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Executives

Alisa Perkins - Investor Relations

Norman Szydlowski - Chief Executive Officer

Bob Fitzgerald - Chief Financial Officer

Peter Schwiering - Chief Operating Officer

Analysts

Brain Zarahn - Barclays

Brad Olsen - Tudor Pickering

Curt Launer - Deutsche Bank

Will Frohnhoefer - BTIG

Rose Rock Midstream, L.P. (RRMS) Q1 2013 Earnings Conference Call May 9, 2013 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the SemGroup Corporation and Rose Rock Midstream First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to Alisa Perkins. Please go ahead.

Alisa Perkins

Thank you for joining us today. The presentation for today’s call is available under the Investor Relations section of our website at semgroupcorp.com and rrmidstream.com.

Before we begin our prepared remarks, I would like to bring your attention to slides 2 and 3 for certain disclaimers and other cautionary statements, as remarks within our presentation may contain forward-looking statements. Also included in the presentation are various non-GAAP financial measures, such as adjusted gross margin, EBITDA and adjusted EBITDA. Reconciliations to the most directly comparable GAAP financial measure are included in the presentation and can also be found on our website.

With that, let me turn the call over to Norm Szydlowski, our Chief Executive Officer.

Norman Szydlowski

Thanks Alisa. In addition to Alisa, I am joined by Bob Fitzgerald, our Chief Financial Officer and Pete Schwiering, Chief Operating Officer for Rose Rock Midstream.

Before I talk about first quarter results, let me address a couple of recent events. On growth opportunities, we announced a proposed agreement to acquire Chesapeake’s gas-gathering and processing assets in the Mississippi Lime play. These assets are strategically situated for exceptional growth and will nearly triple our presence in the Mississippi play, while adding to our inventory of potential dropdowns for Rose Rock. The assets include 200 miles of gathering pipeline that are in service today and they will ultimately include 400 million cubic feet per day in cryogenic processing. The first 200 million cubic feet per day plant is expected to come online in the first quarter of 2014. This plant will be in Woods County, where our Northern Oklahoma Hopeton plant is, and we anticipate connecting the plants to gain operating efficiencies and flexibility. The second 200 million cubic feet per day plant also in the same county is committed to the manufacturer and is expected to come online in the first quarter of 2016. We expect to spend approximately $125 million of capital for the completion of the two plants.

Additional capital will be required for future well connects. The plants and gathering systems are supported by approximately 540,000 net acre dedication in the core of the Mississippi Lime play and Chesapeake Energy is committed to a 20-year 100% fee-based gathering and processing agreement. We agreed to pay $300 million plus make the future capital investments associated with the build-out of these assets. And we will use the SemGroup credit facility to fund the acquisition. We anticipate closing by the third quarter this year. And at that time, we will be able to give you additional detail on the transaction.

Although we won’t be providing specifics today on the growth profile, future EBITDA generation and the multiple to be paid to these assets is expected to be comparable to the results from our SemGas 125 million cubic feet per day plant once the build out is completed and the anticipated volumes are flowing through plants. This proposed acquisition will make us one of the largest processors in the Mississippi Lime, and we are very excited about the future growth in this highly attractive celebrity oil and gas play.

On beginning dividend payments, SemGroup’s Board of Directors declared the first quarterly cash dividend to common shareholders of $0.19 per share to be paid May 30, 2013. The company is targeting a 10% increase in dividends paid in 2013 and anticipates an annual growth rate of double-digits for the next three years. This dividend complements our continued growth story and is an important part of our commitment to return value to our shareholders. It reflects our desire to pay out the distributions from Rose Rock Midstream and NGL Energy Partners, adjusted for tax obligations.

SemGroup and Rose Rock were off to a solid start. For 2013, we are right on track with the execution of our strategic plan. However for the first quarter, we have mixed financial results. SemGroup’s adjusted EBITDA for the first quarter was $35.5 million. Rose Rock reported adjusted EBITDA of $16.4 million. Crude results were better than expected but offset by lower performance in the SemCAMS and SemMexico units and Bob will cover that in more detail. Our guidance for SemGroup’s full year earnings remains unchanged at $165 million to $175 million of adjusted EBITDA which does not include any contribution from the proposed Chesapeake acquisition.

