ROSE ROCK MIDSTREAM, L.P., 10-K filed on 3/1/2013
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Jun. 29, 2012
Jan. 31, 2013
Common Class A [Member]
Jan. 31, 2013
Common Units [Member]
Jan. 31, 2013
Subordinated Units [Member]
Document Type
10-K 
 
 
 
 
Amendment Flag
false 
 
 
 
 
Document Period End Date
Dec. 31, 2012 
 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
 
Document Fiscal Year Focus
2012 
 
 
 
 
Entity Registrant Name
Rose Rock Midstream, L.P. 
 
 
 
 
Entity Central Index Key
0001527622 
 
 
 
 
Current Fiscal Year End Date
--12-31 
 
 
 
 
Entity Filer Category
Accelerated Filer 
 
 
 
 
Entity Common Stock, Shares Outstanding
 
 
1,250,000 
11,893,581 
8,389,709 
Entity Well-known Seasoned Issuer
No 
 
 
 
 
Entity Public Float
 
$ 204,960,591 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
 
Entity Voluntary Filers
No 
 
 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 108 
$ 9,709 
Accounts receivable
222,862 
131,655 
Receivable from affiliates
57 
2,210 
Inventories
24,840 
21,803 
Other current assets
2,750 
1,205 
Total current assets
250,617 
166,582 
Property, plant and equipment, net
291,530 
276,246 
Other noncurrent assets, net
2,579 
2,666 
Total assets
544,726 
445,494 
Current liabilities:
 
 
Accounts payable
220,791 
125,681 
Payable to affiliates
2,649 
7,991 
Accrued liabilities
4,681 
4,708 
Other current liabilities
3,722 
2,173 
Total current liabilities
231,843 
140,553 
Long-term debt
4,562 
87 
Commitments and contingencies (Note 6)
   
   
Partners’ capital:
 
 
General partner
6,159 
6,097 
Total partners’ capital
308,321 
304,854 
Total liabilities and partners’ capital
544,726 
445,494 
Common Units [Member] |
Public [Member]
 
 
Partners’ capital:
 
 
Common units
129,134 
127,531 
Common Units [Member] |
SemGroup [Member]
 
 
Partners’ capital:
 
 
Common units
37,992 
37,739 
Subordinated Units [Member] |
SemGroup [Member]
 
 
Partners’ capital:
 
 
Common units
$ 135,036 
$ 133,487 
Consolidated Balance Sheets (Parenthetical)
Dec. 31, 2012
Dec. 31, 2011
Public [Member]
 
 
Common units, issued
7,000,000 
7,000,000 
Common units, outstanding
7,000,000 
7,000,000 
SemGroup [Member]
 
 
Common units, issued
1,389,709 
1,389,709 
Common units, outstanding
1,389,703 
1,389,709 
Subordinated units, issued
8,389,709 
8,389,709 
Subordinated units, outstanding
8,389,709 
8,389,709 
Consolidated Statements of Income (USD $)
Share data in Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2012
Common Units [Member]
Dec. 31, 2011
Common Units [Member]
Dec. 31, 2012
Subordinated Units [Member]
Dec. 31, 2011
Subordinated Units [Member]
Dec. 31, 2012
Subsequent To Initial Public Offering [Member]
Dec. 31, 2011
Subsequent To Initial Public Offering [Member]
Dec. 31, 2010
Subsequent To Initial Public Offering [Member]
Revenues, including revenues from affiliates (Note 11):
 
 
 
 
 
 
 
 
 
 
Product
$ 576,158,000 
$ 395,301,000 
$ 158,308,000 
 
 
 
 
 
 
 
Service
44,318,000 
35,801,000 
49,408,000 
 
 
 
 
 
 
 
Other
(59,000)
219,000 
365,000 
 
 
 
 
 
 
 
Total revenues
620,417,000 
431,321,000 
208,081,000 
 
 
 
 
 
 
 
Expenses, including expenses from affiliates (Note 11):
 
