SEMGROUP CORP, 10-Q filed on 5/9/2018
Quarterly Report
v3.8.0.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2018
Apr. 30, 2018
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2018  
Document Fiscal Period Focus Q1  
Document Fiscal Year Focus 2018  
Entity Registrant Name SemGroup Corp  
Entity Central Index Key 0001489136  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Common Class A [Member]    
Entity Common Stock, Shares Outstanding   79,029,331
Class B    
Entity Common Stock, Shares Outstanding   0
v3.8.0.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Current assets:    
Cash and cash equivalents $ 285,498 $ 93,699
Accounts receivable (net of allowance of $1,788 and $2,628, respectively) 535,705 653,484
Receivable from affiliates 937 1,691
Inventories 81,542 101,665
Current assets held for sale 2,501 38,063
Other current assets 17,341 14,297
Total current assets 923,524 902,899
Property, plant and equipment (net of accumulated depreciation of $483,904 and $444,842, respectively) 3,380,574 3,315,131
Equity method investments 279,054 285,281
Goodwill 257,302 257,302
Other intangible assets (net of accumulated amortization of $64,810 and $56,409, respectively) 390,242 398,643
Other noncurrent assets 142,845 132,600
Noncurrent assets held for sale 65,784 84,961
Total assets 5,439,325 5,376,817
Current liabilities:    
Accounts payable 492,507 587,898
Payable to affiliates 2,321 6,971
Accrued liabilities 100,373 131,407
Deferred revenue 8,312 7,518
Current liabilities held for sale 2,434 23,847
Other current liabilities 19,184 3,395
Long-term debt, net 5,527 5,525
Total current liabilities 630,658 766,561
Long-term debt, net 2,733,957 2,853,095
Deferred income taxes 60,551 46,585
Other noncurrent liabilities 37,384 38,495
Noncurrent liabilities held for sale 14,258 13,716
Commitments and contingencies (Note 7)
Preferred stock, $0.01 par value, $350,000 liquidation preference (authorized - 4,000 shares; issued - 350 and 0 shares, respectively) 342,354 0
SemGroup owners’ equity:    
Common stock, $0.01 par value (authorized - 100,000 shares; issued - 79,062 and 79,708 shares, respectively) 785 786
Additional paid-in capital 1,735,646 1,770,117
Treasury stock, at cost (35 and 1,024 shares, respectively) (381) (8,031)
Accumulated deficit (80,257) (50,706)
Accumulated other comprehensive loss (35,630) (53,801)
Total owners’ equity 1,620,163 1,658,365
Total liabilities, preferred stock and owners’ equity $ 5,439,325 $ 5,376,817
v3.8.0.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 2018
Dec. 31, 2017
Allowance for Doubtful Accounts Receivable, Current $ 1,788 $ 2,628
Accumulated depreciation 483,904 444,842
Accumulated amortization $ 64,810 $ 56,409
Preferred Stock, Par or Stated Value Per Share $ 0.01 $ 0
Preferred Stock, Liquidation Preference, Value $ 350,000 $ 0
Preferred Stock, Shares Authorized 4,000,000 0
Preferred Stock, Shares Issued 350,000 0
Accounts Payable $ 492,507 $ 587,898
Accrued Liabilities 100,373 131,407
Other current liabilities $ 19,184 $ 3,395
Common stock, $0.01 par value $ 0.01 $ 0.01
Common stock shares authorized 100,000,000 100,000,000
Common stock shares issued 79,062,000 79,708,000
Treasury Stock, Common, Shares 35,000 1,024,000
v3.8.0.1
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Revenues:    
Product $ 510,768 $ 373,361
Service 131,895 68,193
Lease 4,329 0
Other 14,617 14,546
Total revenues 661,609 456,100
Expenses:    
Costs of products sold, exclusive of depreciation and amortization shown below 496,132 348,998
Operating 69,791 52,083
General and administrative 26,477 21,712
Depreciation and amortization 50,536 24,599
Loss (gain) on disposal or impairment, net (3,566) 2,410
Total expenses 639,370 449,802
Earnings from equity method investments 12,614 17,091
Operating income 34,853 23,389
Other expenses (income), net:    
Interest expense 42,461 13,867
Loss on early extinguishment of debt 0 19,922
Foreign currency transaction loss 3,294 0
Other income, net (950) (218)
Total other expenses, net 44,805 33,571
Loss before income taxes (9,952) (10,182)
Income tax expense 23,083 95
Net loss (33,035) (10,277)
Less: cumulative preferred stock dividends 4,832 0
Net loss attributable to common shareholders (37,867) (10,277)
Other comprehensive income, net of income tax 18,171 6,033
Comprehensive loss $ (14,864) $ (4,244)
Net loss per common share (Note 12):    
Basic $ (0.48) $ (0.16)
Diluted $ (0.48) $ (0.16)
v3.8.0.1
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2018
Mar. 31, 2017
Cash flows from operating activities:    
Net loss $ (33,035) $ (10,277)
Adjustments to reconcile net loss to net cash provided by operating activities:    
Depreciation and amortization 50,536 24,599
Loss (gain) on disposal or impairment of long-lived assets, net (3,566) 2,410
Earnings from equity method investments (12,614) (17,091)
Distributions from equity method investments 12,605 17,301
Amortization of debt issuance costs and discount 1,796 1,364
Loss on early extinguishment of debt 0 19,922
Deferred tax expense (benefit) 10,044 (634)
Non-cash equity compensation 2,196 2,757
Provision for uncollectible accounts receivable, net of recoveries (173) 151
Foreign currency transaction loss 3,294 0
Inventory valuation adjustment 0 455
Changes in operating assets and liabilities (Note 13) 52,497 (12,948)
Net cash provided by operating activities 83,580 28,009
Capital expenditures (131,784) (92,248)
Proceeds from sale of long-lived assets 16 15,500
Contributions to equity method investments (309) (2,490)
Proceeds from the sale of Mexican asphalt business, net 63,830 0
Distributions in excess of equity in earnings of affiliates 6,545 4,392
Net cash used in investing activities (61,702) (74,846)
Debt issuance costs (459) (4,632)
Borrowings on credit facilities and issuance of senior notes, net of discount 0 437,018
Principal payments on credit facilities and other obligations (134,246) (348,278)
Debt extinguishment costs 0 (16,293)
Proceeds from issuance preferred stock, net of offering costs 342,354 0
Repurchase of common stock for payment of statutory taxes due on equity-based compensation (381) (1,047)
Dividends paid (37,230) (29,770)
Proceeds from issuance of common stock under employee stock purchase plan 24 231
Net cash provided by financing activities 170,062 37,229
Effect of exchange rate changes on cash and cash equivalents (141) 1,248
Change in cash and cash equivalents 191,799 (8,360)
Cash and cash equivalents at beginning of period 93,699 74,216
Cash and cash equivalents at end of period $ 285,498 $ 65,856
v3.8.0.1
Overview
3 Months Ended
Mar. 31, 2018
Overview [Abstract]  
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, 2017, 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 ended March 31, 2018, are not necessarily indicative of the results to be expected for the full year ending December 31, 2018.
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, 2017, which are included in our Annual Report on Form 10-K for the year ended December 31, 2017, 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, 2017.
Recently adopted 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. We adopted this guidance in the first quarter of 2018. The impact was not 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. We adopted this guidance retrospectively in the first quarter of 2018. For the three months ended March 31, 2017, we reclassified $0.1 million of non-service pension costs from “general and administrative expense” to “other expense (income)”.
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. We adopted this guidance in the first quarter of 2018. The impact was not 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. We adopted this guidance in the first quarter of 2018. 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 were required under previous U.S. GAAP.
On January 1, 2018, we adopted the guidance of ASU 2014-09, codified as Accounting Standards Codification 606 - Revenue from Contracts with Customers (“ASC 606”), using a modified retrospective approach. Upon adoption, a reduction to accumulated deficit of $11.5 million was recorded to reflect the impact of adoption related to uncompleted contracts at the date of adoption. The impacts of adoption to the current period results are as follows (in thousands):
 