We also continued to be on track with capital spending. The White Cliffs Pipeline expansion is on schedule with pipe delivery starting last month. The Healy de-bottlenecking project has experienced some equipment delay and is now expected to be completed in June. Pipe is currently being laid in Colorado for the Wattenberg Oil Trunkline which is on schedule for completion in the fourth quarter. Tanks are being erected along the Glass Mountain Pipeline route. The pipe is being delivered to the construction sites and will begin construction on a new project for two unloading facilities next month. The truck unloading facilities will be located at Alva and Arnett, Oklahoma the origin points for the Glass Mountain Pipeline. These unloading facilities will come online in the fourth quarter when the pipeline is completed.

The new SemGas 125 million cubic feet per day gas processing plant began operation this week. This brings our total Northern Oklahoma processing capacity to 200 million cubic feet per day. Our new 20-inch receipt and delivery line in Cushing started up in February and the new 250,000 barrel storage tank Cushing began generating EBITDA in April. Our capital spend to-date is $60 million and we are on target to spend $400 million for 2013 with the projects disclosed on slide number eight including the undesignated projects. However, please note this doesn’t include the capital spend related to the proposed Chesapeake acquisition.

Now I will turn the presentation over to Bob who will review our financial performance.

Bob Fitzgerald

Thanks, Norman. Good morning, everybody. Beginning on slide nine of our earnings presentation, as noted in our press release yesterday we reported net income of $43.4 million for the first quarter, more than doubling our net income from the fourth quarter due largely to two non-cash items. We reported a $54 million increase to income resulting from the reversal of our tax valuation allowance for our U.S. deferred tax assets. At the time of our restructuring in 2009, we established a reserve against all of our deferred tax assets due to the uncertainty of our ability to utilize the deferred tax assets in the future. We now believe that we will begin to fully utilize those deferred tax assets as we continue to grow our business and dropdown assets to Rose Rock. Somewhat offsetting the income from the reversal of the tax allowance was a non-cash charge of $26 million for warrant expense pertaining to the increase of value over the prior quarter.

Adjusted EBITDA was $35.5 million for the first quarter, down 19% compared to the fourth quarter of 2012, but up 26% when compared to last year’s first quarter. Although the U.S. crude and SemGas segments were up, they were more than offset by lower performance in our SemCAMS and SemMaterials Mexico businesses.

Turning specifically to our segment results in terms of business – turning specifically to our segment results the reduction in quarterly adjusted EBITDA was largely due to several factors at our SemCAMS business in Canada. SemCAMS was down $7.6 million or 62% due to a combination of an outage at our K3 facility and lower maintenance capital fee recovery. The K3 outage was caused by a welding leak in our sulfur recovery unit, resulting in a 35 day shutdown. The shutdown reduced earnings by $1.2 million in the first quarter and we expect to report an additional $1.2 million reduction in the second quarter. The plant was brought back online on April 17th and we do not expect any additional operating issues.

Our maintenance capital fee recovery was down by $3.9 million as maintenance spending generally occurs later in the year. In addition, lower maintenance capital was spent due to the focus on the K3 shutdown. Although SemCAMS experienced a large decrease in the first quarter, we expect that they will finish the year at a level consistent with their performance over the past two years. SemMexico reported a significant drop in adjusted EBITDA, as volumes declined by nearly 40% due to a slowdown in bids on construction projects and lower overall government funding. We believe that this is a temporary situation as numerous governmental agencies are restructuring following the swearing in of the Pena Nieto administration last December.