 
 
 
 
 
 
 
 
 
Costs of products sold, exclusive of depreciation and amortization
546,966,000 
366,265,000 
146,614,000 
 
 
 
 
 
 
 
Operating
23,302,000 
18,973,000 
20,398,000 
 
 
 
 
 
 
 
General and administrative
12,083,000 
9,843,000 
7,660,000 
 
 
 
 
 
 
 
Depreciation and amortization
12,131,000 
11,379,000 
10,435,000 
 
 
 
 
 
 
 
Total expenses
594,482,000 
406,460,000 
185,107,000 
 
 
 
 
 
 
 
Operating income
25,935,000 
24,861,000 
22,974,000 
 
 
 
 
 
 
 
Other expenses (income):
 
 
 
 
 
 
 
 
 
 
Interest expense
1,912,000 
1,823,000 
482,000 
 
 
 
 
 
 
 
Other expense (income), net
69,000 
(197,000)
(985,000)
 
 
 
 
 
 
 
Total other expenses (income), net
1,981,000 
1,626,000 
(503,000)
 
 
 
 
 
 
 
Net income
23,954,000 
23,235,000 
23,477,000 
 
 
 
 
23,954,000 
970,000 
General partner's interest in net income
 
 
 
$ 11,737,500 
$ 475,500 
$ 11,737,500 
$ 475,500 
 
 
 
Consolidated Statements of Changes in Partners' Capital (Deficit) (USD $)
In Thousands, unless otherwise specified
Total
Prior To Contribution of Assets [Member]
Prior To Initial Public Offering [Member]
Common Units Public [Member]
Common Units Public [Member]
Prior To Contribution of Assets [Member]
Common Units Public [Member]
Prior To Initial Public Offering [Member]
Common Units Public [Member]
Common Units SemGroup [Member]
Common Units SemGroup [Member]
Prior To Contribution of Assets [Member]
Common Units SemGroup [Member]
Prior To Initial Public Offering [Member]
Subordinated Units [Member]
Subordinated Units [Member]
Prior To Contribution of Assets [Member]
Subordinated Units [Member]
Prior To Initial Public Offering [Member]
Subordinated Units [Member]
General Partner Interest [Member]
General Partner Interest [Member]
Prior To Contribution of Assets [Member]
General Partner Interest [Member]
Prior To Initial Public Offering [Member]
General Partner Interest [Member]
General Partner [Member]
Predecessor Net Partners' Capital [Member]
Predecessor Net Partners' Capital [Member]
Prior To Contribution of Assets [Member]
Predecessor Net Partners' Capital [Member]
Prior To Initial Public Offering [Member]
Beginning Balance at Dec. 31, 2009
$ 280,214 
 
 
$ 0 
 
 
 
$ 0 
 
 
$ 0 
 
 
 
$ 0 
 
 
 
$ 280,214 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
23,477 
 
23,477 
 
 
 
 
 
 
 
 
 
 
 
23,477 
 
 
Net distributions to SemGroup
(13,703)
 
 
 
 
 
 
 
 
 
 
 
 
 
(13,703)
 
 
Non-cash equity compensation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance at Dec. 31, 2010
289,988 
 
 
 
 
 
 
 
 
 
 
 
 
 
289,988 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
21,087 
 
 
 
 
 
 
 
 
 
 
 
 
 
21,087 
 
 
Net distributions to SemGroup
(20,349)
 
 
 
 
 
 
 
 
 
 
 
 
 
(20,349)
 
 
Ending Balance at Nov. 29, 2011
 
290,726 
 
 
 
 
 
 
 
 
 
 
 
 
 
290,726 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
1,178 
 
 
 
 
 
577 
 
 
577 
 
 
 
24 
 
 
 
Contribution of deferred organizational costs
3,065 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,065 
 
 
Net liabilities of predecessor not contributed to Rose Rock Midstream, L.P.
3,073 
 
 
 
 
 
