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| SGLP.PK > SEC Filings for SGLP.PK > Form 10-Q on 27-May-2009 | All Recent SEC Filings |
27-May-2009
Quarterly Report
As used in this quarterly report, unless we indicate otherwise: (1) "SemGroup Energy Partners," "our," "we," "us" and similar terms refer to SemGroup Energy Partners, L.P., together with our subsidiaries, (2) the "Private Company" refers to SemGroup, L.P. and its subsidiaries and affiliates (other than our general partner and us), and (3) "Crude Oil Business" refers to the crude oil gathering, transportation, terminalling and storage assets that were contributed to us by the Private Company. The historical financial statements for periods prior to the contribution of the operations to us by the Private Company on July 20, 2007 reflect the operations of our predecessor. The following discussion analyzes the historical financial condition and results of operations of the Partnership and should be read in conjunction with our predecessor's financial statements and notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations presented in our Annual Report on Form 10-K for the year ended December 31, 2007. The Partnership as used herein refers to the financial results and operations of our predecessor until its contribution to us, and to our financial results and operations thereafter.
Forward-Looking Statements
This report contains "forward-looking statements" intended to qualify for the safe harbors from liability established by the federal securities laws. Statements included in this quarterly report that are not historical facts (including any statements concerning the benefits of the Settlement (as defined below) or the Credit Agreement Amendment (as defined below), the impact of the Bankruptcy Filings (as defined below) and any statements regarding plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto), including, without limitation, the information set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements. These statements can be identified by the use of forward-looking terminology including "may," "will," "should," "believe," "expect," "intend," "anticipate," "estimate," "continue," or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition, or state other "forward-looking" information. We and our representatives may from time to time make other oral or written statements that are also forward-looking statements.
Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of the filing of this report. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things, those set forth in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission (the "SEC") on March 6, 2008 (the "2007 Form 10-K"), and those set forth in "Item 1A. Risk Factors" of this report.
All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report.
Overview
We are a publicly traded master limited partnership with operations in
twenty-three states. We provide integrated terminalling, storage, gathering and
transportation services for companies engaged in the production, distribution
and marketing of crude oil and liquid asphalt cement. We manage our operations
through two operating segments: (i) terminalling and storage services and
(ii) gathering and transportation services. We were formed in February 2007 as a
Delaware master limited partnership initially to own, operate and develop a
diversified portfolio of complementary midstream energy assets.
In July 2007, we issued 12,500,000 common units, representing limited partner interests, and 12,570,504 subordinated units, representing additional limited partner interests, to SemGroup Holdings, L.P., or SemGroup Holdings, and 549,908 general partner units representing a 2% general partner interest to SemGroup Energy Partners G.P., L.L.C., our general partner. SemGroup Holdings then completed a public offering of 12,500,000 common units at a price of $22 per unit. In addition, we issued an additional 1,875,000 common units to the public pursuant to the underwriters' exercise of their over-allotment option. We did not receive any proceeds from the common units sold by SemGroup Holdings. We received net proceeds of approximately $38.7 million after deducting underwriting discounts from the sale of common units in connection with the exercise of the underwriters' over-allotment option. We used these net proceeds to reduce outstanding borrowings under our credit facility. In connection with our initial public offering, we entered into a Throughput Agreement (the "Throughput Agreement") with the Private Company under which we provided crude oil gathering and transportation and terminalling and storage services to the Private Company.
