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| SEMG > SEC Filings for SEMG > Form 10-K on 1-Mar-2013 | All Recent SEC Filings |
1-Mar-2013
Annual Report
Overview of Business
Horizontal drilling and hydraulic fracturing continue to increase the production
of crude oil and natural gas in the U.S. As a result, there is increasing demand
for the services of midstream companies such as SemGroup, who can gather,
transport, process and store these products as they are moved from the wellhead
to refiners, industrial users and consumers. We have responded to this demand
with additional storage tanks and gas processing facilities and we are building
new crude oil gathering and transportation pipelines.
We, and our significant equity method investees, own gathering systems,
transportation pipelines, processing plants, storage facilities and terminals in
the Midwest and Rocky Mountain regions of the U.S. and in Alberta, Canada.
We maintain and operate storage, terminal and marine facilities at Milford Haven
in the U.K. that enable customers to supply products to markets in the Atlantic
Basin. We also operate a network of liquid asphalt cement terminals throughout
Mexico.
How We Evaluate Our Operations
Our management uses a variety of financial and operational metrics to analyze
our performance. We view these metrics as important factors in evaluating our
profitability and review these measurements on at least a monthly basis for
consistency and trend analysis. These metrics include financial measures such as
Adjusted gross margin, operating expenses and Adjusted EBITDA.
Adjusted Gross Margin
We view Adjusted gross margin as an important performance measure of the core
profitability of our operations, as well as our operating performance as
compared to that of other companies in our industry, without regard to financing
methods, historical cost basis, capital structure or the impact of fluctuating
commodity prices. We define Adjusted gross margin as total revenues minus cost
of products sold and unrealized gain (loss) on derivatives. Adjusted gross
margin allows us to make a meaningful comparison of the operating results
between our fee-based activities, which do not involve the purchase or sale of
petroleum products, and our fixed-margin and marketing operations, which do. In
addition, Adjusted gross margin allows us to make a meaningful comparison of the
results of our fixed-margin and marketing operations across different commodity
price environments because it measures the spread between the product sales
price and costs of products sold.
Operating Expenses
Our management seeks to maximize the profitability of our operations, in part,
by minimizing operating expenses. These expenses are comprised of salary and
wage expense, utility costs, insurance premiums, taxes and other operating
costs, some of which are independent of the volumes we handle.
The current high levels of crude oil exploration, development and production
activities are increasing competition for personnel and equipment. This
increased competition is placing upward pressure on the prices we pay for labor,
supplies and miscellaneous equipment. To the extent we are unable to procure
necessary services or offset higher costs, our operating results will be
negatively impacted.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before interest expense, income
tax expense (benefit), depreciation and amortization and adjusted for selected
items that SemGroup believes impact the comparability of financial results
between reporting periods. We use Adjusted EBITDA as a supplemental performance
measure to assess:
• our operating performance as compared to that of other companies in
our industry, without regard to financing methods, historical cost
basis, capital structure or the impact of fluctuating commodity
prices; and
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• the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
Note About Non-GAAP Financial Measures
Adjusted gross margin and Adjusted EBITDA are not financial measures presented
in accordance with GAAP. We believe that the presentation of these non-GAAP
financial measures will provide useful information to investors in assessing our
financial condition and results of operations.
Operating income (loss) is the GAAP measure most directly comparable to Adjusted
gross margin, and net income (loss) is the GAAP measure most directly comparable
to Adjusted EBITDA. Our non-GAAP financial measures should not be considered as
alternatives to the most directly comparable GAAP financial measures. Each of
these non-GAAP financial measures has important limitations as an analytical
tool because it excludes some, but not all, items that affect the most directly
comparable GAAP financial measure. You should not consider Adjusted gross margin
or Adjusted EBITDA in isolation or as a substitute for analysis of our results
as reported under GAAP. Because Adjusted gross margin and Adjusted EBITDA may be
defined differently by other companies in our industry, our definitions of these
non-GAAP financial measures may not be comparable to similarly titled measures
of other companies, thereby diminishing their utility.