Three Months Ended March 31, 2018
 
Under ASC 606
 
Under ASC 605
 
Increase/(Decrease)
Accounts receivable, net
$
535,705

 
$
534,350

 
$
1,355

Other noncurrent assets
$
142,845

 
$
124,836

 
$
18,009

Other current liabilities
$
19,184

 
$
18,341

 
$
843

Deferred income taxes
$
60,551

 
$
54,970

 
$
5,581

Accumulated deficit
$
(80,257
)
 
$
(93,197
)
 
$
12,940

 
 
 
 
 
 
 
 
 
 
 
 
Revenue
$
661,609

 
$
655,723

 
$
5,886

Cost of sales
$
496,132

 
$
492,591

 
$
3,541

General and administrative expense
$
26,477

 
$
26,377

 
$
100

Income tax expense (benefit)
$
23,083

 
$
22,265

 
$
818

Net loss
$
(33,035
)
 
$
(34,462
)
 
$
1,427

Net loss attributable to common shareholders
$
(37,867
)
 
$
(39,294
)
 
$
1,427

Net loss per common share:
 
 
 
 
 
Basic
$
(0.48
)
 
$
(0.50
)
 
$
0.02

Diluted
$
(0.48
)
 
$
(0.50
)
 
$
0.02


Changes to revenue primarily relate to the timing of recognition of deficiencies on take-or-pay agreements for which there is a contractual make-up period and a change to reporting certain gas gathering and processing fees as revenue rather than a reduction of cost of sales. Under ASC 605 - Revenue (“ASC 605”), revenue related to deficiencies with a make-up period was deferred until the contractual right to make-up a deficiency expired. Under ASC 606, we recognize all or a portion of revenue related to deficiencies before the make-up period expires if we determine that it is probable that the customer will not make-up all or some of its deficient volumes, for example if there is insufficient capacity to make up the deficient volumes. This may lead to earlier recognition of deficiency revenues under ASC 606 as compared with ASC 605.
Changes to cost of sales are due to how certain gathering and processing fees related to percentage of proceeds contracts are treated as revenues rather than reductions to purchase price of commodities (cost of sales).
Changes to accounts receivable, net and noncurrent receivables (included in other noncurrent assets on the condensed consolidated balance sheets) primarily relate to the timing of recognizing take-or-pay deficiencies with make-up rights as discussed above. Noncurrent receivables related to contracts for which we do not have the right to bill the customer for deficiencies until the contract expiration date.
Changes to other noncurrent assets include success fee payments to third parties for certain contracts which were expensed as incurred under ASC 605, but which have been recognized as assets under ASC 606 and are amortized to general and administrative expense in the consolidated statement of operations and comprehensive income (loss).
Changes to deferred income taxes primarily relate to the deferred tax impact of adoption entries.
Changes to retained earnings are due to the impact of adoption at January 1, 2018, as described above, and cumulative differences in net income through March 31, 2018.
See Note 10 for additional information.
Recent accounting pronouncements not yet adopted
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. For public entities, this ASU is effective for annual periods beginning after December 15, 2018, 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 2019. The amendments in this update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. 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 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, as amended, 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.
v3.8.0.1
Disposal of long-lived assets
3 Months Ended
Mar. 31, 2018
Disposal of long-lived assets [Line Items]  
Disposal Groups, Including Discontinued Operations, Disclosure [Text Block]
DISPOSALS OR IMPAIRMENTS OF LONG-LIVED ASSETS

On March 15, 2018, we completed the sale of our Mexican asphalt business for $73.5 million, including working capital, subject to customary post-closing adjustments. We recorded a pre-tax gain on disposal of $4.4 million for the three months ended March 31, 2018. The Mexican asphalt business contributed $2.3 million of pre-tax income for the three months ended March 31, 2018, excluding the gain on disposal.
On February 23, 2018, we entered into an agreement to sell our U.K. operations, SemLogistics. In addition to the sale price, the agreement provides for potential earnout payments to be made to SemGroup if certain revenue targets are met in the four years following the close of the transaction. SemGroup intends to use proceeds from the sale toward its capital raise plan and to pre-fund capital growth projects. The sale was completed on April 12, 2018, for $76.8 million in cash, subject to customary post-closing adjustments.
At March 31, 2018, the assets and liabilities of our storage and terminalling business in the U.K. are reflected on the consolidated balance sheet as held for sale and have been written down to net realizable value of $75.1 million. For the three months ended March 31, 2018, we recorded a pre-tax loss of $0.2 million to adjust the carrying value of the U.K. operations to net realizable value. The U.K. business contributed a pre-tax income of $5.8 million for the three months ended March 31, 2018, excluding the loss recorded to adjust the assets held for sale to net realizable value. At March 31, 2018, the U.K. assets and liabilities held for sale included $142.6 million of property, plant and equipment, $2.5 million of current assets and $2.4 million of current liabilities. Asset and liability balances disclosed above do not reflect adjustments to carry the balances at net realizable value.
v3.8.0.1
Equity Method Investments
3 Months Ended
Mar. 31, 2018
Equity Method Investments and Joint Ventures [Abstract]  
EQUITY METHOD INVESTMENTS
EQUITY METHOD INVESTMENTS

Our equity method investments consisted of the following (in thousands):
 
March 31, 2018
 
December 31, 2017
White Cliffs Pipeline, L.L.C.
$
260,126

 
$
266,362

NGL Energy Partners LP
18,928

 
18,919

Total equity method investments
$
279,054

 
$
285,281


Our earnings from equity method investments consisted of the following (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
White Cliffs Pipeline, L.L.C.
$
12,605

