Exhibit 99.1

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

SemGroup Corporation

Tulsa, Oklahoma

We have audited the accompanying balance sheets of SemStream Non-Residential Division (the “Company”) as of December 31, 2010 and 2009 (Subsequent to Emergence), and the related statements of operations, changes in net parent equity (deficit), and cash flows for the year ended December 31, 2010, and for the one month ended December 31, 2009 (Subsequent to Emergence), and for the eleven months ended November 30, 2009, and for the year ended December 31, 2008 (Prior to Emergence). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SemStream Non-Residential Division at December 31, 2010 and 2009 (Subsequent to Emergence), and the results of its operations and its cash flows the year ended December 31, 2010 and for the one month ended December 31, 2009 (Subsequent to Emergence), and for the eleven months ended November 30, 2009 and for the year ended December 31, 2008 (Prior to Emergence), in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, effective November 30, 2009, the Company emerged from bankruptcy and applied fresh-start accounting. As a result, the statements of operations and cash flows for the year ended December 31, 2010 and for the one month ended December 31, 2009, are presented on a different basis than that for the periods before fresh-start and, therefore, are not comparable.

/s/ BDO USA, LLP

BDO USA, LLP

Dallas, Texas

November 3, 2011

SemStream Non-Residential Division

Balance Sheets

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

SemStream Non-Residential Division

Statements of Operations

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

SemStream Non-Residential Division

Statements of Changes in Net Parent Equity (Deficit)

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

SemStream Non-Residential Division

Statements of Cash Flows

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

SemStream Non-Residential Division

Notes to Financial Statements

1.                                      OVERVIEW

Basis of presentation

SemStream, L.P. is a wholly owned subsidiary of SemGroup Corporation engaged in the terminalling, storage, marketing and distribution of propane and other natural gas liquids in the United States.  Its operations included sales to retail, wholesale and commercial customers linked to purchases from suppliers, and encompassed three primary focus areas:  (i) wholesale marketing at both private and common carrier terminals; (ii) natural gas liquids supply to retail, petrochemical and commercial customers; and (iii) residential propane supply in Arizona.

As described in Note 10, on November 1, 2011, SemStream, L.P. contributed certain of its assets to NGL Energy Partners LP (“NGL Energy”).  The contributed assets included SemStream, L.P.’s primary operating assets, excluding those of its residential operations.  The accompanying financial statements of the SemStream Non-Residential Division reflect the historical activity of the operations that were contributed to NGL Energy.  The SemStream Non-Residential Division will hereinafter be referred to as “SemStream”.

SemGroup Corporation is a Delaware Corporation with its headquarters in Tulsa, Oklahoma. SemGroup Corporation is the successor entity of SemGroup, L.P., which was an Oklahoma limited partnership.  The term “SemGroup” refers to SemGroup Corporation, SemGroup, L.P., and their other controlled subsidiaries.

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

Operations

SemStream’s operations included the following:

·                              twelve natural gas liquids terminals across the United States;

·                              approximately 290,000 barrels of owned natural gas liquids storage capacity;

·                              an additional 3.8 million barrels of leased natural gas liquids storage capacity; and

·                              thirteen owned and over 350 leased railcars.

Bankruptcy

On July 22, 2008 (the “Petition Date”), SemGroup, L.P. and SemStream, L.P. filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. While in bankruptcy, SemGroup, L.P. filed a Plan of Reorganization with the court, which was confirmed on October 28, 2009. The Plan of Reorganization determined, among other things, how pre-Petition Date obligations would be settled, the equity structure of the reorganized company upon emergence, and the financing arrangements upon emergence. SemGroup Corporation and SemStream, L.P. emerged from bankruptcy protection on November 30, 2009 (the “Emergence Date”).

The accompanying financial statements of SemStream include its activities prior to emergence from bankruptcy and its activities subsequent to emergence from bankruptcy. As described in Note 3, SemStream applied fresh-start reporting on the Emergence Date. As a result, the financial statements of SemStream subsequent to the Emergence Date are not comparable to its financial statements prior to the Emergence Date.