On February 20, 2008, we purchased land, receiving infrastructure, machinery, pumps and piping and 46 liquid asphalt cement and residual fuel oil terminalling and storage facilities (the "Acquired Asphalt Assets") from the Private Company for aggregate consideration of $379.5 million, including $0.7 million of acquisition-related costs. For accounting purposes, the acquisition has been reflected as a purchase of assets, with the Acquired Asphalt Assets recorded at the historical cost of the Private Company, which was approximately $145.5 million, with the additional purchase price of $234.0 million reflected in the statement of changes in partners' capital as a distribution to the Private Company. In conjunction with the purchase of the Acquired Asphalt Assets, we amended our existing credit facility, increasing our borrowing capacity to $600 million. Concurrently, we issued 6,000,000 common units, receiving proceeds, net of underwriting discounts and offering-related costs, of $137.2 million. Our general partner also made a capital contribution of $2.9 million to maintain its 2.0% general partner interest in us. On March 5, 2008, we issued an additional 900,000 common units, receiving proceeds, net of underwriting discounts, of $20.6 million, in connection with the underwriters' exercise of their over-allotment option in full. Our general partner made a corresponding capital contribution of $0.4 million to maintain its 2.0% general partner interest in us. In connection with the acquisition of the Acquired Asphalt Assets, we entered into a Terminalling and Storage Agreement (the "Terminalling Agreement") with the Private Company and certain of its subsidiaries under which we provided liquid asphalt cement terminalling and storage and throughput services to the Private Company and the Private Company has agreed to use the our services at certain minimum levels. Our general partner's Board of Directors (the "Board") approved the acquisition of the Acquired Asphalt Assets as well as the terms of the related agreements based on a recommendation from its conflicts committee, which consisted entirely of independent directors. The conflicts committee retained independent legal and financial advisors to assist it in evaluating the transaction and considered a number of factors in approving the acquisition, including an opinion from the committee's independent financial advisor that the consideration paid for the Acquired Asphalt Assets was fair, from a financial point of view, to us.
On May 12, 2008, we purchased the Eagle North Pipeline System, a 130-mile, 8-inch pipeline that originates in Ardmore, Oklahoma and terminates in Drumright, Oklahoma as well as other real and personal property related to the pipeline (the "Acquired Pipeline Assets") from the Private Company for aggregate consideration of $45.1 million, including $0.1 million of acquisition-related costs. The acquisition was funded with borrowings under our revolving credit facility. We have suspended capital expenditures on this pipeline due to the continuing impact of the Bankruptcy Filings. Management currently intends to put the asset into service by late 2009 or early 2010 and is exploring various alternatives to complete the project. The Board approved the acquisition of the Acquired Pipeline Assets based on a recommendation from its conflicts committee, which consisted entirely of independent directors. The conflicts committee retained independent legal and financial advisors to assist it in evaluating the transaction and considered a number of factors in approving the acquisition, including an opinion from the committee's independent financial advisor that the consideration paid for the Acquired Pipeline Assets was fair, from a financial point of view, to us.
On May 30, 2008, we purchased certain land, crude oil storage and terminalling facilities with an aggregate of approximately 2.0 million barrels of storage capacity and related assets located at the Cushing Interchange from the Private Company and we assumed a take-or-pay, fee-based, third party contract through August 2010 relating to the additional 2.0 million barrels of storage capacity (the "Acquired Storage Assets") for aggregate consideration of $90.3 million, including $0.3 million of acquisition-related costs. The acquisition was funded with borrowings under our revolving credit facility. The Board approved the acquisition of the Acquired Storage Assets based on a recommendation from its conflicts committee, which consisted entirely of independent directors. The conflicts committee retained independent legal and financial advisors to assist it in evaluating the transaction and considered a number of factors in approving the acquisition, including an opinion from the committee's independent financial advisor that the consideration paid for the Acquired Storage Assets was fair, from a financial point of view, to us.
Impact of the Bankruptcy of the Private Company and Certain of its Subsidiaries and Related Events
Due to the events related to the Bankruptcy Filings (as defined below) described herein, including the uncertainty relating to future cash flows, we face substantial doubt as to our ability to continue as a going concern. While it is not feasible to predict the ultimate outcome of the events surrounding the Bankruptcy Cases (as defined below), we have been and could continue to be materially and adversely affected by such events and we may be forced to make a bankruptcy filing or take other action that could have a material adverse effect on our business, the price of our common units and our results of operations.
Bankruptcy Filings
On July 17, 2008, we issued a press release announcing that the Private Company was experiencing liquidity issues and was exploring various alternatives, including raising additional equity, debt capital or the filing of a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code to address these issues. We filed this press release in a Current Report on Form 8-K filed with the SEC on July 18, 2008.