 
$
15,193

Glass Mountain Pipeline, LLC

 
1,895

NGL Energy Partners LP
9

 
3

Total earnings from equity method investments
$
12,614

 
$
17,091


Cash distributions received from equity method investments consisted of the following (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
White Cliffs Pipeline, L.L.C.
$
19,150

 
$
18,190

Glass Mountain Pipeline, LLC

 
3,503

Total cash distributions received from equity method investments
$
19,150

 
$
21,693


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 ended March 31, 2018 and 2017, is shown below (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Revenue
$
40,391

 
$
50,184

Cost of products sold, exclusive of depreciation and amortization shown below
$
384

 
$
4,113

Operating, general and administrative expenses
$
5,402

 
$
6,240

Depreciation and amortization expense
$
9,592

 
$
9,256

Net income
$
25,014

 
$
30,575


Our equity in earnings of White Cliffs for the three months ended March 31, 2018 and 2017, 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.
Glass Mountain Pipeline, LLC
On December 22, 2017, we completed the sale of our equity method investment in Glass Mountain Pipeline LLC (“Glass Mountain”) for $300 million, subject to working capital and other adjustments. Proceeds from the sale were used to repay borrowings on SemGroup's revolving credit facility.
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.
v3.8.0.1
Financial Instruments
3 Months Ended
Mar. 31, 2018
Financial Instruments And Fair Value Disclosures [Abstract]  
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 March 31, 2018 and December 31, 2017 (in thousands):

 
March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Total - Net
Assets:
 
 
 
 
 
 
 
 
 
Commodity derivatives (2)
$
31

 
$

 
$

 
$
(31
)
 
$

Interest rate swaps

 

 
130

 

 
130

Total assets
31

 

 
130

 
(31
)
 
130

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity derivatives
3,625

 

 

 
(31
)
 
3,594

Foreign currency forwards

 
1,778

 

 

 
1,778

Total liabilities
3,625

 
1,778

 

 
(31
)
 
5,372

Net assets (liabilities) at fair value
$
(3,594
)
 
$
(1,778
)
 
$
130

 
$

 
$
(5,242
)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Netting (1)
 
Total - Net
Assets:
 
 
 
 
 
 
 
 
 
Commodity derivatives (2)
$
602

 
$

 
$

 
$
(602
)
 
$

Foreign currency forwards

 
2,564

 

 

 
2,564

Total assets
602

 
2,564

 

 
(602
)
 
2,564

Liabilities:


 


 


 


 


Commodity derivatives
1,970

 

 

 
(602
)
 
1,368

Interest rate swaps

 

 
1,228

 

 
1,228

Total liabilities
1,970

 

 
1,228

 
(602
)
 
2,596

Net assets (liabilities) at fair value
$
(1,368
)
 
$
2,564

 
$
(1,228
)
 
$

 
$
(32
)
(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 March 31, 2018, all of our physical fixed price forward purchases and sales commodity contracts were being accounted for as normal purchases and normal sales.
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 Months Ended March 31, 2018
Net liabilities (asset) - beginning balance
$
1,228

Transfers out of Level 3

Realized/Unrealized (gain) loss included in earnings*
(1,074
)
Settlements
(284
)
Net liabilities (asset) - ending balance
$
(130
)
*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 ended March 31, 2017.
See Note 6 for fair value of debt instruments. The approximate fair value of cash and cash equivalents, accounts receivable and accounts payable is equal to book value due to the short-term nature of these items.
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, 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 derivative instruments entered into (in thousands of barrels):
 
Three Months Ended March 31,
 
2018
 
2017
Sales
4,139

 
4,312

Purchases
3,375

 
4,131


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):
 
March 31, 2018
 
December 31, 2017
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
$

 
$
3,594

 
$

 
$
1,368


We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. At March 31, 2018 and December 31, 2017, our margin deposit balances were in net asset positions of $5.0 million and $1.9 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 March 31, 2018 and December 31, 2017, we would have had asset positions of $1.4 million and $0.5 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 March 31,
 
2018
 
2017
Commodity contracts
$
(3,136
)
 
$
4,661


Interest rate swaps
At March 31, 2018, we had interest rate swaps which 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 March 31, 2018, we had interest rate swaps with notional values of $490.4 million. At March 31, 2018, the fair value of our interest rate swaps was $0.1 million which was reported within “other current assets” in our condensed consolidated balance sheet. For the three months ended March 31, 2018, we recognized realized and unrealized gains of $1.1 million related to interest rate swaps.
Foreign currency forwards
At March 31, 2018, we had foreign currency forwards primarily to purchase Canadian dollars to limit exposure to foreign currency rate fluctuations for capital contributions to our SemCAMS segment primarily to fund capital projects. We have not designated the forwards as hedges, as such, changes in the fair value of the forwards are recorded through current period earnings as a component of foreign currency translation gains and losses. At March 31, 2018, we had foreign currency forwards with notional values of $148.7 million. At March 31, 2018, the fair value of our foreign currency swaps was $1.8 million, which is reported within "other current liabilities" and "other noncurrent liabilities" in our consolidated balance sheet. For the three months ended March 31, 2018, we recognized realized and unrealized losses of $4.4 million related to foreign currency forwards.
Concentrations of risk
During the three months ended March 31, 2018, one customer, primarily of our Crude Supply and Logistics segment, accounted for more than 10% of our consolidated revenue with revenues of $240.2 million. No suppliers accounted for more than 10% of our consolidated costs of products sold.
At March 31, 2018, two third-party customers, primarily of our Crude Supply and Logistics segment, accounted for approximately 32% of our consolidated accounts receivable.
v3.8.0.1
Income Taxes
3 Months Ended
Mar. 31, 2018
Income Tax Disclosure [Abstract]  
INCOME TAXES
INCOME TAXES
The effective tax rate was (232)% and (1)% for the three months ended March 31, 2018 and 2017, respectively. The rate for the three months ended March 31, 2018, is impacted by a discrete tax expense related to the vesting of restricted stock in the amount of $1.4 million and a discrete tax expense of $10.9 million in Mexico on the sale of the 100% equity interest in our Mexican asphalt business. The rate is also affected by the US deduction for foreign taxes. The rate for the three months ended March 31, 2017, is impacted by a discrete tax expense related to the vesting of restricted stock in the amount of $1.4 million. Significant items that impacted the effective tax rate for each period, as compared to the U.S. federal statutory rate of 21%, include earnings in foreign jurisdictions taxed at different 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 a foreign tax credit carryover generated in tax years prior to 2014. 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.
v3.8.0.1
Long-Term Debt
3 Months Ended
Mar. 31, 2018
Debt Disclosure [Abstract]  
Long-Term Debt
LONG-TERM DEBT
Our long-term debt consisted of the following (dollars in thousands):
 
