EXHIBIT 99.1
Index to White Cliffs Pipeline, L.L.C. Financial Statements
| Page | ||
| White Cliffs Pipeline, L.L.C. | ||
| Independent Auditor's Report | 2 | |
| Balance Sheets as of December 31, 2015 and 2014 | 3 | |
| Statements of Operations for the years ended December 31, 2015, 2014 and 2013 | 4 | |
| Statements of Changes in Members’ Equity for the years ended December 31, 2015, 2014 and 2013 | 5 | |
| Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 | 6 | |
| Notes to the Financial Statements | 7 | |
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Independent Auditor's Report
To the Members
White Cliffs Pipeline, L.L.C.
Tulsa, Oklahoma
We have audited the accompanying financial statements of White Cliffs Pipeline, L.L.C., which comprise the balance sheets as of December 31, 2015 and 2014, and the related statements of operations, changes in members' equity and cash flows for each of the three years then ended, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of White Cliffs Pipeline, L.L.C., as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the three years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
BDO USA, LLP
Dallas, Texas
February 26, 2016
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WHITE CLIFFS PIPELINE, L.L.C.
Balance Sheets
(In thousands, except unit amounts)
December 31, 2015 | December 31, 2014 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 24,423 | $ | 14,908 | ||||
| Accounts receivable | 25,289 | 16,614 | ||||||
| Receivable from affiliate | 914 | 1,160 | ||||||
| Inventories | 2,545 | 2,237 | ||||||
| Other current assets | 920 | 704 | ||||||
| Total current assets | 54,091 | 35,623 | ||||||
| Property, plant and equipment, net | 509,068 | 471,179 | ||||||
| Goodwill | 17,000 | 17,000 | ||||||
| Other intangible assets (net of accumulated amortization of $42,026 and $37,957 at December 31, 2015 and 2014, respectively) | 11,974 | 16,043 | ||||||
| Total assets | $ | 592,133 | $ | 539,845 | ||||
| LIABILITIES AND MEMBERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 634 | $ | 212 | ||||
| Payable to affiliate | 173 | 161 | ||||||
| Accrued liabilities | 8,684 | 10,735 | ||||||
| Total current liabilities | 9,491 | 11,108 | ||||||
| Commitments and contingencies (Note 5) | ||||||||
| Members’ equity (240,610 units at December 31, 2015 and 2014) | 582,642 | 528,737 | ||||||
| Total liabilities and members’ equity | $ | 592,133 | $ | 539,845 | ||||
The accompanying notes are an integral part of these financial statements.
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WHITE CLIFFS PIPELINE, L.L.C.
Statements of Operations
(In thousands)
Year Ended December 31, 2015 | Year Ended December 31, 2014 | Year Ended December 31, 2013 | ||||||||||
| Revenues | $ | 206,395 | $ | 160,369 | $ | 133,310 | ||||||
| Expenses: | ||||||||||||
| Costs of products sold, exclusive of depreciation and amortization shown below | 2,913 | 3,636 | 6,023 | |||||||||
| Operating | 28,835 | 17,480 | 15,541 | |||||||||
| General and administrative | 1,535 | 1,951 | 2,248 | |||||||||
| Depreciation and amortization | 34,105 | 23,257 | 18,668 | |||||||||
| Total expenses | 67,388 | 46,324 | 42,480 | |||||||||
| Operating income | 139,007 | 114,045 | 90,830 | |||||||||
| Other expenses, net | 7 | — | 13 | |||||||||
| Net income | $ | 139,000 | $ | 114,045 | $ | 90,817 | ||||||
The accompanying notes are an integral part of these financial statements.
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WHITE CLIFFS PIPELINE, L.L.C.
Statements of Changes in Members’ Equity
(In thousands)
Members’ Equity | |||
| Balance at December 31, 2012 | $ | 272,175 | |
| Net income | 90,817 | ||
| Distributions to members | (112,894 | ) | |
| Contributions from members | 189,344 | ||
| Balance at December 31, 2013 | 439,442 | ||
| Net income | 114,045 | ||
| Distributions to members | (130,917 | ) | |
| Contributions from members | 106,167 | ||
| Balance at December 31, 2014 | 528,737 | ||
| Net income | 139,000 | ||
| Distributions to members | (171,584 | ) | |
| Contributions from members | 86,489 | ||
| Balance at December 31, 2015 | $ | 582,642 | |
The accompanying notes are an integral part of these financial statements.