SemStream Non-Residential Division

Notes to Financial Statements

2.                                     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES - 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. SemStream’s significant estimates include, but are not limited to: (1) allowances for doubtful accounts receivable; (2) estimated useful lives of assets, which impacts depreciation; (3) estimated fair values of long-lived assets recorded in fresh-start reporting; (4) estimated fair values of long-lived assets used in impairment tests; (5) fair values of derivative instruments; and (6) accrual and disclosure of contingent losses. Although management believes these estimates are reasonable, actual results could differ materially from these estimates.

FRESH-START REPORTING — SemGroup adopted fresh-start reporting on the Emergence Date. In connection with fresh-start reporting, SemStream recorded its assets and liabilities at fair value at the Emergence Date.

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.

ACCOUNTS RECEIVABLE — Accounts receivable are reported net of the allowance for doubtful accounts. SemStream’s 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. SemStream entered into netting arrangements with certain counterparties to help mitigate credit risk. Receivables subject to netting are presented as gross receivables (with the related accounts payable also presented gross) until such time as the balances are settled. 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.  At the Emergence Date, as part of fresh-start reporting, SemStream recorded accounts receivable at fair value.  This was accomplished by reducing the allowance for doubtful accounts to $-0- and recording a corresponding reduction to accounts receivable.

INVENTORIES - Inventories primarily consist of natural gas liquids. Inventories are valued at the lower of cost or market, with cost generally determined using the weighted-average method, although as described above, inventory was adjusted to fair value at November 30, 2009 upon adoption of fresh-start reporting.  The cost of inventory includes applicable transportation costs.

Prior to emergence from bankruptcy, SemStream’s policy was to measure the fair value of inventory, for the purpose of determining whether to lower the carrying value from cost to market, on a monthly basis.  Subsequent to emergence from bankruptcy, SemStream’s policy is to measure the fair value of inventory, for the purpose of determining whether to lower the carrying value from cost to market, on a quarterly basis.

SemStream enters into exchanges with third parties whereby it acquires products that differ in location, grade, or delivery date from products SemStream has available for sale. These exchanges are valued at cost, and although a transportation, location or product differential may be recorded, generally no significant gain or loss is recognized.

PROPERTY, PLANT AND EQUIPMENT — Property, plant and equipment is recorded at cost (although, as described above, property, plant and equipment was adjusted to fair value at November 30, 2009 upon adoption of fresh-start reporting). SemStream 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.

SemStream Non-Residential Division

Notes to Financial Statements

2.                                     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

Depreciation is calculated primarily on the straight-line method over the following estimated useful lives:

LINEFILL — Pipelines and storage facilities generally require a minimum volume of product in the system to enable the system to operate. Such product, known as linefill, is generally not available to be withdrawn from the system. Linefill owned by SemStream in facilities operated by SemStream is recorded at historical cost, is included in property, plant and equipment on the balance sheets, and is not depreciated. SemStream also owned linefill in third party facilities, which is included in inventory on the balance sheets.

IMPAIRMENT OF LONG-LIVED ASSETS — SemStream tests long-lived asset groups for impairment when events or circumstances indicate that the net book value of the asset group may not be recoverable. SemStream tests 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, SemStream estimates the fair value of the asset group and records a reduction to the net book value of the assets and a corresponding impairment loss.

GOODWILL — SemStream tests goodwill for impairment on an annual basis, or more often if circumstances warrant, by estimating the fair value of its assets and comparing this to the net book value of its assets. If fair value is less than net book value, SemStream 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. Prior to the Emergence Date, SemStream’s policy was to test goodwill for impairment on December 31 of each year. Subsequent to the Emergence Date, SemStream’s policy is to test goodwill for impairment on October 1 of each year.  For the October 1, 2010 impairment test, SemStream developed estimates of future cash flows for a period of 15 years, and also developed an estimated terminal value using an assumed 3% growth rate.  Estimated cash flows were then discounted to present value using a rate of 9.36%.