Interest rate at March 31, 2018
 
March 31,
2018
 
December 31,
2017
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

 
325,000

Senior unsecured notes due 2026
7.250%
 
300,000

 
300,000

SemGroup $1.0 billion corporate revolving credit facility (1)
 
 


 


Eurodollar borrowings

 

 
131,000

HFOTCO acquisition final payment 
8.000%
 
578,441

 
565,868

HFOTCO term loan B (2)
5.800%
 
530,750

 
532,125

HFOTCO tax exempt notes payable due 2050
2.816%
 
225,000

 
225,000

HFOTCO $75 million revolving credit facility (3)
5.403%
 
60,000

 
60,000

Capital leases
 
 
27

 
25

Unamortized premium (discount) and debt issuance costs, net
 
 
(29,734
)
 
(30,398
)
Total long-term debt, net
 
 
2,739,484

 
2,858,620

Less: current portion of long-term debt
 
 
5,527

 
5,525

Noncurrent portion of long-term debt, net
 
 
$
2,733,957

 
$
2,853,095


(1)
SemGroup $1.0 billion corporate revolving credit facility matures on March 15, 2021.
(2)
HFOTCO term loan B is due in quarterly installments of $1.4 million with a final payment due on August 19, 2021.
(3)
HFOTCO $75 million revolving credit facility matures on August 19, 2019.
HFOTCO acquisition final payment
On April 17, 2018, we made the final payment related to the HFOTCO acquisition in the amount of $579.6 million. The payment was funded through revolving credit facility borrowings and cash on hand.
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 wholly-owned 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 March 31, 2018 (dollars in thousands):
SemGroup $1.0 billion revolving credit facility
2.25%
$
39,385

Secured bi-lateral (1)
1.75%
$
55,409

(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.
Capitalized interest
During the three months ended March 31, 2018 and 2017, we capitalized interest of $3.1 million and $5.6 million, respectively.
Fair value
We estimate the fair value of our senior unsecured notes based on unadjusted, transacted market prices near the measurement date. Our other long-term debts are estimated to be carried at fair value as a result of the recent timing of borrowings or rate resets. We estimate the fair value of our consolidated long-term debt, including current maturities, to be approximately $2.7 billion at March 31, 2018, which is categorized as a Level 3 measurement due to certain unobservable inputs used to estimate the fair value of the final payment.
v3.8.0.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2018
Commitments and Contingencies Disclosure [Abstract]  
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 March 31, 2018, we have an asset retirement obligation liability of $22.7 million, which is included within other noncurrent liabilities on our condensed consolidated balance sheets. This amount was calculated using the $129.0 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 that 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 March 31, 2018, such commitments included the following (in thousands):
 
Volume
(Barrels)
 
Value
Fixed price purchases
1,360

 
$
85,555

Fixed price sales
1,590

 
$
99,470

Floating price purchases
8,366

 
$
531,648

Floating price sales
10,884

 
$
567,025


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, 2018
$
7,950

December 31, 2019
9,567

December 31, 2020
8,864

December 31, 2021
7,175

December 31, 2022
6,753

Thereafter
2,791

Total expected future payments
$
43,100


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 minimum volume commitments for pipeline transportation of crude oil. The approximate amount of future obligations is as follows (in thousands):
For year ending:
 
December 31, 2018
$
16,214

December 31, 2019
21,865

December 31, 2020
19,770

December 31, 2021
12,976

December 31, 2022
13,231

Thereafter
20,312

Total expected future payments
$
104,368

v3.8.0.1
Equity
3 Months Ended
Mar. 31, 2018
Stockholders' Equity Note [Abstract]  
EQUITY
EQUITY
The following table shows the changes in our consolidated owners’ equity accounts from December 31, 2017 to March 31, 2018 (in thousands):
 
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Owners’
Equity
Balance at December 31, 2017
$
786

$
1,770,117

$
(8,031
)
$
(50,706
)
$
(53,801
)
$
1,658,365

Adoption of ASC 606



11,513


11,513

Net loss



(33,035
)

(33,035
)
Other comprehensive income, net of income taxes




18,171

18,171

Dividends paid

(37,230
)



(37,230
)
Unvested dividend equivalent rights

53




53

Non-cash equity compensation

2,149




2,149

Issuance of common stock under compensation plans
1

557




558

Retirement of treasury stock
(2
)

8,031

(8,029
)


Repurchase of common stock


(381
)


(381
)
Balance at March 31, 2018
$
785

$
1,735,646

$
(381
)
$
(80,257
)
$
(35,630
)
$
1,620,163


Accumulated other comprehensive loss
The following table presents the changes in the components of accumulated other comprehensive loss from December 31, 2017 to March 31, 2018 (in thousands):
 
Currency
Translation
 
Employee
Benefit
Plans
 
Total
Balance at December 31, 2017
$
(51,014
)
 
$
(2,787
)
 
$
(53,801
)
Currency translation adjustment, net of income tax benefit of $2,950
(9,137
)
 

 
(9,137
)
Currency translation adjustment reclassified to gain on disposal, net of income tax expense of $8,818
27,305

 

 
27,305

Changes related to benefit plans, net of income tax expense of $1

 
3

 
3

Balance at March 31, 2018
$
(32,846
)
 
$
(2,784
)
 
$
(35,630
)

Equity issuances
During the three months ended March 31, 2018, 30,645 shares under the Employee Stock Purchase Plan were issued and 72,413 shares related to our equity-based compensation awards vested.
Equity-based compensation
At March 31, 2018, there were 1,535,285 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 617,000 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 March 31, 2018, the value of the UDs to be settled in cash related to unvested restricted stock awards was approximately $2.0 million.
During the three months ended March 31, 2018, we granted 645,071 restricted stock awards with a weighted average grant date fair value of $22.41 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, 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
 
 
 
 
 
 
 
March 31, 2018
 
$
0.4725

 
March 9, 2018
 
March 19, 2018
June 30, 2018
 
$
0.4725

 
May 16, 2018
 
May 25, 2018
v3.8.0.1
Preferred Stock
3 Months Ended
Mar. 31, 2018
Preferred Stock [Abstract]  
Preferred Stock [Text Block]
9.
REDEEMABLE PREFERRED STOCK