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WHITE CLIFFS PIPELINE, L.L.C.
Statements of Cash Flows
(In thousands)
Year Ended December 31, 2015 | Year Ended December 31, 2014 | Year Ended December 31, 2013 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 139,000 | $ | 114,045 | $ | 90,817 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 34,105 | 23,257 | 18,668 | |||||||||
| Inventory valuation adjustment | 640 | 1,889 | — | |||||||||
| Loss on disposal of long-lived assets | 60 | — | — | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Decrease (increase) in accounts receivable | (8,675 | ) | (5,143 | ) | (1,198 | ) | ||||||
| Decrease (increase) in receivable from affiliate | 246 | (1,146 | ) | (14 | ) | |||||||
| Decrease (increase) in inventories | (948 | ) | (2,811 | ) | 2,136 | |||||||
| Decrease (increase) in other current assets | (223 | ) | (249 | ) | (96 | ) | ||||||
| Increase (decrease) in accounts payable and accrued liabilities | 5,229 | (3,075 | ) | 3,104 | ||||||||
| Increase (decrease) in payable to affiliate | 11 | 30 | 30 | |||||||||
| Net cash provided by operating activities | 169,445 | 126,797 | 113,447 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Capital expenditures | (74,835 | ) | (172,348 | ) | (112,120 | ) | ||||||
| Net cash used in investing activities | (74,835 | ) | (172,348 | ) | (112,120 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Distributions to members | (171,584 | ) | (130,917 | ) | (112,894 | ) | ||||||
| Contributions from members | 86,489 | 106,167 | 189,344 | |||||||||
| Net cash provided by (used in) financing activities | (85,095 | ) | (24,750 | ) | 76,450 | |||||||
| Net increase (decrease) in cash and cash equivalents | 9,515 | (70,301 | ) | 77,777 | ||||||||
| Cash and cash equivalents at beginning of period | 14,908 | 85,209 | 7,432 | |||||||||
| Cash and cash equivalents at end of period | $ | 24,423 | $ | 14,908 | $ | 85,209 | ||||||
The accompanying notes are an integral part of these financial statements.
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WHITE CLIFFS PIPELINE, L.L.C.
Notes to Financial Statements
1. OVERVIEW
White Cliffs Pipeline, L.L.C. (“White Cliffs”) is a Delaware limited liability company. White Cliffs owns two parallel 12" common carrier, crude oil pipelines running 527 miles with origination points in Platteville, Colorado and Healy, Kansas and a termination point in Cushing, Oklahoma.
SemGroup Corporation (“SemGroup”) owns a 51% interest in White Cliffs indirectly through its consolidated subsidiary Rose Rock Midstream, L.P. ("Rose Rock") which serves as White Cliffs' manager. Rose Rock accounts for White Cliffs under the equity method, as the other members have substantive rights to participate in the management of White Cliffs.
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS—Cash includes currency on hand and demand and time deposits with banks or other financial institutions. Cash equivalents include highly liquid investments with maturities of three months or less at the date of purchase. Balances at financial institutions may exceed federally insured limits.
ACCOUNTS RECEIVABLE - Accounts receivable are reported net of the allowance for doubtful accounts. White Cliffs’ assessment of the allowance for doubtful accounts is based on several factors, including the overall creditworthiness of its customers, existing economic conditions, and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are written off against the allowance for doubtful accounts only after all collection attempts have been exhausted. The allowance for doubtful accounts was $0 at December 31, 2015 and 2014.
INVENTORIES—Inventories primarily consist of crude oil. Inventories are valued at the lower of cost or market, with cost generally determined using the weighted-average method. The cost of inventory includes applicable transportation costs. During the years ended December 31, 2015 and 2014, White Cliffs recorded $0.6 million and $1.9 million, respectively, of non-cash adjustments to reduce the carrying value of inventory to the lower of cost or market value.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is recorded at cost. White Cliffs capitalizes costs that extend or increase the future economic benefits of property, plant and equipment, and expenses maintenance costs that do not. When assets are disposed of, their cost and related accumulated depreciation are removed from the balance sheet, and any resulting gain or loss is recorded within operating expenses in the statements of operations.
