The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated interim financial statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC.

Overview of Business
We provide gathering, transportation, storage, distribution, marketing and other midstream services primarily to independent producers, refiners of petroleum products and other market participants located in the Midwest and Rocky Mountain regions of the United States of America (the "U.S."), Canada and the West Coast of the United Kingdom (the "U.K."). We, or our significant equity method investees, have an asset base consisting of pipelines, gathering systems, storage facilities, terminals, processing plants and other distribution assets located in North American production and supply areas, including the Gulf Coast, Midwest, Rocky Mountain and Western Canadian regions. We maintain and operate storage, terminal and marine facilities at Milford Haven in the U.K. that enable customers to supply petroleum products to markets in the Atlantic Basin. We also operate a network of liquid asphalt cement terminals throughout Mexico. Our business is conducted through six primary business segments - Crude, SemStream®, SemCAMS, SemLogistics, SemMexico, and SemGas®. Our assets include:
• A 51% interest in the White Cliffs Pipeline (a 527-mile crude oil pipeline running from Platteville, CO to Cushing, OK), which Crude operates;

•          A 2% general partner interest and a 57% limited partner interest in
           Rose Rock, which owns an approximately 640-mile crude oil pipeline
           network in Kansas and Oklahoma and a crude oil storage facility in
           Cushing, Oklahoma with a capacity of 7.0 million barrels;


•          9.1 million common units of NGL Energy Partners LP ("NGL Energy") and
           a 6.42% interest in NGL Energy Holdings LLC, the general partner of
           NGL Energy;


•          more than 1,560 miles of natural gas and NGL transportation, gathering
           and distribution pipelines in Kansas, Oklahoma, Texas and Alberta,
           Canada;


•          8.7 million  barrels of owned multi-product storage capacity located
           in the United Kingdom;


•          12 liquid asphalt cement terminals and modification facilities and two
           emulsion distribution terminals in Mexico;


•          three natural gas processing plants in the U.S., with 98 million cubic
           feet per day of capacity; and


•          majority ownership interests in two sour gas and two sweet gas
           processing plants in Alberta, Canada, with combined operating capacity
           of 694 million cubic feet per day.

We believe that the variety of our petroleum product assets creates opportunities for us and our customers year round.

Recent Developments

Increased Ownership in Glass Mountain Pipeline LLC On October 10, 2012, SemGroup and Gavilon Energy Holdings II, LLC ("Gavilon") announced that each had completed the acquisition of a 25% share of Glass Mountain Pipeline LLC ("GMP"), previously owned by an affiliate of Chesapeake Energy Corporation ("Chesapeake"). Following this purchase, SemGroup now owns 50% of GMP, with the remaining 50% owned by Gavilon. Chesapeake will maintain its long-term transportation agreement with GMP, providing the economic incentive for its construction.

Results of Operations
Consolidated Results of Operations

Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2012 2011 2012 2011 Revenue $ 277,852 $ 391,522 $ 921,660 $ 1,135,087 Expenses
Costs of products sold 189,830 313,490 651,283 896,871 Operating 52,367 41,772 172,750 116,384 General and administrative 16,680 16,883 53,073 56,443 Depreciation and amortization 12,081 12,894 35,687 38,355 Gain on disposal or impairment (3,615 ) - (3,496 ) (136 ) Total expenses 267,343 385,039 909,297 1,107,917 Earnings from equity method
investments 3,116 4,016 22,903 10,166 Operating income 13,625 10,499 35,266 37,336 Other expense (income)
Interest expense 1,992 6,013 7,763 49,321 Other (income) expense, net 9,709 (11,847 ) 17,141 (17,994 ) Total other (income) expenses, net 11,701 (5,834 ) 24,904 31,327 Income from continuing operations
before income taxes 1,924 16,333 10,362 6,009 Income tax expense 2,091 1,308 985 3,202 Income (loss) from continuing
operations (167 ) 15,025 9,377 2,807 Loss from discontinued operations (265 ) (686 ) (456 ) (735 ) Net income (loss) $ (432 ) $ 14,339 $ 8,921 $ 2,072