On January 19, 2018 (the “Issue Date”), we issued and sold to WP SemGroup Holdings L.P. (“Warburg”) and certain other investors an aggregate of 350,000 shares of Series A Cumulative Perpetual Convertible Preferred Stock, par value $0.01 per share, of the Company (the “Preferred Stock”), convertible into 10,606,061 shares (subject to adjustment) of the Company’s Class A Common Stock, par value $0.01 per share (the “Common Stock”), for a cash purchase price of $1,000 per share of Preferred Stock and aggregate gross proceeds to the Company of $350,000,000, which proceeds were utilized (i) to repay amounts borrowed under the Company’s revolving credit facility, (ii) to fund growth capital expenditures and (iii) for general corporate purposes. The Preferred Stock was recorded on our condensed consolidated balance sheets net of $7.6 million of issuance costs.
The Preferred Stock is a new class of equity security that ranks senior to the Common Stock with respect to distribution rights and rights upon liquidation. Subject to certain exceptions, so long as any Preferred Stock remains outstanding, no dividend or distribution will be declared or paid on, and no redemption or repurchase will be agreed to or consummated of, stock on a parity with the Preferred Stock (“Parity Stock”), Common Stock or any other shares of stock junior to the Preferred Stock, unless all accumulated and unpaid dividends for all preceding full fiscal quarters have been declared and paid with respect to the Preferred Stock. In addition, no dividend or distribution or redemption or repurchase shall be paid on Parity Stock, Common Stock or any other shares of stock junior to the Preferred Stock for any period unless the Preferred Stock has been paid full cash dividends in respect of the same period; provided, however, that the Company may pay dividends on Common Stock in respect of any fiscal quarter ending on or prior to June 30, 2020 (the “PIK Period”).
The holders of Preferred Stock (the “Holders”) will receive quarterly distributions equal to an annual rate of 7.0% ($70.00 per share annualized) of $1,000 per share of Preferred Stock, subject to certain adjustments (the “Liquidation Preference”). With respect to any quarter ending on or prior to the PIK Period, the Company may elect, in lieu of paying a distribution in cash, to have the amount that would have been payable if such dividend had been paid in cash added to the Liquidation Preference.
On or after the eighteen month anniversary of the Issue Date, the Holders may convert their Preferred Stock into a number of shares of Common Stock equal to, per share of Preferred Stock, the quotient of the Liquidation Preference divided by $33.00 (the “Conversion Price”), subject to certain adjustments including customary anti-dilution adjustments (such quotient, the “Conversion Rate”). Holders may elect to convert the Preferred Stock, in whole or in part, so long as the aggregate value of Common Stock to be issued pursuant to such partial conversion is not for less than $50,000,000 or a lesser amount if such conversion relates to all of a Holder’s remaining Preferred Stock.
On or after the three year anniversary of the Issue Date, if the Holders have not elected to convert all of their shares of Preferred Stock, the Company may cause the outstanding Preferred Stock to be converted into a number of shares of Common Stock equal to, per share of Preferred Stock, the quotient of the Liquidation Preference divided by the Conversion Price, subject to certain adjustments including customary anti-dilution adjustments; provided, that in order for the Company to exercise such conversion right, the closing sale price of the Common Stock during a designated period be greater than or equal to $47.85, the resale of the shares of Common Stock issuable upon conversion shall be registered and available for resale by the Holders pursuant to a registration statement declared effective by the Securities and Exchange Commission covering such resales, the Common Stock is listed on a national securities exchange, and certain average daily trading volume minimum requirements are met. The Company may elect to convert the Preferred Stock, in whole or in part, so long as the aggregate value of Common Stock to be issued pursuant to such partial conversion is not for less than $50,000,000 or such lesser amount if such conversion relates to the aggregate amount of all remaining Preferred Stock.
Upon a change of control that involves consideration that is at least 90% cash, Holders are required to convert their shares of Preferred Stock into Common Stock at a rate equal to the greater of (i) the product of the Conversion Rate and the quotient of (a) the product of the Conversion Price and the Cash Change of Control Conversion Premium (as defined below), divided by (b) the average volume weighted average price of the Common Stock during a designated period and (ii) the Conversion Rate otherwise in effect at such time. The “Cash Change of Control Conversion Premium” equals (i) on or prior to the first anniversary of the Issue Date, 130%, (ii) after the first anniversary of the Issue Date, but on or prior to the second anniversary of the Issue Date, 120%, (iii) after the second anniversary of the Issue Date, but on or prior to the third anniversary of the Issue Date, 105%, and (iv) thereafter, 101%.
Upon a change of control that involves consideration that is less than 90% cash, Holders may elect to: (i) convert all, but not less than all, outstanding shares of Preferred Stock into Common Stock at the then-applicable Conversion Rate; (ii) except as described below, if the Company will not be the surviving person upon the consummation of such change of control, require the Company to use its commercially reasonable efforts to deliver to the Holders a security in the surviving person or the parent of the surviving person that has rights, preferences and privileges substantially similar to the Preferred Stock; provided, however, that, if the Company is unable to do so, such Holders shall be entitled to: (A) instead elect to convert shares of Preferred Stock pursuant to the mechanics described in clause (i) above or (B) require the Company to redeem all (but not less than all) of such Holder’s Preferred Stock at a price per share equal to 101% of the Liquidation Preference, with the redemption price being paid (at the Company’s option): (1) in cash or (2) in Common Stock; (iii) if the Company is the surviving person upon the consummation of such change of control, continue to hold such Holders’ shares of Preferred Stock; or (iv) require the Company to redeem all (but not less than all) of such Holder’s Preferred Stock at a cash price per share equal to the Liquidation Preference. At March 31, 2018, a change in control is not considered probable.
Holders shall be entitled to vote on all matters on which the holders of shares of Common Stock are entitled to vote and, except as otherwise provided in the Certificate of Incorporation, or by law, the Holders shall vote together with the holders of shares of Common Stock as a single class. Each Holder shall be entitled to a number of votes equal to the number of votes such Holder would have had if all shares of Preferred Stock held by such Holder had been converted into shares of Common Stock.
So long as any Preferred Stock is outstanding, the affirmative vote or consent of the Holders of at least 66 2/3% of the outstanding Preferred Stock, voting together as a separate class, will be necessary for effecting or validating: (i) any issuance of stock senior to the Preferred Stock, (ii) any issuance by the Company of Parity Stock, subject to certain exceptions described below, (iii) any repurchase by the Company of any Preferred Stock, other than on a pro rata basis among all Holders of Preferred Stock, (iv) any special, one-time dividend or distribution with respect to any class of junior stock and (v) any spinoff or other distribution of any equity securities or assets of any of the Company’s subsidiaries to its stockholders in which the consideration received by the Company in such transaction is less than fair market value, subject to certain exceptions. However, the foregoing rights of the Holders will not restrict any of the following actions, subject to certain terms: (i) the Company and any of its controlled affiliates entering into joint ventures with third parties, (ii) the issuance of securities, capital contributions or incurrence of intercompany indebtedness among the Company or any of its subsidiaries, or (iii) the issuance of securities, capital contributions or incurrence of intercompany indebtedness among the Company and any joint ventures, partnerships or other minority owned entities in which the Company or its subsidiaries have an equity or other interest, in each case, which exist as of the Issue Date.
Notwithstanding the vote or consent of the Holders described above, after the Issue Date, the Company may issue certain amounts of Parity Stock without the approval of the Holders if: (A) the aggregate amount of such issuances is less than or equal to $250,000,000 (excluding the aggregate amount of any additional shares of Preferred Stock issued to Warburg); or (B) the aggregate initial purchase price of the then outstanding Preferred Stock is less than $100,000,000.
Prior to the first anniversary of the Issue Date, no Holder may transfer any Preferred Stock without the prior written consent of the Company. Prior to the second anniversary of the Issue Date, Holders and their affiliates are prohibited from directly or indirectly engaging in any short sales or other hedging transactions involving the Preferred Stock and Common Stock underlying such Holder’s Preferred Stock.
For so long as Warburg and its affiliates collectively own 75% or more of the outstanding Preferred Stock acquired by Warburg and its affiliates on the Issue Date, the Company, prior to any issuance of Parity Stock, is required to provide Warburg with a reasonable opportunity to purchase all or any portion of such shares of Parity Stock to be issued by the Company on substantially the same terms offered to the other purchasers of such securities.
The terms of the Preferred Stock purchase agreement (the “Purchase Agreement”) contains customary representations, warranties and covenants of the Company and the Purchasers made as of the date of the Purchase Agreement and as of the Issue Date, and the parties have agreed to indemnify each other against certain losses resulting from breaches of their respective representations, warranties and covenants.
Pursuant to the Purchase Agreement, the Company has granted to Warburg, until Warburg no longer owns at least 50% of the Preferred Stock issued to Warburg and its affiliates on the Issue Date, certain rights to designate an observer (the “Board Observer”) to the board of directors of the Company (the “Board”), who shall have the right to attend full meetings of the Board (including any executive session and certain committees thereof) and receive such materials as other members of the Board receive.
In addition, pursuant to the Purchase Agreement, the Company also granted Warburg and its affiliates rights to require the Company to file and maintain, subject to the penalties described in the Purchase Agreement, registration statements with respect to the resale of the Common Stock issuable upon conversion of the Preferred Stock. The Company is required to file or cause to be filed a registration statement (the “Preferred Registration Statement”) for the resale of registrable securities and is required to cause the Preferred Registration Statement to become effective no later than the eighteen month anniversary of the Issue Date. In certain circumstances, Warburg and its affiliates will have piggyback registration rights on offerings initiated by the Company or other persons who have been granted registration rights, and Warburg has the right to request two underwritten offerings upon certain terms and conditions set forth in the Purchase Agreement. Holders of registrable securities will cease to have registration rights under the Purchase Agreement on the earlier of (i) the second anniversary of the date on which shares Preferred Stock are first converted into shares of Common Stock and (ii) the date on which no registrable securities remain outstanding; provided, that the Company shall use reasonable best efforts to maintain the effectiveness of the Preferred Registration Statement during all periods in which Warburg (A) is deemed to be an affiliate of the Company pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), or (B) together with its affiliates, owns more than 5% of the Company’s Common Stock (including Common Stock it would own on an as-converted basis).
On May 1, 2018, we declared a paid-in-kind dividend of $4.8 million, which has been prorated for the period from January 19, 2018 to March 31, 2018. The dividend will be paid on May 25, 2018.
v3.8.0.1
Revenue Revenue
3 Months Ended
Mar. 31, 2018
Revenue from Contract with Customer [Abstract]  
Revenue from Contract with Customer [Text Block]
10.
REVENUE FROM CONTRACTS WITH CUSTOMERS