Moving on to the performance of our other business units, the crude segment was up 7% due to higher marketing and transportation volumes. Marketing volumes increased by 14% for the quarter and our marketing margin per barrel increased by 17% as a result of improved market conditions. Transportation margins also contributed $800,000 to the increase in adjusted EBITDA. White Cliffs Pipeline net EBITDA was down slightly on relatively flat volumes as we reported a charge related to an inventory adjustment and we had fewer total barrels shipped due to two fewer days in the quarter as compared to the prior quarter.

SemGas reported a 20% jump in adjusted EBITDA despite slightly lower volumes attributable to weather problems and power outages during the quarter that forced a number of wells to go offline. However, the decline in volume was more than offset by higher NGL and natural gas prices as compared to the prior quarter. Finally, SemLogistics continued to operate near breakeven due to ongoing backwardation in crude and refined products in Europe.

Next, moving to our capitalization and liquidity position on slide 11, we ended the quarter with total consolidated debt of $181 million, a debt to capitalization ratio of 14% and a leverage ratio of 1.3 times. We ended the quarter with total liquidity of $532 million. Our liquidity increased during the first quarter due to the upsizing of the Rose Rock Midstream revolving credit facility and its equity issuance related to the dropdown of an interest in the White Cliffs Pipeline. Subsequent to the end of the first quarter, SemGroup increased its revolving credit facility from $300 million to $500 million. On a pro forma basis, taking into consideration the revolver upsizing and the GAAP acquisition purchase price, we would have ended the quarter with $432 million of liquidity and a debt to adjusted EBITDA leverage ratio of 3.4 times.

Moving next to Rose Rock’s results on Slide 13, we reported adjusted EBITDA of $16.4 million, up 66% from the fourth quarter, due to the inclusion of White Cliffs Pipeline cash distributions and higher volumes and margins on the base Rose Rock business. Excluding the lift from the White Cliffs Pipeline distributions, Rose Rock adjusted EBITDA increased by 36% on a quarter-over-quarter basis due to the previously mentioned increase in marketing volumes and transportation margins. In addition, Rose Rock benefited from higher ancillary fees at both the Cushing and Platteville terminals.

Turning to Rose Rock’s distribution per LP unit, we previously announced our fifth consecutive quarterly increase in the distribution per limited partner unit to $0.43 per unit or $1.72 per unit on an annualized basis to be paid out next week. The first quarter distribution represents a 6.8% increase over the prior quarterly distribution and a 15% increase over the first quarter of 2012. Our 2013 guidance for distribution growth is targeted at 15% on a year-over-year basis. As outlined in detail in the appendix of our earnings presentation, our distributable cash flow for the quarter was $12.7 million. Our distribution of $8.9 million, declared on April 25, represents a coverage ratio of 1.4 times for the quarter. We are targeting a coverage ratio of 1.1 to 1.2 times for the full year of 2013. We are maintaining Rose Rock’s adjusted EBITDA guidance of $56 million to $60 million for the year. We will revisit our guidance later in the year as we assess our future opportunities.

Slide 15 summarizes our 2013 CapEx guidance of $60 million, which remains unchanged from our prior guidance. Our capital spend to-date is $40 million and we are well on our way to spend the $60 million for 2013. Rose Rock’s capitalization and liquidity position is presented on slide 16. As previously discussed, Rose Rock increased its revolving credit facility to $385 million during the first quarter in conjunction with the White Cliffs Pipeline acquisition. Borrowings for the acquisition and ongoing organic growth projects resulted in total debt of $153 million and a debt to adjusted EBITDA leverage ratio of 3.4 times as of March 31. We ended quarter with $186 million of total liquidity.

I will now turn the call back over to Norm for some final comments.

Norman Szydlowski

Thanks Bob. Our strategic plan is on target with the 2013 goals we gave in our last quarterly conference call. We have completed our first dropdown to Rose Rock, initiated a dividend at SemGroup Corp, and announced a very significant proposed acquisition. The companies have done exceptionally well in safety, on operations, and organic growth, and now are appropriately returning capital to both unit holders and shareholders All of these things are consistent with and necessary for our strategy of transitioning SemGroup to a GP holding company. Thank you.