OTHER INTANGIBLE ASSETS — Other intangible assets consist of customer relationships and contracts.  Prior to the Emergence Date, intangible assets were generally amortized on a straight-line basis over the expected period of benefit.  Subsequent to the Emergence Date, intangible assets are generally amortized on an accelerated basis over the estimated period of benefit. These assets could be subject to impairment in the event relationships are not maintained with the customers to which the assets relate.  SemStream recorded intangible asset amortization expense of $2.9 million for the year ended December 31, 2010, $0.2 million for the month ended December 31, 2009, $0.6 million for the eleven months ended November 30, 2009, and $0.8 million for the year ended December 31, 2008. At December 31, 2010, amortization of other intangible assets was scheduled to be as follows (in thousands):

SemStream Non-Residential Division

Notes to Financial Statements

2.                                     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

DERIVATIVE INSTRUMENTS AND MARGIN DEPOSITS — SemStream generally records the fair value of derivative instruments on its balance sheets and the change in fair value as an increase or decrease to product revenue.  The fair values of derivatives and related margin deposits at December 31, 2010 and 2009 are reported within current assets or current liabilities on the balance sheets. Margin deposits have generally not been netted against derivative assets or liabilities at December 31, 2010 and 2009.

The fair value of a derivative contract is determined based on the nature of the transaction and the market in which the transaction was executed.  Quoted market prices, when available, are used to value derivative transactions.  In situations where quoted market prices are not readily available, SemStream estimates the fair value using other valuation techniques that reflect the best information available under the circumstances. Fair value measurements of derivative assets include consideration of counterparty credit risk. Fair value measurements of derivative liabilities include consideration of SemGroup’s creditworthiness.

SemStream has elected “normal purchase” and “normal sale” treatment for certain commitments to purchase or sell petroleum products at future dates. This election is only available when a transaction is expected to result in physical delivery of product over a reasonable period in the normal course of business and is not expected to be net settled. Agreements accounted for under this election are not recorded at fair value; instead, the transaction is recorded when title to the product is transferred.

INTERCOMPANY ACCOUNTS — SemStream participated in SemGroup’s cash management program.  Under this program, cash SemStream received from customers was transferred to SemGroup on a regular basis; when SemStream remitted payments to suppliers, SemGroup transferred cash to SemStream to cover the payments.  In addition, SemGroup incurred certain expenses on SemStream’s behalf that are reported within SemStream’s statements of operations.

SemStream recorded transactions with SemGroup and its other controlled subsidiaries to intercompany accounts. When SemStream’s intercompany accounts were in a net receivable position, the balance has been reported as a reduction to equity on the balance sheet. When SemStream’s intercompany accounts were in a net payable position, the balance has been reported as a current liability on the balance sheet.   In the statements of cash flows, SemStream has reported the net change in the intercompany accounts as a financing cash flow within “net contributions from (distributions to) SemGroup”. SemStream has reported the net change in equity associated with these transactions as “net contributions from SemGroup” or “net distributions to SemGroup” in the statements of changes in net parent equity.

SemStream’s intercompany accounts were in a net receivable position of $13.5 million at December 31, 2010. SemStream has reported this balance as a reduction to equity on the balance sheet, as SemStream does not expect to collect these intercompany receivables. SemStream’s intercompany accounts were in a net payable position of $5.0 million at December 31, 2009.

PAYABLES TO PRE-PETITION CREDITORS — SemGroup’s Plan of Reorganization specified the total amount of consideration it would provide to all pre-petition creditors in settlement of their claims.  SemGroup has not yet completed the process of disbursing funds to settle pre-petition claims, as it has not yet completed the process of resolving all of the claims.  Upon emergence from bankruptcy, SemStream recorded a liability to reflect its obligations to these claimants pursuant to the Plan of Reorganization.

CONTINGENT LOSSES — SemStream 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. SemStream records attorneys’ fees incurred in connection with a contingent loss at the time the fees are incurred.  SemStream does not record liabilities for attorneys’ fees that are expected to be incurred in the future.

SemStream Non-Residential Division

Notes to Financial Statements

2.                                     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued

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. SemStream 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 — Sales of product are recognized at the time title to the product transfers to the purchaser.  Any transportation costs incurred to ship product on third-party infrastructure are included in the price of product sold to customers, and are included within product revenues and costs of goods sold.  Taxes collected from customers and remitted to governmental authorities are recorded on a net basis (excluded from revenue).