We provide gathering, transportation, storage, distribution, marketing and other midstream services primarily to producers, refiners of petroleum products and other market participants located in the Gulf Coast, Midwest and Rocky Mountain regions of the United States of America (the “U.S.”) and Western Canada. In general, we recognize service revenue as the service is performed (“over time”) and product sales revenues are recognized when control of the product transfers to the customer (“point in time”). Our revenue from contracts with customers are disaggregated by segment as follows:
Crude Transportation
Crude Transportation generates revenue by providing crude oil pipeline and truck transportation services to customers under fee-based contractual arrangements generally based on units of volume transported. In some instances fees are fixed and not dependent on usage, such as take-or-pay arrangements.
Crude Facilities
Crude Facilities generates revenue by providing crude oil storage and terminalling services primarily to customers at the Cushing Hub under fee-based contractual arrangements that, in some instances are fixed and not dependent on usage. Pump-over and unloading fees are based on per volume fees for units delivered or withdrawn.

Crude Supply and Logistics
Crude Supply and Logistics performs marketing activities including purchasing crude oil for its own account from producers and aggregators and selling to traders and refiners under contracts generally with initial terms of less than one year. Revenue is recognized based on market prices at the time the commodities are sold. In certain transactions, we purchase inventory from, and sell inventory to, the same counterparty. Such transactions that are entered into in contemplation of one another are recorded on a net basis.

HFOTCO
HFOTCO generates revenue by providing storage and terminalling services to customers in the Houston Ship Channel. These contractual arrangements typically include fixed take-or-pay fees related to provision of storage and throughput capacity and usage based charges for pump-over, heating, berthing and excess throughput volumes.

HFOTCO also generates revenue from leases of certain land, tanks and a barge dock, which are accounted for as a direct financing lease and are outside of the scope of ASC 606.

SemGas
SemGas generates revenue by providing natural gas and natural gas liquids gathering and processing services to customers based on agreements that are a combination of percent of proceeds and fee-based contracts. Initial contract terms can range from monthly and interruptible to the life of the reserves and, upon expiration, continue to renew on a month-to-month or year-to-year evergreen basis. SemGas’ customers include producers, operators, marketers and traders. Gathering and processing fees are generally based on per volume fees. Product sales revenue is generated from the sale of NGLs and residue gas arising from processing at prevailing market prices.

SemCAMS
SemCAMS generates revenue from its processing plants through volumetric fees for services under contractual arrangements with working interest owners and third-party customers and the pass through of certain operating costs. Pass-through cost and operating expense fee recoveries are reported as "Other revenue" in the consolidated statements of operations and comprehensive income (loss). SemCAMS also derives revenue as the owner and operator of pipeline gathering systems that gather gas from multiple wells located in the same production unit and as the owner and operator of pipeline transportation systems that deliver the gathered gas to its processing plant. SemCAMS’ customers include producers of varying sizes. To support operations at our plants, several producers have committed to process all of their current and future natural gas production.

Corporate and Other
Corporate and Other is not an operating segment, but contains the results of operations for our former Mexican asphalt business and U.K. storage business, which are not significant components of our business.
Key areas of judgment    

Take or pay
Contracts with take-or-pay provisions are recognized over time as the customer simultaneously receives and consumes the benefit of available capacity. Payments made for unused take-or-pay capacity, which allow the customer to carryforward a portion of the unused capacity to future periods, are deferred until it becomes unlikely that the capacity will be used prior to contract expiration. Determining when, or if, the capacity will be used requires judgment.