Revenues and Expenses
Revenue and expenses before intercompany eliminations leading to operating income (loss) are analyzed by operating segment below. Interest Expense
Interest expense decreased in the three months ended September 30, 2012 to $2.0 million from $6.0 million in the three months ended September 30, 2011. Interest expense also decreased in the nine months ended September 30, 2012 to $7.8 million from $49.3 million in the nine months ended September 30, 2011. The outstanding debt balance decreased to $191.7 million at September 30, 2012 from $387.0 million at September 30, 2011. The reduction in outstanding debt is due to repayments made from proceeds received from the sale of the SemStream assets and Rose Rock's initial public offering which were completed in the fourth quarter of 2011. The reduction in the outstanding debt balance, coupled with a significant reduction in interest rates due to the refinancing of the credit facility that was completed in the second quarter of 2011, comprise the majority of the decrease in interest expense. Also contributing to the decrease is the write-off in June 2011 of $17.3 million of unamortized capitalized loan fees related to the refinancing of the credit facility. Other Expense (Income), net
Other expense was $9.7 million for the three months ended September 30, 2012, compared to other income of $11.8 million for the same period in 2011. Other expense was $17.1 million for the nine months ended September 30, 2012, compared to other income of $18.0 million for the same period in 2011. Other expense (income) for all periods presented was comprised primarily of gains and losses due to the change in the fair value of our warrants.

Income Tax Expense (Benefit)
The effective tax rate was 109% for the three months ended September 30, 2012 and 8% for the three months ended September 30, 2011. The effective tax rate for nine months ended September 30, 2012 and 2011 was 10% and 53%, respectively. Significant items that impacted the effective tax rate for each period, as compared to the U.S. Federal statutory rate of 35%, include earnings in foreign jurisdictions taxed at lower rates and the full valuation allowance which was recorded against our deferred tax assets. Further, the foreign earnings are taxed in foreign jurisdictions as well as in the U.S., since they are disregarded entities for U.S. federal income tax purposes. For the three months and nine months ended September 30, 2012, the rate is impacted by a noncontrolling interest in Rose Rock for which taxes are not provided. Deferred tax liabilities, with the exception of those related to certain long-lived assets, have been considered as a source of future taxable income in establishing the amount of the valuation allowance. These combined factors, and the magnitude of permanent items impacting the tax rate relative to income from continuing operations before income taxes, result in rates that are not comparable between the periods.

Results of Operations by Reporting Segment

Crude
                                          Three Months Ended September 30,             Nine Months Ended September 30,
(in thousands)                               2012                   2011                 2012                   2011
Revenue                               $        131,616       $        104,616     $        468,748       $        299,121
Expenses
Costs of products sold                         111,790                 90,660              412,847                252,804
Operating                                        6,042                  4,530               17,957                 13,683
General and administrative                       5,015                  2,040                9,796                  6,508
Depreciation and amortization                    3,066                  3,122                9,032                  8,505
Loss (gain) on disposal or impairment           (3,500 )                    -               (3,444 )                   12
Total expenses                                 122,413                100,352              446,188                281,512
Equity earnings in White Cliffs                 10,021                  4,016               25,053                 10,166
Operating income                      $         19,224       $          8,280     $         47,613       $         27,775

Three months ended September 30, 2012 versus three months ended September 30, 2011
Revenue
Revenue increased in the three months ended September 30, 2012 to $132 million from $105 million in the three months ended September 30, 2011.

                                              Three Months Ended September 30,
                                                  2012                 2011
                                                       (in thousands)
Gross product revenue                      $       565,595       $       266,132
ASC 845-10-15                                     (445,791 )            (169,512 )
Unrealized gain (loss) on derivatives, net             554                (1,190 )
Product revenue                                    120,358                95,430
Service revenue                                     11,196                 9,142
Other                                                   62                    44
Total revenue                              $       131,616       $       104,616

Gross product revenue increased in the three months ended September 30, 2012 to $566 million from $266 million in the three months ended September 30, 2011. The increase was primarily a result of increased sales volumes to 6.2 million barrels for the three months ended September 30, 2012 from 3.0 million barrels for the same period in 2011, and an increase in the average sales price of crude oil to $91 per barrel for the three months ended September 30, 2012 from $89 per barrel for the same period in 2011.