Management compensates for the limitations of Adjusted gross margin and Adjusted
EBITDA as an analytical tool by reviewing the comparable GAAP measures,
understanding the difference between Adjusted gross margin and Adjusted EBITDA,
on the one hand, and operating income (loss) and net income (loss), on the other
hand, and incorporating this knowledge into its decision-making processes. We
believe that investors benefit from having access to the same financial measures
that our management uses in evaluating our operating results.
The following table presents a reconciliation of operating income (loss) to
Adjusted gross margin and net income (loss) to Adjusted EBITDA, the most
directly comparable GAAP financial measures, on a historical basis for each of
the periods indicated.
Successor Predecessor
Eleven Months
Year Ended Month Ended Ended Year Ended
Year Ended December 31, Year Ended December 31, November 30, December 31,
December 31, 2012 2011 December 31, 2010 2009 2009 2008
(Unaudited; in thousands)
Reconciliation of
operating income
(loss) to
Adjusted gross
margin:
Operating income
(loss) $ 57,351 $ 55,199 $ (49,764 ) $ (39,643 ) $ 13,827 $ (1,239,210 )
Add:
Operating expense 224,700 155,041 151,385 16,591 46,046 473,554
General and
administrative
expense 71,918 75,447 85,836 7,867 43,271 104,939
Depreciation and
amortization
expense 48,210 49,823 69,158 8,674 38,158 86,139
(Gain) loss on
disposal or
impairment of
long-lived
assets, net (3,531 ) 301 105,051 23,119 13,625 71,718
Less:
Unrealized gain
(loss) on
derivatives (1,196 ) 14,114 13,339 (7,112 ) (24,118 ) (677,755 )
Earnings from
equity method
investments 36,036 15,004 1,949 - - -
Adjusted gross
margin $ 363,808 $ 306,693 $ 346,378 $ 23,720 $ 179,045 $ 174,895
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Successor Predecessor
Eleven Months
Year Ended Month Ended Ended Year Ended
Year Ended Year Ended December 31, December 31, November 30, December 31,
December 31, 2012 December 31, 2011 2010 2009 2009 2008
(Unaudited; in thousands)
Reconciliation of net
income (loss) to
Adjusted EBITDA:
Net income (loss) $ 31,897 $ 2,812 $ (132,072 ) $ (37,917 ) $ 3,394,079 $ (2,829,027 )
Add:
Interest expense 8,902 60,138 86,121 7,169 11,816 110,553
Income tax expense
(benefit) (2,078 ) (2,310 ) (6,320 ) (7,217 ) 6,310 48,497
Depreciation and
amortization 48,210 49,823 69,158 8,674 38,158 86,139
(Gain) loss on
disposal or impairment
of long-lived assets,
net (3,531 ) 301 105,051 23,119 13,625 71,718
Reorganization items
(gain) loss - - - - (3,529,014 ) 411,601
Loss (income) from
discontinued
operations, net of
income taxes (2,939 ) 9,548 (1,831 ) (455 ) 139,328 1,019,536
Foreign currency
transaction (gain)
loss 298 (3,450 ) 2,899 (678 ) (3,950 ) 12,879
Remove NGL Energy
equity (earnings)
losses 403 - - - - -
NGL Energy cash
distribution 9,218 - - - - -
Employee severance
expense 354 4,374 1,558 - - -
Impact of change in
basis of NGL inventory
in fresh-start
reporting - - 27,821 8,681 - -
Unrealized (gain) loss
on derivatives 1,196 (14,114 ) (13,339 ) 7,112 24,118 677,755
Change in fair value
of warrants 21,310 (5,012 ) 283 872 - -
Reversal of allowance
on goods and services
tax receivable - (4,144 ) - - - -
Depreciation and
amortization included
within equity in
earnings of White
Cliffs 10,181 10,630 2,897 - - -
Defense costs related
to an unsolicited take
over proposal 5,899 1,000 - - - -
Allowance on (recovery
of) receivable from
AGE Refining - (2,692 ) 3,340 - - -
Recovery of
receivables written
off at emergence (858 ) - - - - -
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Non-cash equity compensation 6,503 8,641 6,230 234 - - Adjusted EBITDA $ 134,965 $ 115,545 $ 151,796 $ 9,594 $ 94,470 $ (390,349 ) |
Business and Performance Drivers
We operate our business through six primary business segments: Crude, SemStream,
SemLogistics, SemCAMS, SemMexico and SemGas. We generate revenue in these
segments by utilizing our assets to provide products and services to third
parties and by selectively using our assets to support our marketing activities.