SemStream routinely enters into transactions to purchase inventory from, and sell inventory to, the same counterparty. Revenues for such transactions that are entered into in contemplation of one another are recorded net of costs of products sold.  SemStream accounted for $118.9 million of such transactions on a net basis during the year ended December 31, 2010, $3.6 million of such transactions on a net basis during the month ended December 31, 2009, $10.2 million of such transactions on a net basis during the eleven months ended November 30, 2009, and $222.6 million of such transactions on a net basis during the year ended December 31, 2008.

INTEREST EXPENSE — The interest expense reported in SemStream’s statements of operations consists of letter of credit fees. SemGroup has been a borrower on several corporate credit agreements (and SemStream’s assets served as collateral under these agreements), but SemGroup did not allocate this debt to its subsidiaries.  SemGroup did not charge SemStream interest on the balances in its intercompany accounts.

OTHER INCOME — Other income in the statement of operations for the year ended December 31, 2010 includes a $1.2 million gain on the settlement of a dispute related to the cancellation of a contract by a counterparty during 2008, and also includes a gain of $1.2 million related to the settlement of a dispute related to certain transportation fees charged to SemStream by an unaffiliated party during the years 2005-2009.

INCOME TAXES — SemStream, L.P. is a pass-through entity for federal and state income tax purposes.  Its earnings are allocated to its owners, who are responsible for any related income taxes.  Because of this, no provision for income taxes is reported in the accompanying statements of operations.

REORGANIZATION ITEMS — As described in Note 1, SemGroup and SemStream, L.P. operated as debtors-in-possession subject to the jurisdiction of the bankruptcy court during the period from the Petition Date to the Emergence Date. Revenues, expenses, realized gains and losses, and provisions for losses resulting from the reorganization and restructuring of the business are reported as reorganization items in the statements of operations.  The effects of the adjustments to the reported amounts of assets and liabilities resulting from the adoption of fresh-start reporting are reported within reorganization items in the statement of operations for the eleven months ended November 30, 2009.

SUBSEQUENT EVENTS — SemStream has evaluated subsequent events for accrual or disclosure in these financial statements through November 3, 2011, which is the date these financial statements were issued.

SemStream Non-Residential Division

Notes to Financial Statements

3.                                      REORGANIZATION

On July 22, 2008, SemGroup and many of its affiliates (including SemStream, L.P.), filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Certain claims against SemGroup in existence prior to the filing of the petitions for relief under the federal bankruptcy laws were stayed while SemGroup continued business operations as a debtor-in-possession. SemGroup received approval from the court to pay or otherwise honor certain of its obligations incurred before the Petition Date. The court also approved SemGroup’s use of cash to meet post-Petition Date obligations.

While in bankruptcy, SemGroup filed a Plan of Reorganization with the court, which was confirmed on October 28, 2009. The Plan of Reorganization determined, among other things, how pre-Petition Date obligations would be settled, SemGroup’s equity structure upon emergence, and SemGroup’s financing arrangements upon emergence.

Determination of reorganization value

An essential element in negotiating a reorganization plan with the various classes of creditors is the determination of reorganization value by the parties in interest. In the event that the parties in interest cannot agree on the reorganization value, the court may be called upon to determine the reorganization value of the entity before a plan of reorganization can be confirmed.

During SemGroup’s reorganization process, a reorganization value was proposed. This reorganization value was ultimately agreed to by the creditors and confirmed by the court. The proposed reorganization value was determined by applying the following valuation methods:

·                  a “guideline company” approach, in which valuation multiples observed from industry participants were considered and comparisons were made between SemGroup’s expected performance relative to other industry participants to determine appropriate multiples to apply;

·                  analysis of recent transactions involving companies determined to be similar to SemGroup; and

·                  a calculation of the present value of SemGroup’s estimated future cash flows.

After completing this analysis, the reorganization value of SemGroup was determined to be $1.5 billion. This proposed reorganization value was determined using numerous projections and assumptions. These estimates are subject to significant uncertainties, many of which are beyond SemGroup’s control, including, but not limited to, the following:

·                  changes in the economic environment;

·                  changes in supply or demand for petroleum products;

·                  changes in prices of petroleum products;

·                  the ability to successfully implement expansion projects;

·                  the ability to improve relationships with customers and suppliers, as these relationships were adversely impacted by the bankruptcy filing;

·                  the ability to renew certain business operations that were limited during the bankruptcy due to limitations on access to capital; and

·                  the ability to manage the additional costs associated with being a public company.