On July 22, 2008, the Private Company and certain of its subsidiaries filed voluntary petitions (the "Bankruptcy Filings") for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), Case No. 08-11547-BLS. The Private Company and its subsidiaries continue to operate their businesses and own and manage their properties as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code (the "Bankruptcy Cases"). None of us, our general partner, our subsidiaries nor the subsidiaries of our general partner are debtors in the Bankruptcy Cases. However, because of the contractual relationships with the Private Company and certain of its subsidiaries, the Bankruptcy Filings have adversely impacted us and may in the future impact us in various ways, including the items discussed below. Our financial results as of September 30, 2008 reflect a $0.4 million allowance for doubtful accounts related to amounts due from third parties as of September 30, 2008. The allowance related to amounts due from third parties was established as a result of certain third party customers netting amounts due them from the Private Company with amounts due to us. Also, due to the change of control of our general partner related to the Private Company's liquidity issues, all outstanding awards under our general partner's long-term incentive plan (the "Plan") vested on July 18, 2008, resulting in an incremental $18.0 million in non-cash compensation expense for the three months ended September 30, 2008. In addition to the allowance for doubtful accounts and non-cash compensation expense described above, the results of operations for the three and nine months ended September 30, 2008 included in this quarterly report were affected by the Bankruptcy Filings and related events, which resulted in decreased revenues and increased general and administrative expenses as described below under "-Our Revenues," and "-Other Effects," respectively.
Board and Management Composition
On July 9, 2008, Edward F. Kosnik was appointed as an independent member of the Board. Mr. Kosnik is the chairman of the compensation committee and also serves on the audit committee and the conflicts committee of the Board. Under the provisions of the Plan, Mr. Kosnik was granted an award of 5,000 restricted common units on July 9, 2008. These restricted common units vested on July 18, 2008 in connection with the change of control of our general partner described below.
On July 18, 2008, Manchester Securities Corp. ("Manchester") and Alerian Finance Partners, LP ("Alerian"), as lenders to SemGroup Holdings, the sole member of our general partner, exercised certain rights described below under a Loan Agreement and a Pledge Agreement, each dated June 25, 2008 (the "Holdings Credit Agreements"), that were triggered by certain events of default under the Holdings Credit Agreements. On March 20, 2009, Alerian transferred its interest in the Holdings Credit Agreements to Manchester. The Holdings Credit Agreements are secured by our subordinated units and incentive distribution rights and the membership interests in our general partner owned by SemGroup Holdings. Manchester has not foreclosed on our subordinated units owned by SemGroup Holdings or the membership interests in our general partner. Manchester may in the future exercise other remedies available to them under the Holdings Credit Agreement and related loan documents, including taking action to foreclose on the collateral securing the loan. Neither us nor our general partner is a party to the Holdings Credit Agreements or the related loan documents.
On July 18, 2008, Manchester and Alerian exercised their right under the Holdings Credit Agreements to vote the membership interests of our general partner in order to reconstitute the Board (the "Change of Control"). Messrs. Thomas L. Kivisto, Gregory C. Wallace, Kevin L. Foxx, Michael J. Brochetti and W. Anderson Bishop were removed from the Board. Mr. Bishop had served as the chairman of the audit committee and as a member of the conflicts committee and compensation committee of the Board. Messrs. Sundar S. Srinivasan, David N. Bernfeld and Gabriel Hammond (each of whom is affiliated with Manchester or Alerian) were appointed to the Board. Mr. Srinivasan was elected as Chairman of the Board. Messrs. Brian F. Billings and Edward F. Kosnik remain as independent directors of the Board and continue to serve as members of the conflicts committee, audit committee and compensation committee of the Board. In addition, Messrs. Foxx and Alex Stallings resigned the positions each officer held with SemGroup, L.P. in July 2008. Mr. Brochetti had previously resigned from his position with SemGroup, L.P. in March 2008. Messrs. Foxx, Brochetti and Stallings remain as officers of our general partner.
On October 1, 2008, Dave Miller (who is an affiliate of Manchester) and Duke R. Ligon were appointed members of the Board. Mr. Ligon is an independent member of the Board and is the chairman of the audit committee and also serves on the compensation committee and the conflicts committee of the Board. In connection with his appointment to the Board, Mr. Ligon was granted an award of 5,000 restricted common units. The restricted common units granted to Mr. Ligon vest in one-third increments over a three-year period.