ASC 845-10-15, "Nonmonetary Transactions," requires certain transactions - those where inventory is purchased from a customer then resold to the same customer - to be presented in the income statement on a net basis, resulting in a reduction of revenue and costs of products sold by the same amount, but has no effect on operating income (loss). However, changes in the level of such purchase and sale activity between periods can have an effect on the comparison between those periods. Gross product revenue was reduced by $446 million and $170 million during the three months ended September 30, 2012 and 2011, respectively, in accordance with ASC 845-10-15.
Service revenue increased in the three months ended September 30, 2012 to $11 million from $9 million for the three months ended September 30, 2011, due to additional storage capacity at Cushing, OK. Costs of products sold
Costs of products sold increased in the three months ended September 30, 2012 to $112 million from $91 million for the same period in 2011. Costs of products sold were reduced by $446 million and $170 million in the three months ended September 30, 2012 and 2011, respectively, in accordance with ASC 845-10-15. Costs of products sold increased in the three months ended September 30, 2012, primarily as a result of an increase in the volume sold offset, in part, by an increase in the average cost of crude oil per barrel to $89 from $87 per barrel for the same period in 2011.
Adjusted gross margin
We view Adjusted gross margin as an important performance measure of the core profitability of our operations, as well as our operating performance as compared to that of other companies in our industry, without regard to financing methods, historical costs basis, capital structure or the impact of fluctuating commodity prices. We define Adjusted gross margin as total revenues minus cost of products sold and unrealized gain (loss) on derivatives. Adjusted gross margin allows us to make a meaningful comparison of the operating results between our fee-based activities, which do not involve the purchase or sale of petroleum products, and our fixed-margin and marketing operations, which do. In addition, Adjusted gross margin allows us to make a meaningful comparison of the results of our fixed-margin and marketing operations across different commodity price environments because it measures the spread between the product sales price and costs of products sold.
Because Adjusted gross margin may be defined differently by other companies in our industry, our definition may not be comparable to similarly titled measures of other companies.
The following table shows the Adjusted gross margin generated by our fee-based services, our fixed-margin transactions and our marketing activities for the three months ended September 30, 2012 (in thousands):

                                                                       Marketing
                                   Storage        Transportation       Activities       Other(1)        Total
Revenues                         $    8,367     $          4,768     $    116,318     $    2,163     $ 131,616
Less: Costs of products sold,
exclusive of depreciation and
amortization                              -                    -          111,790              -       111,790
Less: Unrealized gain (loss) on
derivatives                               -                    -              554              -           554
Adjusted gross margin            $    8,367     $          4,768     $      3,974     $    2,163     $  19,272

(1) This category includes fee-based services such as unloading and ancillary storage terminal services.

The following table shows the Adjusted gross margin generated by our fee-based services, our fixed-margin transactions and our marketing activities for the three months ended September 30, 2011 (in thousands):

                                                                       Marketing
                                   Storage        Transportation      Activities       Other(1)        Total
Revenues                         $    6,108     $          3,365     $    93,591     $    1,552     $ 104,616
Less: Costs of products sold,
exclusive of depreciation and
amortization                              -                    -          90,660              -        90,660
Less: Unrealized gain (loss) on
derivatives                               -                    -          (1,190 )            -        (1,190 )
Adjusted gross margin            $    6,108     $          3,365     $     4,121     $    1,552     $  15,146

(1) This category includes fee-based services such as unloading and ancillary storage terminal services.

The following table presents a reconciliation of operating income to Adjusted gross margin, the most directly comparable GAAP financial measure for each of the periods indicated.

                                                                Three Months Ended September 30,
                                                                    2012                 2011
                                                                         (in thousands)
Reconciliation of operating income to Adjusted gross margin:
Operating income                                             $        19,224       $         8,280
Add:
Operating expense                                                      6,042                 4,530
General and administrative expense                                     5,015                 2,040
Depreciation and amortization expense                                  3,066                 3,122
Gain on disposal or impairment                                        (3,500 )                   -
Less:
Unrealized gain (loss) on derivatives                                    554                (1,190 )
Earnings from equity method investment                                10,021                 4,016
Adjusted gross margin                                        $        19,272       $        15,146

Operating expense
Operating expense increased in the three months ended September 30, 2012, to $6 million from $5 million for the three months ended September 30, 2011. This increase is due primarily to increased allocation of corporate engineering costs ($345 thousand), field expense ($300 thousand), employment expense ($250 thousand) and maintenance expense ($175 thousand). In addition, a recovery in 2011 of a previously written off account receivable ($300 thousand) did not reoccur in 2012.
General and administrative
General and administrative expense increased in the three months ended September 30, 2012, to $5 million from $2 million for the three months ended September 30, 2011. This increase is primarily the result of giving year to date effect to a recently completed transfer pricing study which increased the allocation of corporate costs by approximately $3 million. Gain on disposal or impairment
We sold a portion of our ownership interest in White Cliffs during September 2010. At the time, we recorded a loss of $6.8 million on disposal of that asset. In September 2012, we reached a settlement in a dispute concerning the selling price of that ownership interest and reduced the loss by $3.5 million. Earnings from equity method investment
Crude's only equity method investment is in White Cliffs. Earnings from this investment increased in the three months ended September 30, 2012 to $10 million from $4 million in the three months ended September 30, 2011. This increase is due primarily to a 61% increase in the crude oil volume shipped from Platteville, CO to Cushing, OK.
Nine months ended September 30, 2012 versus nine months ended September 30, 2011 Revenue
Revenue increased in the nine months ended September 30, 2012 to $469 million from $299 million in the nine months ended September 30, 2011.