SemStream Non-Residential Division

Notes to Financial Statements

3.                                      REORGANIZATION, Continued

The use of different estimates could have resulted in a materially different proposed reorganization value, and there can be no assurance that actual results will be consistent with the estimates that were used to determine the proposed reorganization value. The reorganization value confirmed by the court was utilized in the application of fresh-start reporting.

Valuation of SemStream’s assets and liabilities

SemGroup determined that $253.8 million of its reorganization value was attributable to SemStream. Accordingly, SemStream recorded individual assets and liabilities based on their estimated fair values at the Emergence Date.

November 30, 2009 balance sheet

The following table shows the effects of the emergence from bankruptcy on SemStream’s November 30, 2009 balance sheet (in thousands):

SemStream Non-Residential Division

Notes to Financial Statements

3.                                      REORGANIZATION, Continued

(a)    Prior to emergence from bankruptcy, SemStream had a receivable from SemCanada Crude Company, which is a wholly-owned subsidiary of SemGroup that applied for bankruptcy protection in Canada in July 2008 and emerged from bankruptcy on November 30, 2009, concurrent with the emergence of SemGroup and SemStream.  SemCanada Crude Company was not under SemGroup’s control during the bankruptcy.

(b)   SemStream elected not to cancel certain contracts that were in effect prior to the Petition Date.  For these contracts, SemStream was required to make payments to the counterparties to cure defaults on the contracts.  These payments were made by SemGroup upon emergence from bankruptcy.

SemStream Non-Residential Division

Notes to Financial Statements

3.                                      REORGANIZATION, Continued

(c)    SemStream’s liabilities to SemGroup and its controlled subsidiaries were extinguished pursuant to the Plan of Reorganization.

(d)         Reflects the transfer to SemGroup of a commodity derivative contract.

(e)          SemGroup’s Plan of Reorganization specified the total amount of consideration it would provide to all pre-petition creditors in settlement of their claims.  SemGroup has not yet completed the process of disbursing funds to settle pre-petition claims, as it has not yet completed the process of resolving all of the claims.  Upon emergence from bankruptcy, SemStream recorded a liability to reflect its obligations to these claimants pursuant to the Plan of Reorganization.

(f)            Represents the transfer to SemGroup of liabilities subject to compromise, pursuant to the Plan of Reorganization.

(g)         Reflects the cancellation of predecessor equity and the issuance of successor equity.

(h)         Reflects the adjustments to the recorded values of assets and liabilities resulting from fresh-start reporting.

(i)             Reflects the reorganization items gain resulting from fresh-start reporting.

Reorganization items

The reorganization items gain (loss) shown on the statements of operations consists of the following (in thousands):

(a)    SemStream revalued its assets and liabilities in fresh-start reporting, and recorded a reorganization gain for the increase in fair value of the net assets over the previously recorded values.

(b)   SemGroup incurred a variety of professional fees related to the restructuring of the business, including, among others:

·                        legal fees related to the reorganization process, including those related to bankruptcy court filings and hearings, negotiation of credit agreements, settlements of disputes with claimants, and other matters;

·                        general management consulting services related to the disposal of assets, the reconciliation and negotiation of pre-petition claims, preparation for emergence from bankruptcy, and other matters;

SemStream Non-Residential Division

Notes to Financial Statements

3.                                      REORGANIZATION, Continued

·                        valuation advisory fees for the determination of the reorganization value of the business required for the Plan of Reorganization and the valuation of long-lived assets required by fresh-start reporting;

·                        accounting fees for assistance with fresh-start reporting and preparation for public company financial reporting obligations; and

·                        fees paid to the United States Trustee.

SemGroup allocated a portion of these fees to SemStream, based on the reorganization value of SemStream relative to the total reorganization value of SemGroup’s United States subsidiaries that emerged from bankruptcy.

(c)    Represents the write-off of receivables in situations where SemStream believed the customer non-payment was related to the bankruptcy.