We believe that the variety of our petroleum product assets creates
opportunities for us and our customers that avoid seasonal fluctuations of less
diverse businesses.
Certain factors are key to our operations. These include the safe, reliable and
efficient operation of the pipelines and facilities that we own and operate,
while meeting the regulations that govern the operation of our assets and the
costs associated with such regulations. Our revenue is impacted by several
factors, including:
Throughput and processing fees
Throughput and processing fees are fees charged to third parties based on
volumes of product run through our processing facilities or pipeline gathering
systems.
Service, Storage and Terminalling Fees
Storage and terminalling fees are fees charged to third parties for petroleum
product storage or terminalling services provided by us and are based on leased
shell capacity and/or volumes moved through our terminal facilities.
Petroleum Product Marketing
We intend to capture the normalized gross margin associated with the purchase
and sale of petroleum products. Purchases, sales and derivative transactions
related to this activity are tracked in our systems to the ultimate realization
of profit. We seek to maintain limited net open positions to manage our exposure
to commodity prices. Marketing transactions may only be entered into by persons
delegated such authority by senior management, as provided in our Comprehensive
Risk Management Policy. Each person authorized to make transactions is subject
to internal volume and dollar limits, portfolios are subject to net open
position and stop loss limits, and counterparties are subject to credit limits
and provisions as approved by our credit department. See "Business-Risk
Governance and Comprehensive Risk Management Policy" for more information on our
Comprehensive Risk Management Policy.
Revenue
Our revenue is generated from third-party fees earned through the gathering,
pipeline transporting and storing of petroleum products principally in the
Midwest region. Our customers pay us fees based on volumes gathered, transported
and stored; through the sale of petroleum products based upon contract or index
rates per barrel, million Btu or gallon. We generate additional revenue through
selected marketing of petroleum products. Marketing operations consist primarily
of aggregating petroleum products purchased at the lease along pipeline systems
or trucked, and arranging the necessary transportation logistics for the
ultimate sale or delivery of the petroleum products to customers or other
end-users. Gathering and transportation revenue is recognized as petroleum
products are delivered to customers. Storage revenue is recognized upon leasing
of shell capacity on a take or pay basis. Marketing revenue is accrued at the
time title to the petroleum product sold transfers to the purchaser, which
typically occurs upon receipt of the petroleum product by the purchaser.
We utilize futures, swaps and options contracts to manage our exposure to market
changes in commodity prices, to protect our gross margins on our purchased
petroleum products and to manage our liquidity risk associated with margin
deposit requirements on our overall derivative positions. When purchasing
petroleum products, we seek to manage our exposure to commodity price risk. As
we purchase inventory from suppliers, we may establish a fixed or variable
margin with future sales utilizing one of the following methods:
• we have already sold that product for physical delivery pursuant to
sales contracts at a market index price,
• we sell the product for future physical delivery pursuant to
effectively back-to-back sales contracts, or
• we enter into futures and swaps contracts on the NYMEX or over the
counter ("OTC") markets.
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In addition, we may purchase put options or derivatives other than futures or swaps to hedge our inventory of petroleum products prior to our sale of such inventory.
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.
Volumes
Generally, we expect revenue to increase or decrease in conjunction with
increases or decreases in total volumes. Our total volumes are affected by
different factors, including our physical storage or transportation capacity,
our working capital and credit availability under our credit facilities to
support petroleum product purchases and the availability of the supply of
petroleum product available for purchase, which is determined based primarily
upon producer activity in market areas contiguous with our asset base.
