflation over the assumed life of the assets, actual remediation activities to be required, and the rate at which such obligations should be discounted. Future changes in these estimates could result in material changes in the value of the recorded liability. In addition, future changes in laws or regulations could require us to record additional asset retirement obligations.
Our other segments may also be subject to removal and restoration costs upon retirement of their facilities. However, we are unable to predict when, or if, our pipelines, storage tanks and other facilities would become completely obsolete and require decommissioning. Accordingly, we have not recorded a liability or corresponding asset, as both the amount and timing of such potential future costs are indeterminable.
Purchase and sale commitments
We routinely enter into agreements to purchase and sell petroleum products at specified future dates. We account for derivatives at fair value with the exception of commitments which have been designated as normal purchases and sales for which we do not record assets or liabilities related to these agreements until the product is purchased or sold. At June 30, 2017, such commitments included the following (in thousands):
 
Volume
(Barrels)
 
Value
Fixed price purchases
2,971

 
$
135,402

Fixed price sales
4,195

 
$
194,801

Floating price purchases
14,905

 
$
665,226

Floating price sales
19,818

 
$
806,286


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
$
6,018

December 31, 2018
10,060

December 31, 2019
9,121

December 31, 2020
8,451

December 31, 2021
6,841

Thereafter
9,099

Total expected future payments
$
49,590


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 and annual payments are expected to be $11.9 million.
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 June 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



(666
)

(666
)
Other comprehensive income, net of income taxes




14,985

14,985

Dividends paid

(59,493
)



(59,493
)
Unvested dividend equivalent rights

(597
)



(597
)
Non-cash equity compensation

5,470




5,470

Issuance of common stock under compensation plans
2

516




518

Repurchase of common stock


(1,266
)


(1,266
)
Balance at June 30, 2017
$
661

$
1,505,941

$
(7,824
)
$
(34,450
)
$
(58,929
)
$
1,405,399


Accumulated other comprehensive loss
The following table presents the changes in the components of accumulated other comprehensive loss from December 31, 2016 to June 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 $9,116
14,956

 

 
14,956

Changes related to benefit plans, net of income tax expense of $11

 
29

 
29

Balance at June 30, 2017
$
(56,469
)
 
$
(2,460
)
 
$
(58,929
)

There were no significant items reclassified out of accumulated other comprehensive loss to net income for the three months and six months ended June 30, 2017.
Equity issuances
During the six months ended June 30, 2017, 16,385 shares under the Employee Stock Purchase Plan were issued and 116,299 shares related to our equity based compensation awards vested.
Equity-based compensation
At June 30, 2017, there were 1,121,736 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 516,000 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 June 30, 2017, the value of the UDs to be settled in cash related to unvested restricted stock awards was approximately $1.5 million.
During the six months ended June 30, 2017, we granted 365,798 restricted stock awards with a weighted average grant date fair value of $35.57 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
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 six months ended June 30, 2017 and 2016 (in thousands, except per share amounts):
 
Three Months Ended June 30, 2017
 
Three Months Ended June 30, 2016
 
Continuing
Operations
 
Discontinued
Operations
 
Net
 
Continuing
Operations
 
Discontinued
Operations
 
Net
Income (loss)
$
9,611

 
$

 
$
9,611

 
$
10,789

 
$
(2
)
 
$
10,787

less: Income attributable to noncontrolling interests

 

 

 
1,922

 

 
1,922

Net income (loss) attributable to SemGroup
$
9,611

 
$

 
$
9,611

 
$
8,867

 
$
(2
)
 
$
8,865

Weighted average common stock outstanding
65,749

 
65,749

 
65,749

 
45,236

 
45,236

 
45,236

Basic earnings per share
$
0.15

 
$

 
$
0.15

 
$
0.20

 
$

 
$
0.20

 
Six Months Ended June 30, 2017
 
Six Months Ended June 30, 2016
 
Continuing
Operations
 
Discontinued
Operations
 
Net
 
Continuing
Operations
 
Discontinued
Operations
 
Net
Income (loss)
$
(666
)
 
$

 
$
(666
)
 
$
5,898

 
$
(4
)
 
$
5,894

less: Income attributable to noncontrolling interests

 

 

 
10,942

 

 
10,942

Net loss attributable to SemGroup
$
(666
)
 
$

 
$
(666
)
 
$
(5,044
)
 
$
(4
)
 
$
(5,048
)
Weighted average common stock outstanding
65,717

 
65,717

 
65,717

 
44,553

 
44,553

 
44,553

Basic loss per share
$
(0.01
)
 
$

 
$
(0.01
)
 
$
(0.11
)
 
$

 
$
(0.11
)
The following summarizes the calculation of diluted earnings per share for the three months and six months ended June 30, 2017 and 2016 (in thousands, except per share amounts):
 
Three Months Ended June 30, 2017
 
Three Months Ended June 30, 2016
 
Continuing
Operations
 
Discontinued
Operations
 
Net
 
Continuing
Operations
 
Discontinued
Operations
 
Net
Income (loss)
$
9,611

 
$

 
$
9,611

 
$
10,789

 
$
(2
)
 
$
10,787

less: Income attributable to noncontrolling interests

 

 

 
1,922

 