On January 9, 2009, Mr. Srinivasan resigned his positions as Chairman of the Board and as a director. Mr. Ligon was subsequently elected as Chairman of the Board.
On March 18, 2009, the Board realigned the officers of our general partner appointing Michael J. Brochetti as Executive Vice President-Corporate Development and Treasurer, Alex G. Stallings as Chief Financial Officer and Secretary, and James R. Griffin as Chief Accounting Officer. Mr. Brochetti had previously served as Chief Financial Officer, Mr. Stallings had previously served as Chief Accounting Officer and Secretary and Mr. Griffin had previously served as Controller.
Bankruptcy Court Order
On September 9, 2008, the Bankruptcy Court entered an order relating to the
settlement of certain matters between us and the Private Company (the "Order")
in the Bankruptcy Cases. Among other things, the Order provided that (i) the
Private Company was to directly pay any utility costs attributable to the
operations of the Private Company at certain shared facilities, and the Private
Company was to pay us for past utility cost reimbursements that were due from
the Private Company; (ii) commencing on September 15, 2008, payments under the
Terminalling Agreement were netted against amounts due under the Amended Omnibus
Agreement and were made on the 15th day of each month for the prior month (with
a three business-day grace period); (iii) the Private Company provided us with a
letter of credit in the amount of approximately $4.9 million to secure the
Private Company's postpetition obligations under the Terminalling Agreement;
(iv) the Private Company was to make payments under the Throughput Agreement for
the month of August on September 15, 2008 (with a three business-day grace
period) based upon the monthly contract minimums in the Throughput Agreement and
netted against amounts due under the Amended Omnibus Agreement; (v) the Private
Company was to make payments under the Throughput Agreement for the months of
September and October on October 15, 2008 (with a three business-day grace
period) and November 15, 2008 (with a three business-day grace period),
respectively, or three business days after amounts due are determined and
documentation therefore was provided and exchanged based upon actual volumes for
each such month and at a rate equal to the average rate charged by us to
third-party shippers in the same geographical area, with any such amounts netted
against amounts due under the Amended Omnibus Agreement (as defined below); (vi)
the parties were to reevaluate the Throughput Agreement and the payment terms
with respect to services provided after October 2008; (vii) representatives of
us and the Private Company were to meet to discuss the transition to us of
certain of the Private Company's employees necessary to maintain our business,
and pending agreement between the parties, the Private Company was to continue
to provide services in accordance with the Amended Omnibus Agreement through at
least November 30, 2008; (viii) the Private Company was to consent to an order
relating a third-party storage contract which provided that we were the rightful
owner of the rights in and to a certain third-party storage agreement and the
corresponding amounts due thereunder; and (ix) we were to enter into a specified
lease with the Private Company to permit the Private Company to construct a
pipeline.
Settlement with the Private Company
On March 12, 2009, the Bankruptcy Court held a hearing and approved the transactions contemplated by a term sheet (the "Settlement Term Sheet") relating to the settlement of certain matters between the Private Company and us (the "Settlement"). The Bankruptcy Court entered an order approving the Settlement upon the terms contained in the Settlement Term Sheet on March 20, 2009. We and the Private Company executed definitive documentation, in the form of a master agreement (the "Master Agreement"), dated April 7, 2009 to be effective as of 11:59 PM CDT March 31, 2009, and certain other transaction documents to effectuate the Settlement and that superseded the Settlement Term Sheet. The Bankruptcy Court entered an order approving the Master Agreement and the Settlement on April 7, 2009. In addition, in connection with the Settlement, we and the requisite lenders under our secured credit facility entered into the Credit Agreement Amendment (as defined below) under which, among other things, the lenders consented to the Settlement and waived all existing defaults and events of default described in the Forbearance Agreement (as defined below) and amendments thereto.