And now, I would like to turn the call over to Samya for any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Brain Zarahn of Barclays. Your line is now open.

Brain Zarahn - Barclays

Good morning.

Norman Szydlowski

Good morning.

Brain Zarahn - Barclays

Well, you are certainly adding to your dropdown inventory set, I guess as we get through the year, what are your expectations on the next drop? I know you mentioned crude will come first, but any updates to your thought process around potential, another drop sometime in 2013?

Norman Szydlowski

It’s possible that in 2013 at the end of the year that we may do a another drop, and that maybe Brian, either what could be, it’s the something in crude we expect if it happens that soon, if it doesn’t happen earlier in 2014, it could be the Wattenberg Oil Trunkline, that’s still on schedule ready to complete, that’s the project for Noble, potentially, Glass Mountain Pipeline, although we want to get volumes moving into the pipeline or potentially another drop with the White Cliffs Pipeline. So, while it’s not impossible that we would see another drop late in 2013, I would say at this juncture, we’ll look more likely to see that in early 2014 and still expected to be one of the crude pieces.

Brain Zarahn - Barclays

And then with the addition of the Mississippi Lime gathering and processing assets, how do you think about, if you do decide to complete the crude pipeline drops first, how does the Mississippi Lime asset and SemGas, how do you think about those eventual drop-downs?

Norman Szydlowski

We’ve got some new I think opportunities with that Brian, because we could alter a bit. SemGas potentially with SemCAMS and combined SemGas with the proposed Chesapeake asset acquisition. I think that’s still to be determined. We’ll still have to sort out what really makes the most sense, but it could reorder the drop you will remember our ordering of dropdown inventory as we have seen it so far. And it shows SemGas ahead of the Canadian gas. So, potentially with this new acquisition that could be reversed. And one other possibility is to look at these potential new assets here in segments as opposed to an entire build-out. If you look at the Chesapeake activity, it’s very large and has an extended period of build-out. I really like you probably already looked, but for those of you that may not have on slide five of the presentation, there is a good geographic showing of how the Chesapeake asset base and potential build-out would overlap and does overlap with the existing SemGas assets. So, it’s yet to be determined, but it could be the reordering to answering your original question of SemCAMS ahead of the domestic gas assets.

Brain Zarahn - Barclays

On the last one from me, on the Rose Rock distribution growth guidance, it’s around 15% your first quarter sequential bump was large at 7%, was that just, I am assuming that’s more of a one-time large bump and you will be in that 15% range for the year.

Bob Fitzgerald

That’s right, Brain. This is Bob. Our distribution strategy and philosophy is to do a bump-up where we have a drop-down and then go back to normal study distribution beyond that so, I think you can expect to see that process going into the future.

Brain Zarahn - Barclays

Thank you.

Operator

Thank you. Our next question comes from Brad Olsen of Tudor Pickering. Your line is now open.

Brad Olsen - Tudor Pickering

Hi, good morning everyone.

Norman Szydlowski

Good morning.

Brad Olsen - Tudor Pickering

I wanted to maybe push a little bit on the CapEx guidance that’s in the presentation on page 8. I see that you’ve moved $5 million, it looks like of CapEx from the other category to the Glass Mountain trucking project. Is there – are there significant milestones that you are waiting on in order to move more of that CapEx backlog from the other category or is it just that the individual projects are sufficiently small that it makes more sense just to keep them as a single line item.

Bob Fitzgerald

Hi, Brad. This is Bob. The other category as we had last year is project that we have pretty good confidence that we are going to continue to build. We are working on finalizing contracts and project engineering work etcetera and when we complete that and then sanction those projects to the extent that the material went up. We would pull them out and post them as a separate. It is still early in the year to be able to pull out. I wouldn’t read much into that other than, there’s timing, and there’s working on the project invest the decision analysis and we will have all that done throughout the year and then we pull it out like we did last year.