Depreciation is calculated primarily on the straight-line method over the following estimated useful lives:
| Pipelines and related facilities | 20 years |
| Storage and terminal facilities | 10 –25 years |
| Other property and equipment | 3 – 7 years |
GOODWILL – White Cliffs tests goodwill for impairment each year as of October 1, or more often if circumstances warrant, by estimating the fair value of the asset group to which the goodwill relates and comparing this fair value to the net book value of the asset group. If fair value is less than net book value, White Cliffs estimates the implied fair value of goodwill, reduces the book value of the goodwill to the implied fair value, and records a corresponding impairment loss.
For the October 1, 2015 goodwill impairment test, White Cliffs developed estimates of cash flows for the next nine years, and also developed an estimated terminal value. White Cliffs discounted the estimated cash flows to present value using a rate of 11%. No impairment was recorded for the period.
IMPAIRMENT OF LONG-LIVED ASSETS – We test long-lived asset groups for impairment when events or circumstances indicate that the net book value of the asset group may not be recoverable. We test an asset group for impairment by estimating the undiscounted cash flows expected to result from its use and eventual disposition. If the estimated undiscounted cash flows are lower than the net book value of the asset group, we then estimate the fair value of the asset group and record a reduction to the net book value of the assets and a corresponding impairment loss.
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WHITE CLIFFS PIPELINE, L.L.C.
Notes to Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
CONTINGENT LOSSES – White Cliffs records a liability for a contingent loss when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. White Cliffs records attorneys’ fees incurred in connection with a contingent loss at the time the fees are incurred, and does not record liabilities for attorneys’ fees that are expected to be incurred in the future.
ASSET RETIREMENT OBLIGATIONS – Asset retirement obligations include legal or contractual obligations associated with the retirement of long-lived assets, such as requirements to incur costs to dispose of equipment or to remediate the environmental impacts of the normal operation of the assets. White Cliffs records liabilities for asset retirement obligations when a known obligation exists under current law or contract and when a reasonable estimate of the value of the liability can be made.
REVENUE RECOGNITION – Revenue for the transportation of product is recognized upon delivery of the product to its destination.
LINE LOSS DEDUCTIONS AND INVENTORY – The White Cliffs tariff allows White Cliffs to retain a pipeline loss allowance ("PLA") in the amount of two-tenths of one percent of any customer product placed in the system. The PLA is intended to compensate for expenses associated with product shrinkage and evaporation. If the PLA exceeds the actual amount of product loss, White Cliffs is entitled to sell the product overage for its own gain. The PLA is recorded to revenue and inventory in the month in which the shipment occurs. Gains or losses resulting from actual product overages or shortages are also recorded to cost of products sold and inventory during the month the overage or shortage occurs.
White Cliffs recorded $3.5 million, $4.7 million and $4.0 million of revenue related to PLA during the years ended December 31, 2015, 2014 and 2013, respectively. White Cliffs recorded $2.3 million, $1.7 million and $1.9 million of cost of sales related to actual product shortages for the years ended December 31, 2015, 2014 and 2013, respectively. There were no product sales during the years ended December 31, 2015 and 2014. White Cliffs sold $4.9 million of inventory during the year ended December 31, 2013, of which $3.3 million was sold to Rose Rock.
INCOME TAXES - White Cliffs is a pass-through entity for federal and state income tax purposes. Its earnings are allocated to its members, who are responsible for any related income taxes. Because of this, no provision for income taxes is reported in the accompanying financial statements.
SUBSEQUENT EVENTS - White Cliffs has evaluated subsequent events for accrual or disclosure in these financial statements through February 26, 2016, which is the date these financial statements were available to be issued.
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WHITE CLIFFS PIPELINE, L.L.C.