The Settlement provided for the following:
· we transferred certain crude oil storage assets located in Kansas and northern Oklahoma to the Private Company;
· the Private Company transferred ownership of 355,000 barrels of crude oil tank bottoms and line fill to us;
· the Private Company rejected the Throughput Agreement;
· we and one of our subsidiaries have a $20 million unsecured claim against the Private Company and certain of its subsidiaries relating to rejection of the Throughput Agreement;
· we and the Private Company entered into the New Throughput Agreement (as defined below) pursuant to which we provide certain crude oil gathering, transportation, terminalling and storage services to the Private Company;
· we offered employment to certain crude oil employees;
· the Private Company transferred its asphalt assets that are connected to our asphalt assets to us;
· the Private Company rejected the Terminalling Agreement;
· one of our subsidiaries has a $35 million unsecured claim against the Private Company and certain of its subsidiaries relating to rejection of the Terminalling Agreement;
· we and the Private Company entered into the New Terminalling Agreement (as defined below) pursuant to which we provide liquid asphalt cement terminalling and storage services for the Private Company's remaining asphalt inventory;
· the Private Company agreed to remove all of its remaining asphalt inventory from our asphalt storage facilities no later than October 31, 2009;
· the Private Company will be entitled to receive 20% of the proceeds of any sale by us of any of the asphalt assets transferred to us in connection with the Settlement that occurs prior to December 31, 2009;
· the Private Company rejected the Amended Omnibus Agreement;
· we and the Private Company entered into the Shared Services Agreement (as defined below) pursuant to which the Private Company provides certain operational services for us;
· other than as provided above, we and the Private Company entered into mutual releases of claims relating to the rejection of the Terminalling Agreement, the Throughput Agreement and the Amended Omnibus Agreement;
· certain pre-petition claims by the Private Company and us were netted and waived;
· we and the Private Company resolved certain remaining issues related to the contribution of crude oil assets to us in connection with our initial public offering, our acquisition of the Acquired Asphalt Assets, our acquisition of the Acquired Pipeline Assets and our acquisition of the Acquired Storage Assets, including the release of claims relating to such acquisitions; and
· we and the Private Company entered into the Trademark Agreement (as defined below) which provides us with a non-exclusive, worldwide license to use certain trade names, including the name "SemGroup", and the corresponding mark until December 31, 2009, and the Private Company waived claims for infringement relating to such trade names and mark prior to the date of such license agreement.
Management is currently evaluating the accounting for the Settlement, and is obtaining independent valuations of the assets transferred. Certain terms of the transaction documents relating to the Settlement are discussed in more detail below.
Shared Services Agreement
In connection with the Settlement, we entered into a Shared Services Agreement, dated April 7, 2009 to be effective as of 11:59 PM CDT March 31, 2009 (the "Shared Services Agreement"), with the Private Company. Pursuant to the Shared Services Agreement, the Private Company will provide certain general shared services, Cushing shared services (as described below), and SCADA services (as described below) to us.
The general shared services include crude oil movement services, Department of Transportation services, right-of-way services, environmental services, pipeline and civil structural maintenance services, safety services, pipeline truck station maintenance services, project support services and truck dispatch services. The fees for such general shared services are fixed at $125,000 for the month of April 2009 and such fixed fee may be extended by mutual agreement of the parties for one additional month. Thereafter the fees will be calculated in accordance with the formulas contained therein. The Private Company has agreed to provide the general shared services for three years (subject to earlier termination as provided therein) and the term may be extended an additional year by mutual agreement of the parties.
The Cushing shared services include operational and maintenance services related to terminals at Cushing, Oklahoma. The fees for such Cushing shared services are fixed at $20,000 for the month of April 2009 and such fixed fee may be extended by mutual agreement of the parties for one additional month. Thereafter the fees will be calculated in accordance with the formulas contained therein. The Private Company has agreed to provide the Cushing shared services for three years (subject to earlier termination as provided therein) and the term may be extended an additional year by mutual agreement of the parties.
The SCADA services include services related to the operation of the SCADA system which is used in connection with our crude oil operations. The fees for such SCADA services are fixed at $15,000 for the month of April 2009 and such fixed fee may be extended by mutual agreement of the parties for one additional month. Thereafter the fees will be calculated in accordance with the formulas . . .
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