Brad Olsen - Tudor Pickering

Okay, great. And I noticed that White Cliffs had flattened out a little bit quarter-over-quarter in terms of volume growth. Is that the result of well connects or something that you’ve seen on the producer side or are there other dynamics at play there?

Peter Schwiering

Well, the principle dynamics – this is Pete Schwiering by the way, are that we are near capacity on White Cliffs, so there’s not that much growth until we finish our debottlenecking project at Healy. But also there was if you remember Noble’s earnings call that they had some weather related delays in getting some of their new production online so the combination of being right near capacity and weather related production issues contribute to that.

Brad Olsen - Tudor Pickering

That’s helpful color, thank you. On the SemCAMS side, with the dip in EBITDA caused by that turnaround, and you may have mentioned this in a previous conference call, but I thought it would be worth asking again. Some of these turnarounds seem to have been covered by pass-through fees and this one, it appears that it wasn’t. Was there a difference in the type of – is there a difference I guess in the way these were treated in terms of whether or not they received pass-through fees?

Bob Fitzgerald

This is Bob. Brad, the situation we had occurred from mid March to mid April was a plant shutdown was actually during a turnaround where we do paths around, we are spending a bunch of operating expenses and those get pass-through. In this case, it was actually a shutdown of plant. We weren’t really spending a lot of OpEx either so, it’s very different. We will have a turnaround of our other larger plant, that KA facility that will start up in actually.

Brad Olsen - Tudor Pickering

Going on right now.

Bob Fitzgerald

Started – it’s going to the turnaround varying this month so, we’ll see some pass-through of those costs on the OpEx side and get any capital recovery for any CapEx we spend on that as well. So, it’s really two different scenarios.

Brad Olsen - Tudor Pickering

Okay, great, that’s helpful. Thank you. And last question from me, I appreciate the dividend guidance and it’s obviously very good to see that first dividend come through. The three-year forward double-digit growth target that you’ve laid out, certainly given the fact that SemGroup is paying out a relatively small piece of its overall free cash flow today and that you do, it sounds like, have quite a few drop-downs planned for Rose Rock going forward. It would seem as though there’s probably an ability to increase the dividend at a pretty significant double-digit rate somewhere in the – above 30% or 40% and I realize that one of the probably intentionally vague language there around the double-digit growth, but when you think about that double-digit growth, is that kind of 20% or 30% or is that something that could be significantly higher than that?

Norman Szydlowski

Brad, it could be significantly higher, but as you very correctly pointed out, it’s going to be very much a function of how we proceed on the dropdown path. We still see our view that we want to return at this juncture, given the project lift and the other things on the growth side with effectively passing through the distributions from Rose Rock, so you’ll get the benefit of that growth, but also NGL, who has also been growing. And as long as we are covering that from a tax impact standpoint, then that’s still our idea. So, could it be considerably different than as you mentioned, it could be but very dependent on the dropdowns.

Brad Olsen - Tudor Pickering

Great and I guess on that just a follow-up on your tax comment. The tax rate that you have guided to in the past, is there any potential for that to maybe be biased lower, given the fact that you are spending so much CapEx over the next couple of years, especially with the Rose Valley acquisition? And that’s it for me. Thank you.

Bob Fitzgerald

Brad, just with regards to that question regarding the tax impact, and that’s on the effect on the distributions that we’re receiving. The way you should think about that is we’re withholding an estimated 20% on the Rose Rock distributions and effectively zero on the NGL distributions. Relative to the deferred gains that we are getting on the dropdowns, those deferred gains get turned around over their depreciable life. So, we are going to continue to probably use that going forward. I think you can just model it that way.

Operator

Our next question comes from Curt Launer of Deutsche Bank. Your line is now open.

Curt Launer - Deutsche Bank

Good morning and thank you very much for the opportunity here. I wanted to ask two questions unrelated really, one is about the Chesapeake Mississippi Lime acquisition, just for some elaboration Norm on the comments that you made. You talked about $300 million cost, $125 million additional CapEx, second plant online in 2016 plus well connects. And then you referenced the page eight discussion relative to being similar to the SemGas multiple on the North Oklahoma plant, that’s a 4.6 times EBITDA there. Is that something you are referencing in terms of the full build out, perhaps 2016 multiple of what you would expect to generate on that asset acquisition?