Percentage of proceeds
Contracts with percentage of proceeds terms typically involve the receipt of natural gas at the wellhead and include gathering, processing and marketing of the resulting NGLs and residue gas with SemGroup retaining a portion of the proceeds from the ultimate sale to a third-party. The terms of these agreements include various gathering and processing fees. The determination of whether the transaction is a purchase at the wellhead by SemGroup with gathering and processing performed on our own account or whether the transaction represents gathering and processing as a service provided to the producer by SemGroup with a purchase and sale of processed gas at the completion of the service, requires judgment and is impacted by when control of the underlying commodity has been deemed to move from the producer to the processor. This determination impacts whether gathering and processing fees are recorded as reductions to cost of sales or recorded as service revenue.

Principal vs. agent

We engage in various types of transactions where we perform marketing activities for producers, such as our percentage of proceeds contracts, or transactions where costs are incurred and reimbursed by customers or other owners in facilities, such as SemCAMS' pass-through costs. These types of transactions require judgment to determine whether we are the principal or an agent in the transaction and as a result whether revenues are recorded gross or net.

Non-cash consideration
SemGroup receives commodities from its customers in the form of plant and field fuel, pipeline loss allowance and retention of drip liquids. The purpose of the receipt of these commodities is to keep the Company whole in the case of minor operational usage or loss of product and is not intended as a consideration for services performed. Therefore, the receipt of these commodities does not represent consideration and is not recorded as revenue. Any net retention of commodities in excess of actual losses is recorded in inventory and recognized as revenue when sold.

Tiered pricing and material rights
We have certain contracts that provide customers with rates that reduce incrementally as volumes increase beyond certain thresholds. These types of agreements require judgment to determine if the option for the customer to acquire additional services constitutes a material right that the customer would not receive without entering into the contract, e.g. the discount exceeds the range of discounts typically given. If it is determined that a material right exists, a portion of the revenue is allocated to that right at contract inception and recognized as revenue as the option for additional services is exercised or when the option expires. In contrast, if it is concluded that the option to acquire additional services reflects standalone selling price, this would constitute a marketing offer and not a material right.
Disaggregated revenue

Our revenue is disaggregated by segment and by activity below (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Crude Transportation
 
 
 
Pipeline transportation
$
21,112

 
$
6,184

Truck transportation
13,164

 
14,349

 
 
 
 
Crude Facilities
 
 
 
Storage fees
7,549

 
7,881

Service fees
4,728

 
4,260

 
 
 
 
Crude Supply and Logistics
 
 
 
Product sales
443,399

 
297,471

 
 
 
 
HFOTCO
 
 
 
Storage fees
32,102

 

Service fees
7,767

 

Lease revenue
4,329

 

 
 
 
 
SemGas
 
 
 
Product sales
39,708

 
47,227

Service fees
16,187

 
14,436

 
 
 
 
SemCAMS
 
 
 
Service fees
30,542

 
22,393

Other revenue
14,603

 
14,405

 
 
 
 
Corporate and Other
 
 
 
Product sales
31,319

 
32,573

Storage fees
7,104

 
5,870

Service fees
2,855

 
2,022

Intersegment eliminations
(14,859
)
 
(12,971
)
 
 
 
 
Total revenue
$
661,609

 
$
456,100



Remaining performance obligations

Most of our service contracts are such that we have the right to consideration from a customer in an amount that corresponds directly with the value to the customer of our performance completed to date. Therefore, we are utilizing the practical expedient in ASC 606-10-55-18 under which we recognize revenue in the amount to which we have the right to invoice. Applying this practical expedient, we are not required to disclose the transaction price allocated to remaining performance obligations under these agreements. However, certain of our agreements, such as "take-or-pay" agreements, do not qualify for the practical expedient. The amount and timing of revenue recognition for such contracts is presented below (in thousands):

 
2018
2019
2020
2021
2022
Thereafter
Expected timing of revenue recognized for remaining performance obligations
$
217,031

$
224,065

$
179,824

$
153,794

$
151,699

$
1,835,912



For our product sales contracts, we have elected the practical expedient set out in ASC 606-10-50-14A that states that we are not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these agreements, each unit of product represents a separate performance obligation and therefore future volumes are wholly unsatisfied and disclosure of transaction price allocated to remaining performance obligations is not required. Under product sales contracts, the variability arises as both volume and pricing (typically index based) are not known until the product is delivered.

Receivables from contracts with customers

Accounts receivable, net on the condensed consolidated balance sheets represents current receivables from contracts with customers. Certain noncurrent receivables from contracts with customers are included in “other noncurrent assets” on the condensed consolidated balance sheets. These amounts are accruals to recognize revenue for performance to date related to customer deficiencies on minimum volume commitments with make-up rights for which the use of the make-up rights are not probable due to capacity constraints or other factors. Therefore, we have accrued the amount for which no future performance by SemGroup will be required, but for which we do not have a present right to bill the customer until the end of the contract. The balance of noncurrent receivables from customer contracts was (in thousands):

 
March 31,
2018
 
December 31,
2017
Noncurrent receivables
$
8,309

 
$



Noncurrent receivables for the transactions described above were not recorded prior to the adoption of ASC 606 as our policy was to defer recognition of deficiencies with make-up rights until the contractual make-up rights expired.

Deferred revenue

We record deferred revenue when we have received a payment in advance of delivering a product or performing a service. For the three months ended March 31, 2018, we recognized $3.2 million of revenue which was included in deferred revenue at the beginning of the period.

Costs to obtain or fulfill a contract

Unless material, we expense costs to obtain or fulfill a contract in the period incurred. At March 31, 2018, we had contract assets of $9.7 million related to costs incurred to obtain contracts which had been expensed as incurred under previous guidance. These costs are reported within “other noncurrent assets” on the condensed consolidated balance sheets and are being amortized straight-line over the 25-year life of the related contracts.
v3.8.0.1
Segments
3 Months Ended
Mar. 31, 2018
Segment Reporting [Abstract]  
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. Prior period segment disclosures have been recast to include the SemMexico and SemLogistics segments within Corporate and Other, as these businesses are no longer significant and are not expected to be significant in the future. Eliminations of transactions between segments are also included within Corporate and Other in the tables below.
During the fourth quarter of 2017, we changed our definition of segment profit to focus on the results of each segment exclusive of general and administrative costs and related overhead allocations. Segment Profit is defined as revenue, less cost of products sold (exclusive of depreciation and amortization) and operating expenses, plus equity earnings and is adjusted to remove unrealized gains and losses on commodity derivatives and to reflect equity earnings on an earnings before interest, taxes and depreciation and amortization (“EBITDA”) basis. Reflecting equity earnings on an EBITDA basis is achieved by adjusting equity earnings to exclude our percentage of interest, taxes, depreciation and amortization from equity earnings for operated equity method investees. For our investment in NGL Energy, we exclude equity earnings and include cash distributions received. Prior period segment profit has been recast to be consistent with the revised definition.
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.
Our results by segment are presented in the tables below (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Revenues:
 