 
 
 
 
 
 
 
 
3,073 
 
 
Contribution of net assets to Rose Rock Midstream, L.P. in exchange for common units, subordinated units, incentive distribution rights, and a 2% general partner interest
 
 
 
 
 
 
 
35,843 
 
 
124,945 
 
 
 
5,876 
 
 
 
(166,664)
Ending Balance at Dec. 14, 2011
 
 
298,042 
 
 
 
 
 
36,420 
 
 
125,522 
 
 
 
5,900 
 
 
 
130,200 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
970 1
 
 
397 
 
 
 
78 
 
 
476 
 
 
 
19 
 
 
 
 
 
Net distributions to SemGroup
(130,200)
 
 
 
 
 
 
 
 
 
 
 
 
 
(130,200)
 
 
Issuance of common units to the public, net of underwriters' discount and fees
127,134 
 
 
127,134 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transfer liability to SemGroup
8,908 
 
 
 
 
 
1,241 
 
 
7,489 
 
 
 
178 
 
 
 
 
 
Ending Balance at Dec. 31, 2011
304,854 
 
 
127,531 
 
 
 
37,739 
 
 
133,487 
 
 
 
6,097 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity [Roll Forward]
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
23,954 
 
9,797 
 
 
 
1,940 
 
 
 
 
 
11,738 
 
 
 
479 
 
 
Distributions
(20,795)
 
 
 
 
 
(8,502)
(1,687)
 
 
 
 
 
(10,189)
 
 
 
(417)
 
 
Non-cash equity compensation
308 
 
 
 
 
 
308 
 
 
 
 
 
 
 
 
 
 
Ending Balance at Dec. 31, 2012
$ 308,321 
 
 
$ 129,134 
 
 
 
$ 37,992 
 
 
$ 135,036 
 
 
 
$ 6,159 
 
 
 
$ 0 
 
 
Consolidated Statements of Changes in Partners' Capital (Deficit) (Parenthetical)
12 Months Ended
Dec. 31, 2012
Partners' interest
2.00% 
General Partner [Member]
 
Partners' interest
2.00% 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Cash flows from operating activities:
 
 
 
Net income
$ 23,954 
$ 23,235 
$ 23,477 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,131 
11,379 
10,435 
(Gain) loss on disposal of long-lived assets, net
(1)
64 
67 
Amortization of debt issuance costs
359 
28 
Provision for (recovery of) uncollectible accounts receivable
(916)
3,340 
Non-cash equity compensation
308 
Net unrealized (gain) loss related to derivative instruments
1,196 
(787)
763 
Changes in assets and liabilities:
 
 
 
Decrease (increase) in restricted cash
16,681 
Decrease (increase) in accounts receivable
(91,207)
(57,352)
(69,904)
Decrease (increase) in receivable from affiliates
2,153 
(2,130)
(80)
Decrease (increase) in inventories
(3,251)
44 
(3,210)
Decrease (increase) in margin deposits
(1,254)
1,410 
(2,006)
Decrease (increase) in other current assets
(453)
208 
3,801 
Decrease (increase) in other assets
(20)
1,270 
121 
Increase (decrease) in accounts payable and accrued liabilities
96,524 
66,643 
48,005 
Increase (decrease) in payable to affiliates
(5,342)
7,989 
Net cash provided by operating activities
35,097 
51,085 
31,492 
Net Cash Provided by (Used in) Investing Activities [Abstract]
 
 
 
Capital expenditures
(28,370)
(31,635)
(16,732)
Proceeds from sale of long-lived assets
244 
Net cash used in investing activities
(28,126)
(31,631)
(16,723)
Cash flows from financing activities:
 
 
 