(d)   Represents refinements to the estimated amount of valid claims by pre-petition creditors. During 2008, SemStream recorded an estimated loss for the total amount of valid claims subject to compromise. During 2009, SemStream refined this estimate as it reviewed the claims, and reversed a $4.1 million loss that had been recorded to general and administrative expense in 2008.

(e)    Employment costs include severance related to the termination of employment relationships and bonuses paid to retain personnel during the reorganization.

4.                                     PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following (in thousands):

SemStream recorded depreciation expense of $2.2 million for the year ended December 31, 2010, $0.2 million for the month ended December 31, 2009, $3.2 million for the eleven months ended November 30, 2009, and $3.1 million for the year ended December 31, 2008.

SemStream Non-Residential Division

Notes to Financial Statements

4.                                     PROPERTY, PLANT AND EQUIPMENT, Continued

SemStream includes within the cost of property, plant and equipment interest costs incurred by SemGroup while an asset is being constructed. SemStream capitalized $0.1 million of interest costs during the year ended December 31, 2008.  Since the related debt was recorded by SemGroup, rather than by SemStream, no interest expense related to SemGroup’s debt is reported in SemStream’s statements of operations.  The increase in the value of property, plant and equipment associated with capitalized interest is reported as an increase to SemStream’s net parent equity.

5.                                      FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK

Commodity derivative contracts

SemStream’s results of operations and cash flows are impacted by changes in market prices for petroleum products. This exposure to commodity price risk was managed, in part, by entering into various commodity derivatives.

During 2009 and 2010, SemStream managed commodity price risk by limiting its net open positions subject to outright price risk and basis risk resulting from grade, location or time differences.  SemStream did so by selling and purchasing similar quantities of natural gas liquids with purchase and sale transactions for current or future delivery, by entering into future delivery and purchase obligations with futures contracts or other commodity derivatives and employing its storage and transportation assets. At times SemStream hedged its natural gas liquids commodity price exposure with derivatives on commodities other than natural gas liquids due to the limited size of the market for natural gas liquids derivatives.  In addition, physical transaction sale and purchase strategies were intended to lock in positive margins for SemStream, e.g., the sales price was sufficient to cover purchase costs, any other fixed and variable costs and SemStream’s profit.  All marketing activities were subject to SemGroup’s risk management policy, which established limits to manage risk and mitigate financial exposure.

During 2010 and 2009, SemStream’s commodity derivatives were comprised of natural gas liquids swaps, forward contracts and futures contracts.  These are defined as follows:

Swaps — Over the counter transactions where a floating price, basis or index is exchanged for a fixed (or a different floating) price, basis, or index at a preset schedule in the future according to an agreed upon formula.

Forward contracts — Over the counter contracts to buy or sell a commodity at an agreed upon future date.  The buyer and seller agree on specific terms (price, quantity, delivery period, and location) and conditions at the inception of the contract.

Futures contracts — Exchange traded contracts to buy or sell a commodity.  These contracts are standardized by the exchange in terms of quality, quantity, delivery period and location for each commodity.

The table below summarizes the balances of derivative assets and liabilities at December 31, 2010 and 2009 (in thousands):

SemStream Non-Residential Division

Notes to Financial Statements

5.                                      FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK, Continued

“Level 1” measurements were obtained using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. These include futures contracts that are traded on an exchange.

“Level 2” measurements use as inputs market observable and corroborated prices for similar derivative contracts. Assets and liabilities classified as Level 2 include over-the-counter (OTC) traded forward contracts and swaps.

“Level 3” measurements were obtained using information from a pricing service and internal valuation models incorporating observable and unobservable market data.  These include commodity derivatives, such as forward contracts and swaps for which there is not a highly liquid market and therefore are not included in Level 2 above.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.  SemStream’s assessment of the significance of a particular input to the measurement requires judgment, and may affect the valuation of assets and liabilities and their placement within the fair value levels.

The following table reconciles changes in the fair value of commodity derivatives classified as Level 3 in the fair value hierarchy (in thousands):

(*) SemStream’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.

SemStream Non-Residential Division

Notes to Financial Statements

5.                                     FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK, Continued

The following table sets forth the notional quantities for derivative instruments entered into during the periods indicated (amounts in thousands of barrels):

Realized and unrealized losses from SemStream’s commodity derivatives were recorded to product revenue in the following amounts (in thousands):