Commodity Prices
Our business is primarily fee based. As a result, our financial results are
typically not correlated with increases and decreases in commodity prices. Our
financial results, however, are positively correlated with the absolute
difference between current (prompt) and future month petroleum product prices.
That is, wide contango (when the prices for future deliveries are higher than
current prices) spreads generally have a favorable impact on our results
relative to a slightly contango, flat or backwardated (when the prices for
future deliveries are lower than current prices) market.
Timing of Purchase and Sales
Our financial results are affected by the timing of the purchase and sale of
petroleum products, such that financial results may not be comparable between
periods. When we enter into an arrangement to purchase product, place the
product in storage and resell the product in the future, our financial results
do not reflect any related margin until the settlement of the product sale.
Prior to the settlement of the product sale, our results reflect the cost of the
product in our inventory. Differences in the timing of our product purchases and
sales, especially if they extend over fiscal years or quarters, may result in
sizable differences between our results over the comparable period.
Analysis of Business Segments
The following provides an overview of the makeup of revenue at each of our
respective business segments.
Crude
Rose Rock was formed in August 2011. In November 2011, SemGroup contributed
SemCrude, L.P. to Rose Rock in exchange for limited partner interests, general
partner interests and certain incentive distribution rights. In December 2011,
Rose Rock completed an initial public offering in which it sold 7,000,000 common
units representing limited partner interests. SemGroup consolidates the accounts
of Rose Rock as a result of the level of its ownership interests and control
over the entity.
Crude conducts business through its 51% (34% direct and 17% indirect via Rose
Rock) ownership interest in White Cliffs and the 2% general partner interest and
58.2% of the limited partner interest in Rose Rock. These operations include
crude oil transportation, storage, terminalling, gathering and marketing in
Colorado, Kansas, Montana, North Dakota, Oklahoma and Texas, for third party
customers as well as for itself. The Crude business unit consists of four
primary operations: (i) Cushing storage; (ii) Kansas and Oklahoma pipeline
system; (iii) Bakken Shale operations; and (iv) Platteville Facility. A majority
of Crude's revenue is generated from fee-based contractual arrangements that, in
some instances, are fixed and not dependent on usage.
Fee-Based Services
Crude charges a capacity or volume-based fee for the unloading, transportation
and storage of crude oil and related ancillary services. Crude's fee-based
services include substantially all of its operations in Cushing, Oklahoma and
Platteville, Colorado and a portion of the transportation services it provides
on its Kansas and Oklahoma pipeline system. Some of Crude's fee-based contracts
are take-or-pay contracts, whereby the customer is required to pay Crude a fixed
minimum monthly fee regardless of usage. For the years ended December 31, 2012,
2011 and 2010, approximately 59%, 56% and 80%, respectively, of Crude's Adjusted
gross margin was generated by providing fee-based services to customers.
Fixed-Margin Transactions
Crude purchases crude oil from a producer or supplier at a designated receipt
point at an index price, less a transportation fee, and simultaneously sells an
identical volume of crude oil at a designated delivery point to the same party
at
the same index price, thereby locking in a fixed margin that is, in effect,
economically equivalent to a transportation fee. We refer to these arrangements
as "fixed-margin" or "buy/sell" transactions. These fixed-margin transactions
account for a portion of the Adjusted gross margin Crude generates on its Kansas
and Oklahoma pipeline system and through its Bakken Shale operations. For the
years ended December 31, 2012, 2011 and 2010, approximately 20%, 14% and 5%,
respectively, of its Adjusted gross margin was generated through fixed-margin
transactions.
Marketing Activities
Crude conducts marketing activities by purchasing crude oil for its own account
from producers, aggregators and traders and selling crude oil to traders and
refiners. Crude's marketing activities account for a portion of the Adjusted
gross margin it generates on its Kansas and Oklahoma pipeline system and through
its Bakken Shale operations. For the years ended December 31, 2012, 2011 and
2010, approximately 21%, 30% and 15%, respectively, of its Adjusted gross margin
was generated through marketing activities.