Gross product revenue increased in the nine months ended September 30, 2012 to $1.5 billion from $748 million in the nine months ended September 30, 2011. The increase was primarily a result of increased sales volumes to 16.4 million barrels for the nine months ended September 30, 2012 from 8.0 million barrels for the same period in 2011, and an increase in the average sales price of crude to $94 per barrel for the nine months ended September 30, 2012 from $93 per barrel for the same period in 2011.
ASC 845-10-15, "Nonmonetary Transactions," requires certain transactions - those where inventory is purchased from a customer then resold to the same customer - to be presented in the income statement on a net basis, resulting in a reduction of revenue and costs of products sold by the same amount, but has no effect on operating income (loss). However, changes in the level of such purchase and sale activity between periods can have an effect on the comparison between those periods.
Gross product revenue was reduced by $1.1 billion and $477 million during the nine months ended September 30, 2012 and 2011, respectively, in accordance with ASC 845-10-15.
Service revenue increased in the nine months ended September 30, 2012 to $33 million from $27 million for the nine months ended September 30, 2011, due to additional storage capacity at Cushing, OK. Costs of products sold
Costs of products sold increased in the nine months ended September 30, 2012 to $413 million from $253 million for the same period in 2011. Costs of products sold were reduced by $1.1 billion and $477 million in the nine months ended September 30, 2012 and 2011, respectively, in accordance with ASC 845-10-15. Costs of products sold increased in the nine months ended September 30, 2012, as a result of increased volume of barrels sold and an increase in the average cost of crude oil per barrel to $93 from $91 per barrel for the same period in 2011. Adjusted gross margin
The following table shows the Adjusted gross margin generated by our fee-based services, our fixed-margin transactions and our marketing activities for the nine months ended September 30, 2012 (in thousands):

                                                                     Marketing
                                   Storage      Transportation       Activities       Other(1)        Total
Revenues                         $  24,205     $        13,425     $    425,439     $    5,679     $ 468,748
Less: Costs of products sold,
exclusive of depreciation and
amortization                             -                   -          412,847              -       412,847
Less: Unrealized gain (loss) on
derivatives                              -                   -              432              -           432
Adjusted gross margin            $  24,205     $        13,425     $     12,160     $    5,679     $  55,469

(1) This category includes fee-based services such as unloading and ancillary storage terminal services.

The following table shows the Adjusted gross margin generated by our fee-based services, our fixed-margin transactions and our marketing activities for the nine months ended September 30, 2011 (in thousands):

(1) This category includes fee-based services such as unloading and ancillary storage terminal services.

The following table presents a reconciliation of operating income to Adjusted gross margin, the most directly comparable GAAP financial measure for each of the periods indicated.

                                                                 Nine Months Ended September 30,
                                                                    2012                 2011
                                                                         (in thousands)
Reconciliation of operating income to Adjusted gross margin:
Operating income                                             $        47,613       $        27,775
Add:
Operating expense                                                     17,957                13,683
General and administrative expense                                     9,796                 6,508
Depreciation and amortization expense                                  9,032                 8,505
Loss (gain) on disposal or impairment                                 (3,444 )                  12
Less:
Unrealized gain (loss) on derivatives                                    432                   334
Earnings from equity method investment                                25,053                10,166
Adjusted gross margin                                        $        55,469       $        45,983

Operating expense
Operating expense increased in the nine months ended September 30, 2012, to $18 million from $14 million in the nine months ended September 30, 2011. This increase is due primarily to increased compensation expense ($1.2 million), allocation of corporate engineering costs ($800 thousand), field expense ($600 thousand) and maintenance expense ($350 thousand). In addition, a recovery in 2011 of a previously written off account receivable ($900 thousand) did not reoccur in 2012.
General and administrative expense
General and administrative expense increased in the nine months ended September 30, 2012, to $10 million from $7 million in the nine months ended September 30, 2011. This increase is primarily the result of giving year to date effect to a recently completed transfer pricing study which increased the allocation of corporate costs by approximately $3 million. Gain on disposal or impairment
We sold a portion of our ownership interest in White Cliffs during September 2010. At the time, we recorded a loss of $6.8 million on disposal of that asset. . . .