Norman Szydlowski

Good question and good point. That really is the full build out, so look at it as effectively the future multiple. But we do think that the way we have got it structured, it’s going to be very comparable to what we did. And that’s the item on page eight with the SemGas 125 million cubic feet per day plant. But it does – we have got to get it built. There is two pieces to that. The one Rose Valley plant finishes up first quarter of ’14 and the second one finishes up first quarter ’16. That takes the (Technical Difficulty) finishes up first quarter ’16. That takes the additional $125 million that was referenced. But also I think it’s important to point out that what’s not in there are the well connections and the subsequent build out that comes to connect all these plants with all the wells, it is dependent on how fast the well gets drilled. But after looking at all that, we are confident that we’ll get a comparable multiple to what we’ve had with the 125 plant.

Curt Launer - Deutsche Bank

Okay, thank you. And if I could follow on before I ask my second question just from that. So, if we look back at the North Oklahoma expansion, the 125 million a day coming into service now, that was about $96 million, can you breakdown the magnitude of that in terms of how much was for the plant and how much was for well connects?

Norman Szydlowski

I don’t know if I have got that level of detail, Curt. But suffice to say that when we look at that, we are incorporating both. So, both the plant costs and the cost to connect them. And I should point to you too, the connection cost is not only pipe and metering, but also compression, but I don’t have a breakdown for you that says which of those pieces make up their total.

Curt Launer - Deutsche Bank

Okay, thank you. And second question for me is just to go back to the topic of the warrants. I think I’ve been at least part of what’s been out there creating some confusion about this issue and I apologize for that. But November 14 is the expiration date of the warrants. Could you review for us the options that those warrant holders have and what the potential impact could be relative to capital for the company or the exercise of those warrants?

Bob Fitzgerald

Curt, this is Bob. I’ll take that one. Just for clarity, the warrants expire or term out on November 30, 2014 so, the later next year when it turn out. The way that would work is from a cash flow prospective. The warrants had a strike price of 25. So, a warrant holder can cash those in with $25 million and receive a SemGroup share in return. So, it depends on how they want to exercise those warrants and when they want to exercise those warrants. The company would in fact be getting about $25 million in for the shares.

Curt Launer - Deutsche Bank

Okay. And is there an option for the holders to not do that and turn them over to the secured creditors or something like that or was I mistaken in that impression?

Bob Fitzgerald

No, it’s really just they can exchanged the warrant for share and they just do that through the company.

Curt Launer - Deutsche Bank

Okay, thank you very much.

Operator

Thank you. Our next question comes from Will Frohnhoefer of BTIG. Your line is now open.

Will Frohnhoefer - BTIG

Hi everyone.

Norman Szydlowski

Hello.

Will Frohnhoefer - BTIG

Hi, how are you doing? Thanks for taking the call. So, I have just a couple of questions, more or less housekeeping. Number one, you mentioned before and I think it was discussed also the Q&A, the connect on the SemGas assets. I guess my question is, the connection is really between Rose Valley 1 and Rose Valley 2. There won’t be any connection to clarify between the Rose Valley assets and then Hopeton directly, correct?

Norman Szydlowski

Well, I’m glad you asked that, Will, because we would connect Hopeton. There is a real – I’ll call it optimizing, like we’ve done with our Hopeton and Nash plants. Presuming everything comes together, what we would do is connect Hopeton to Rose Valley and get the benefit and the flexibility of having an even broader, more flexible processing system.

Will Frohnhoefer - BTIG

Perfect, okay. And then I also I guess some more questions around some of the data on SemCAMS, and I think the way Bob had split it out is he said specifically that the unplanned downtime in this particular quarter was $1.2 million in total costs. And then there was about $6 million basically in discrepancy quarter-over-quarter. There was also I believe was it $3.9 million for the recovered maintenance CapEx costs or how does that work? What is the exact split there on the differential?