Net proceeds from initial public offering
127,134 
Change in book overdrafts
(425)
Debt issuance costs
(252)
(1,666)
Borrowings on debt and other obligations
91,000 
Principal payments on debt and other obligations
(86,525)
(13)
(338)
Net distributions to partners
(20,795)
(135,503)
(13,703)
Net cash used in financing activities
(16,572)
(10,048)
(14,466)
Net increase (decrease) in cash and cash equivalents
(9,601)
9,406 
303 
Cash and cash equivalents at beginning of period
9,709 
303 
Cash and cash equivalents at end of period
$ 108 
$ 9,709 
$ 303 
Overview
OVERVIEW
Rose Rock Midstream, L.P. is a Delaware limited partnership. Its operations include the following:
a storage terminal in Cushing, Oklahoma with 7.0 million barrels of crude oil storage capacity;
a 640-mile crude oil gathering and transportation pipeline system with over 660,000 barrels of associated storage capacity in Kansas and northern Oklahoma that is connected to several third-party pipelines and refineries and our storage terminal in Cushing;
a crude oil gathering, storage, transportation and marketing business in the Bakken Shale area in western North Dakota and eastern Montana; and
a modern, sixteen-lane crude oil truck unloading facility with 230,000 barrels of associated storage capacity in Platteville, Colorado, which connects to the origination point of the White Cliffs Pipeline, a 527-mile crude oil pipeline running from Platteville, Colorado in the Denver-Julesburg Basin to Cushing, Oklahoma.
The general partner of Rose Rock Midstream, L.P. is Rose Rock Midstream GP, LLC, which is a wholly-owned subsidiary of SemGroup Corporation. SemGroup Corporation is a Delaware corporation headquartered in Tulsa, Oklahoma that provides diversified midstream services to the energy industry. SemGroup Corporation is the successor entity of SemGroup, L.P., which was an Oklahoma limited partnership.
Rose Rock Midstream, L.P. was formed in August 2011. On November 29, 2011, SemGroup Corporation contributed a wholly-owned subsidiary, SemCrude, L.P. ("SemCrude"), to Rose Rock Midstream, L.P., in return for limited partner interests, general partner interests, and certain incentive distribution rights in Rose Rock Midstream, L.P. On December 14, 2011, Rose Rock Midstream, L.P. completed an initial public offering ("IPO"), in which it sold 7,000,000 common units representing limited partner interests.
Basis of presentation
These consolidated financial statements of Rose Rock Midstream, L.P. include the activity of its predecessor prior to November 29, 2011. The predecessor included SemCrude, L.P. (exclusive of SemCrude’s ownership interests in SemCrude Pipeline, L.L.C., which holds a 51% ownership interest in White Cliffs Pipeline, L.L.C. ("White Cliffs")), and Eaglwing, L.P. (“Eaglwing”), which is also a wholly-owned subsidiary of SemGroup Corporation. Although Eaglwing is not currently conducting any revenue-generating operations and was not contributed to Rose Rock Midstream, L.P., it was included in the financial statements of the predecessor because it previously conducted operations that were similar to those of SemCrude. Eaglwing did not have a significant impact on these financial statements during the periods presented. Subsequent to November 29, 2011, these consolidated financial statements include the accounts of Rose Rock Midstream, L.P. and its controlled subsidiaries, which include SemCrude, L.P.
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. All significant transactions between Rose Rock Midstream, L.P. and its consolidated subsidiaries have been eliminated. All significant transactions between SemCrude and Eaglwing have been eliminated.
The terms “we”, “our”, “us”, “Rose Rock”, the “Partnership” and similar language used in these notes to the consolidated financial statements refer to Rose Rock Midstream, L.P, its subsidiaries, and its predecessor. The term “SemGroup” refers to SemGroup Corporation, SemGroup, L.P., and their other controlled subsidiaries, including Rose Rock Midstream GP, LLC.
Ownership
Our partnership interests include the following at December 31, 2012:
8,389,709 common units representing limited partner interests (of which 1,389,709 units are held by SemGroup)
8,389,709 subordinated units representing limited partner interests (all of which are held by SemGroup); and
a 2% general partner interest (which is held by SemGroup).
On December 14, 2011, we sold 7,000,000 common units in an initial public offering. We received net proceeds of $127.1 million, which we distributed to SemGroup (related to assets contributed at formation of Rose Rock).
See Note 13 for details related to the issuance of units in 2013.
OVERVIEW