We mitigate the commodity price exposure of our crude oil marketing operations
by limiting our net open positions through (i) the concurrent purchase and sale
of like quantities of crude oil to create "back-to-back" transactions intended
to lock in positive margins based on the timing, location or quality of the
crude oil purchased and delivered or (ii) derivative contracts. All of our
marketing activities are subject to our Comprehensive Risk Management Policy,
which establishes limits to manage risk and mitigate financial exposure.
More specifically, we utilize futures and swap contracts to manage our exposure
to market changes in commodity prices, to protect our Adjusted gross margin on
our purchased crude oil and to manage our liquidity risk associated with margin
deposit requirements on our overall derivative positions. As we purchase
inventory from suppliers, we may establish a fixed or variable margin with
future sales by:
• selling a like quantity of crude oil for future physical delivery to
create an effective back-to-back transaction; or
• entering into futures and swaps contracts on the NYMEX or OTC markets.
SemStream
Until December 31, 2012, SemStream was engaged in the residential propane supply
business through its wholly-owned subsidiary, SemStream Arizona, with operations
in Page and Payson, Arizona. In September 2012, we entered into a definitive
agreement to sell those assets. The sale was finalized on December 31, 2012,
after receiving the required approval by the Arizona Corporation Commission.
In addition, SemStream holds our interests in NGL Energy.
SemLogistics
SemLogistics owns the largest independent petroleum products storage facility in
the U.K. The facility is located on the north bank of the Milford Haven Waterway
on the west coast of Wales. The main activities of SemLogistics are the receipt,
storage and redelivery of clean petroleum and crude oil products via sea-going
vessels at the Milford Haven site. SemLogistic's revenue is based on fixed-fee
storage tank leases and related services.
SemCAMS
SemCAMS operates majority-owned gathering assets and natural gas processing
plants. All of SemCAMS' assets are located in West-Central Alberta, in the heart
of the Western Canadian Sedimentary Basin. SemCAMS' revenue is based on
fee-based throughput arrangements, which represent, in part, operating cost
recovery from working interest owners in certain processing plants and is
recorded when earned in accordance with the terms of the related agreement.
SemMexico
SemMexico operates a network of liquid asphalt terminals in Mexico. Operations
include purchasing, producing, storing and distributing liquid asphalt cement
products. SemMexico purchases asphalt from refineries in Mexico. SemMexico's
revenue is based on contractual arrangements with customers for liquid asphalt
cement.
SemGas
SemGas provides gathering, processing and storage services to the natural gas
markets in the U.S. SemGas owns and operates gathering systems and processing
plants in Kansas, Oklahoma and Texas. SemGas aggregates gas supplies from the
wellhead and provides various services to producers that condition the wellhead
gas production for downstream markets.
SemGas' performance is largely based on percent-of-proceeds and percent-of-index
contractual arrangements where SemGas receives a portion of product sales as
well as fee-based gathering service payments.
Recent Developments
On January 11, 2013, we contributed a one-third interest in SemCrude Pipeline,
L.L.C. ("SCPL") to Rose Rock in exchange for (i) cash of approximately $189.5
million, (ii) the issuance of 1.5 million common units, (iii) the issuance of
1.25 million Class A units and (iv) an increase of the capital account of the
general partner of Rose Rock and a related issuance of general partner interest,
to allow the general partner of Rose Rock to maintain its two percent general
partner interest. The Class A units are not entitled to receive any
distributions of available cash (other than upon liquidation) prior to the first
day of the month immediately following the first month for which the average
daily throughput volumes on the White Cliffs Pipeline for such month are 125,000
barrels per day or greater. Upon such date, the Class A units will automatically
convert into common units. SCPL owns a 51 percent membership interest in White
Cliffs, giving Rose Rock an indirect 17 percent interest in White Cliffs.
In connection with this transaction, Rose Rock issued and sold 2.0 million
common units to third-party purchasers in a private placement. In addition, Rose
Rock exercised the accordion feature of its revolving credit facility and
increased the total borrowing capacity under the credit facility from $150
. . .
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