Bob Fitzgerald

Yeah, looking at quarter-over-quarter, that’s exactly right, $1.2 million of the reduction was associated with the plant shutdown and again that was only for 2 of the 4 weeks it was down that was associated with the first quarter, the other obviously, as I mentioned, the four weeks that was down that would associated with first one that’s obviously as I mentioned would show up in the second quarter for a similar amount. $3.9 million reflects the reduction in the maintenance capital recovery fees where we saw a drop in that and again part of that drop in the maintenance capital recovery fees was due to the fact that in the first quarter, typically there’s a lot of planning going on and not as much boots on the ground activity. And then secondly, there was a fair amount of refocusing on the shutdown, so, we weren’t doing maintenance projects. We were focused on resolving the shutdown issues.

Will Frohnhoefer - BTIG

Okay. Then this discrepancy then between so, if we’re assuming a $3.9 million and $1.2 million and we’re getting the basic differential then of $2.5 million. Is that more attributable to lower volumes or mix or what’s the story? As far as rest of that, just plugging that gap there?

Bob Fitzgerald

Yes. And good question and I’d refer you to slide 10. I didn't talk about this, but the other differential that would attribute to some of that would be the fact that we did not have sulfur sale in the first quarter. Sulfur sales occur just periodically. They’re not continuous throughout the year as we recover sulfur at our plants. We will build up enough mass of inventory will go ahead and execute a sale. We did that in the fourth quarter but we did not do that in the first quarter we’re building that inventory. So you have that also affecting n the quarter-over-quarter results.

Will Frohnhoefer - BTIG

Okay. So it comes out much closer than I thought. Okay, then I guess the last point that I had was that we talked about the existing gas processing assets to existing SemGas assets and their transition from basically, to become more fee-based over time, and clearly the contracts with Chesapeake are going to be entirely fee-based at the 400 or so of capacity at the Rose Valley units. I’m wondering how progress is going in transitioning the contracts at the northern Oklahoma existing assets right now?

Bob Fitzgerald

Progressing quite well actually, we have most of our contracts renegotiated to a either fee-based as you mentioned with the Chesapeake or the blending structure that I mentioned in that last call where about 50% of the revenues would be coming through fixed fee-based structure and half of it would be coming through a percent of proceeds or costs structure. So we’re basically trying to de-risk some of those volumes about 90% of our contracts are completed at this point we’re negotiating and finalizing the contracts on the remaining, and these are the ones that pertain to the committed acreage. So..

Will Frohnhoefer - BTIG

Okay.

Bob Fitzgerald

So there’s always spot things that could come up that might not be at the same structure but the committed acreage the material volumes coming in and we’re well on our way and almost complete with that project.

Will Frohnhoefer - BTIG

But with the Chesapeake assets coming online, that would also effectively make it even if there were no transition, there would still be, at this point roughly what 80% fee-based on a total all-in basis, or probably higher then, like 83% or 84% of totally fee-based if we add in Chesapeake assets to that overall portfolio, even if there’s no further. You are making progress, but even if there’s no further progress. I think that kind of shows the risk profile has shifted dramatically with this acquisition. Is that correct?

Bob Fitzgerald

Exactly right. We’re continuing to focus on de-risking the volatility associated with those revenue streams and in the Chesapeake is well on its way contributing to that to the extent that we get that transaction closed.

Will Frohnhoefer - BTIG

Okay, very good. Thanks a lot guys. I appreciate it.

Bob Fitzgerald

You’re welcome.

Operator

Thank you. And at this time, I am not showing any further questions. I’d like to turn the call back to Norm for any closing comments.

Norman Szydlowski

We just thank you all again for participating today and your interest in SemGroup and Rose Rock. We’ve got clear idea and how we can use our assets and capabilities to maximize value per shareholders and we’re making very good progress. Thank you all again.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.

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