 
 
   Crude Transportation
 
 
 
External
$
26,068

 
$
13,979

Intersegment
8,208

 
6,554

   Crude Facilities
 
 
 
External
9,284

 
9,635

Intersegment
2,993

 
2,506

   Crude Supply and Logistics
 
 
 
External
443,399

 
297,471

HFOTCO
 
 
 
External
44,198

 

   SemGas
 
 
 
External
52,237

 
57,752

Intersegment
3,658

 
3,911

   SemCAMS
 
 
 
External
45,145

 
36,798

   Corporate and Other
 
 
 
External
41,278

 
40,465

Intersegment
(14,859
)
 
(12,971
)
Total Revenues
$
661,609

 
$
456,100

 
Three Months Ended March 31,
 
2018
 
2017
Earnings from equity method investments:
 
 
 
   Crude Transportation
$
12,605

 
$
17,088

   Corporate and Other
9

 
3

Total earnings from equity method investments
$
12,614

 
$
17,091

 
Three Months Ended March 31,
 
2018
 
2017
Depreciation and amortization:
 
 
 
   Crude Transportation
$
12,476

 
$
5,927

   Crude Facilities
2,132

 
1,944

   Crude Supply and Logistics
193

 
62

HFOTCO
19,306

 

   SemGas
10,449

 
8,927

   SemCAMS
5,238

 
4,496

   Corporate and Other
742

 
3,243

Total depreciation and amortization
$
50,536

 
$
24,599

 
Three Months Ended March 31,
 
2018
 
2017
Income tax expense (benefit):
 
 
 
HFOTCO
$
209

 
$

SemCAMS
2,970

 
1,424

Corporate and Other(1)
19,904

 
(1,329
)
Total income tax expense (benefit)
$
23,083

 
$
95

(1) Corporate and Other includes the impact of intra-period tax allocation.
 
Three Months Ended March 31,
 
2018
 
2017
Segment profit:
 
 
 
   Crude Transportation
$
34,310

 
$
28,251

   Crude Facilities
9,341

 
9,564

   Crude Supply and Logistics
(6,583
)
 
(2,428
)
HFOTCO
30,988

 

   SemGas
14,277

 
18,227

   SemCAMS
22,113

 
16,865

   Corporate and Other
10,963

 
8,367

Total segment profit
$
115,409

 
$
78,846

 
Three Months Ended March 31,
 
2018
 
2017
Reconciliation of segment profit to net loss:
 
 
 
   Total segment profit
$
115,409

 
$
78,846

     Less:
 
 
 
Adjustment to reflect equity earnings on an EBITDA basis
4,883

 
6,709

Net unrealized loss related to commodity derivative instruments
2,226

 
27

General and administrative expense
26,477

 
21,712

Depreciation and amortization
50,536

 
24,599

Loss on disposal or impairment, net
(3,566
)
 
2,410

Interest expense
42,461

 
13,867

Loss on early extinguishment of debt

 
19,922

Foreign currency transaction loss
3,294

 

Other income, net
(950
)
 
(218
)
Income tax expense
23,083

 
95

   Net loss
$
(33,035
)
 
$
(10,277
)
 
March 31,
2018
 
December 31,
2017
Total assets (excluding intersegment receivables):
 
 
 
   Crude Transportation
$
1,032,730

 
$
1,039,399

   Crude Facilities
148,520

 
153,953

   Crude Supply and Logistics
545,551

 
674,684

   HFOTCO
2,011,823

 
2,003,298

   SemGas
720,827

 
714,777

   SemCAMS
561,857

 
518,900

   Corporate and Other
418,017

 
271,806

Total assets
$
5,439,325

 
$
5,376,817

 
March 31,
2018
 
December 31,
2017
Equity investments:
 
 
 
   Crude Transportation
$
260,126

 
$
266,362

   Corporate and Other
18,928

 
18,919

Total equity investments
$
279,054


$
285,281

v3.8.0.1
Earnings Per Share
3 Months Ended
Mar. 31, 2018
Earnings Per Share [Abstract]  
EARNINGS PER SHARE
EARNINGS PER SHARE
Basic earnings per share is based on net income (loss) attributable to common shareholders, which is calculated as net income (loss) less cumulative preferred stock dividends. Diluted earnings per share includes the dilutive effect of unvested equity compensation awards and the potential conversion of preferred stock, if dilutive.
The following summarizes the calculation of basic earnings per share for the three months ended March 31, 2018 and 2017 (in thousands, except per share amounts):
 
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
Net loss
$
(33,035
)
 
$
(10,277
)
Less: cumulative preferred stock dividends
4,832

 

Net loss attributable to common shareholders
$
(37,867
)
 
$
(10,277
)
Weighted average common stock outstanding
78,198

 
65,692

Basic loss per share
$
(0.48
)
 
$
(0.16
)
The following summarizes the calculation of diluted earnings per share for the three months ended March 31, 2018 and 2017 (in thousands, except per share amounts):
 
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
Net loss
$
(33,035
)
 
$
(10,277
)
Less: cumulative preferred stock dividends
4,832

 

Net loss attributable to common shareholders
$
(37,867
)
 
$
(10,277
)
Weighted average common stock outstanding
78,198

 
65,692

Effect of dilutive securities

 

Diluted weighted average common stock outstanding
78,198

 
65,692

Diluted loss per share
$
(0.48
)
 
$
(0.16
)
For the three months ended March 31, 2018, we experienced net losses attributable to common shareholders. The unvested equity compensation awards and the preferred stock would have been antidilutive and, therefore, were not included in the computation of diluted earnings per share. For the three months ended March 31, 2017, we experienced net losses. The unvested equity compensation awards would have been antidilutive and, therefore, were not included in the computation of diluted earnings per share.
v3.8.0.1
Supplemental Cash Flow Information
3 Months Ended
Mar. 31, 2018
Supplemental Cash Flow Information [Abstract]  
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):
 
Three Months Ended March 31,
 
2018
 
2017
Decrease (increase) in restricted cash
$
33

 
$
28

Decrease (increase) in accounts receivable
122,829

 
(55,150
)
Decrease (increase) in receivable from affiliates
754

 
12,529

Decrease (increase) in inventories
25,220

 
(2,441
)
Decrease (increase) in other current assets
(3,748
)
 
857

Decrease (increase) in other assets
805

 
(875
)
Increase (decrease) in accounts payable and accrued liabilities
(104,888
)
 
40,485

Increase (decrease) in payable to affiliates
(4,650
)
 
(9,422
)
Increase (decrease) in other noncurrent liabilities
16,142

 
1,041

 
$
52,497