 
1,922

Net income (loss) attributable to SemGroup
$
9,611

 
$

 
$
9,611

 
$
8,867

 
$
(2
)
 
$
8,865

Weighted average common stock outstanding
65,749

 
65,749

 
65,749

 
45,236

 
45,236

 
45,236

Effect of dilutive securities
528

 
528

 
528

 
411

 
411

 
411

Diluted weighted average common stock outstanding
66,277

 
66,277

 
66,277

 
45,647

 
45,647

 
45,647

Diluted earnings per share
$
0.15

 
$

 
$
0.15

 
$
0.19

 
$

 
$
0.19

 
Six Months Ended June 30, 2017
 
Six Months Ended June 30, 2016
 
Continuing
Operations
 
Discontinued
Operations
 
Net
 
Continuing
Operations
 
Discontinued
Operations
 
Net
Income (loss)
$
(666
)
 
$

 
$
(666
)
 
$
5,898

 
$
(4
)
 
$
5,894

less: Income attributable to noncontrolling interests

 

 

 
10,942

 

 
10,942

Net loss attributable to SemGroup
$
(666
)
 
$

 
$
(666
)
 
$
(5,044
)
 
$
(4
)
 
$
(5,048
)
Weighted average common stock outstanding
65,717

 
65,717

 
65,717

 
44,553

 
44,553

 
44,553

Effect of dilutive securities

 

 

 

 

 

Diluted weighted average common stock outstanding
65,717

 
65,717

 
65,717

 
44,553

 
44,553

 
44,553

Diluted loss per share
$
(0.01
)
 
$

 
$
(0.01
)
 
$
(0.11
)
 
$

 
$
(0.11
)
For the six months ended June 30, 2017 and 2016, we experienced net losses attributable to SemGroup. The unvested equity compensation awards would have been antidilutive and, therefore, were not included in the computation of diluted earnings per share.
Supplemental Cash Flow Information
SUPPLEMENTAL CASH FLOW INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes the changes in the components of operating assets and liabilities shown on our condensed consolidated statements of cash flows (in thousands):
 
Six Months Ended June 30,
 
2017
 
2016
Decrease (increase) in restricted cash
$
(3
)
 
$
1

Decrease (increase) in accounts receivable
43,717

 
(60,062
)
Decrease (increase) in receivable from affiliates
16,805

 
(4,305
)
Decrease (increase) in inventories
19,994

 
(15,918
)
Decrease (increase) in derivatives and margin deposits
1,778

 
(2,234
)
Decrease (increase) in other current assets
(4,812
)
 
956

Decrease (increase) in other assets
(14,710
)
 
(1,266
)
Increase (decrease) in accounts payable and accrued liabilities
(28,909
)
 
60,867

Increase (decrease) in payable to affiliates
(23,000
)
 
3,997

Increase (decrease) in other noncurrent liabilities
1,739

 
(1,453
)
 
$
12,599

 
$
(19,417
)
  
Other supplemental disclosures
We paid cash interest of $25.2 million and $34.9 million for the six months ended June 30, 2017 and 2016, respectively.
We paid cash income taxes, net of refunds of $2.9 million and $2.3 million for the six months ended June 30, 2017 and 2016, respectively.
We incurred liabilities for construction work in process that had not been paid of $17.4 million and $9.1 million as of June 30, 2017 and 2016, respectively. Such amounts are not included in capital expenditures on the consolidated statements of cash flows.
We financed prepayments of insurance premiums of $6.1 million and $4.0 million for the six months ended June 30, 2017 and 2016, respectively.
Related Party Transactions
RELATED PARTY TRANSACTIONS
RELATED PARTY TRANSACTIONS
Transactions with NGL Energy and its subsidiaries primarily relate to marketing, leased storage and transportation services of crude oil, including buy/sell transactions. Transactions with White Cliffs primarily relate to leased storage, purchases and sales of crude oil, transportation fees for shipments on the White Cliffs Pipeline, and management fees. Transactions with Glass Mountain primarily relate to transportation fees for shipments on the Glass Mountain Pipeline, fees for support and administrative services associated with pipeline operations and purchases of crude oil.
In accordance with ASC 845-10-15, the buy/sell transactions with NGL Energy and White Cliffs were reported as revenue on a net basis in our condensed consolidated statements of operations and comprehensive income (loss) because the purchases of inventory and subsequent sales of the inventory were with the same counterparty and entered into in contemplation of one another.
During the three months and six months ended June 30, 2017 and 2016, we generated the following transactions with related parties (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
NGL Energy
 
 
 
 
 
 
 
   Revenues
$
2,512

 
$
8,303

 
$
24,716

 
$
16,832

   Purchases
$
1,564

 
$
6,366

 
$
17,148

 
$
13,196

 
 
 
 
 
 
 
 
White Cliffs
 
 
 
 
 
 
 
   Crude oil revenues
$

 
$

 
$
436

 
$

   Storage revenues
$
1,088

 
$
1,088

 
$
2,176

 
$
2,176

   Transportation fees
$
2,386

 
$
2,699

 
$
5,041

 
$
5,225

   Management fees
$
127

 
$
121

 
$
254

 
$
242

   Crude oil purchases
$
4,613

 
$
3,545

 
$
8,616

 
$
3,545

 
 
 
 
 
 
 
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