Notes to Financial Statements
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
December 31, 2015 | December 31, 2014 | ||||||
| Land | $ | 31,732 | $ | 31,205 | |||
| Pipelines and related facilities | 519,248 | 496,713 | |||||
| Storage and terminal facilities | 1,830 | 1,830 | |||||
| Other property and equipment | 3,431 | 3,451 | |||||
| Construction-in-progress | 54,632 | 9,749 | |||||
| Property, plant and equipment, gross | 610,873 | 542,948 | |||||
| Accumulated depreciation | (101,805 | ) | (71,769 | ) | |||
| Property, plant and equipment, net | $ | 509,068 | $ | 471,179 | |||
White Cliffs recorded depreciation expense of $30.0 million, $18.5 million and $13.1 million for the years ended December 31, 2015, 2014 and 2013, respectively. Property, plant and equipment includes accruals for construction costs incurred but not yet paid of $0.8 million and $7.6 million at December 31, 2015 and 2014, respectively.
4. OTHER INTANGIBLE ASSETS
Other intangible assets consist of customer relationships. They are generally amortized on an accelerated basis over the estimated period of benefit and may be subject to impairments in the future if we are unable to maintain the relationships with the customers to which the assets relate. The following table shows the changes in the other intangible asset balances (in thousands):
| Balance, December 31, 2012 | $ | 26,369 | |
| Amortization | (5,567 | ) | |
| Balance, December 31, 2013 | 20,802 | ||
| Amortization | (4,759 | ) | |
| Balance, December 31, 2014 | 16,043 | ||
| Amortization | (4,069 | ) | |
| Balance, December 31, 2015 | $ | 11,974 | |
White Cliffs estimates that future amortization of other intangible assets will be as follows (in thousands):
| For the year ending: | |||
| December 31, 2016 | $ | 3,478 | |
| December 31, 2017 | 2,972 | ||
| December 31, 2018 | 2,541 | ||
| December 31, 2019 | 1,133 | ||
| December 31, 2020 | 748 | ||
| Thereafter | 1,102 | ||
| Total estimated amortization expense | $ | 11,974 | |
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WHITE CLIFFS PIPELINE, L.L.C.
Notes to Financial Statements
5. COMMITMENTS AND CONTINGENCIES
Environmental
White Cliffs may from time to time experience leaks of petroleum products from its facilities, as a result of which it may incur remediation obligations or property damage claims. In addition, White Cliffs is subject to numerous environmental regulations. Failure to comply with these regulations could result in the assessment of fines or penalties by regulatory authorities.
Asset retirement obligations
We may be subject to removal and restoration costs upon retirement of our facilities. However, we are unable to predict when, or if, our pipelines, storage tanks and related 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.
Other matters
White Cliffs is a party to various other claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of 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 White Cliffs’ 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.
Leases
White Cliffs has entered into operating lease agreements for storage tanks with Rose Rock. Future minimum payments required under operating leases that have initial or remaining non-cancellable lease terms in excess of one year at December 31, 2015, are as follows (in thousands):
| Years ending: | |||
| December 31, 2016 | $ | 3,750 | |
| December 31, 2017 | 3,750 | ||
| December 31, 2018 | 2,963 | ||
| December 31, 2019 | 2,088 | ||
| December 31, 2020 | 187 | ||
| Thereafter | — | ||
| Total future minimum lease payments | $ | 12,738 | |
White Cliffs recorded lease and rental expenses of $4.6 million, $3.3 million and $3.2 million for the years ended December 31, 2015, 2014 and 2013, respectively.
6. RELATED PARTY TRANSACTIONS
During the years ended December 31, 2015, 2014 and 2013, White Cliffs generated revenues from its owners in the amounts of $184.4 million, $134.3 million and $121.5 million, respectively. White Cliffs has storage and management services agreements with Rose Rock. White Cliffs paid $4.8 million, $2.9 million and $2.9 million for such services during the years ended December 31, 2015, 2014 and 2013, respectively.
During the years ended December 31, 2015, 2014 and 2013 White Cliffs generated revenues from its affiliates in the amounts of $3.2 million, $3.1 million and $3.3 million, respectively.
Rose Rock incurs certain general and administrative expenses on behalf of White Cliffs for which the other owners of White Cliffs are not responsible. White Cliffs records the expense and a corresponding member contribution from Rose Rock, since White Cliffs is not required to reimburse Rose Rock for these expenses. White Cliffs recorded $1.3 million, $1.6 million and $1.8 million of such general and administrative expense during the years ended December 31, 2015, 2014 and 2013, respectively.
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