Rose Rock Midstream, L.P. is a Delaware limited partnership. Its operations include the following:
a storage terminal in Cushing, Oklahoma with 7.0 million barrels of crude oil storage capacity;
a 640-mile crude oil gathering and transportation pipeline system with over 660,000 barrels of associated storage capacity in Kansas and northern Oklahoma that is connected to several third-party pipelines and refineries and our storage terminal in Cushing;
a crude oil gathering, storage, transportation and marketing business in the Bakken Shale area in western North Dakota and eastern Montana; and
a modern, sixteen-lane crude oil truck unloading facility with 230,000 barrels of associated storage capacity in Platteville, Colorado, which connects to the origination point of the White Cliffs Pipeline, a 527-mile crude oil pipeline running from Platteville, Colorado in the Denver-Julesburg Basin to Cushing, Oklahoma.
The general partner of Rose Rock Midstream, L.P. is Rose Rock Midstream GP, LLC, which is a wholly-owned subsidiary of SemGroup Corporation. SemGroup Corporation is a Delaware corporation headquartered in Tulsa, Oklahoma that provides diversified midstream services to the energy industry. SemGroup Corporation is the successor entity of SemGroup, L.P., which was an Oklahoma limited partnership.
Rose Rock Midstream, L.P. was formed in August 2011. On November 29, 2011, SemGroup Corporation contributed a wholly-owned subsidiary, SemCrude, L.P. ("SemCrude"), to Rose Rock Midstream, L.P., in return for limited partner interests, general partner interests, and certain incentive distribution rights in Rose Rock Midstream, L.P. On December 14, 2011, Rose Rock Midstream, L.P. completed an initial public offering ("IPO"), in which it sold 7,000,000 common units representing limited partner interests.
Summary of Significant Accounting Policies
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Our 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 used in impairment tests; (4) fair values of derivative instruments; and (5) accrual and disclosure of contingent losses. Although management believes these estimates are reasonable, actual results could differ materially from these estimates.
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. Our assessment of the allowance for doubtful accounts is based on several factors, including the overall creditworthiness of our customers, existing economic conditions, and the amount and age of past due accounts. We enter 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.
The allowance for doubtful accounts was $0 and $0.2 million at December 31, 2012 and 2011, respectively. At December 31, 2010, our predecessor had a receivable from a customer in the amount of $3.3 million, on which a full valuation allowance had been recorded. During 2011, our predecessor collected $1.1 million of this receivable, which was recorded as a reduction to operating expense in the consolidated statement of income. SemGroup did not contribute the receivable to Rose Rock, so we are not entitled to the benefit of any additional collections SemGroup may receive on this receivable.
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.
We enter into exchanges with third parties whereby we acquire products that differ in location, grade, or delivery date from products we have available for sale. These exchanges are valued at cost, and although a transportation, location or product differential may be recorded, generally no gain or loss is recognized.
PROPERTY, PLANT AND EQUIPMENT – Property, plant and equipment is recorded at cost. We capitalize costs that extend or increase the future economic benefits of property, plant and equipment, and expense 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 consolidated statements of income.
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
Office and other property and equipment
3 – 7 years
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 us in facilities operated by us is recorded at historical cost, is included in property, plant and equipment in the consolidated balance sheets, and is not depreciated. We also own linefill in third party facilities, which is included in inventory on the consolidated balance sheets.
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.
COMMODITY DERIVATIVE INSTRUMENTS – We generally record the fair value of derivative instruments on the consolidated balance sheets and the change in fair value as an increase or decrease to product revenue. As shown in Note 4, the fair value of derivatives at December 31, 2012 and 2011 are recorded to other current assets or other current liabilities on the consolidated balance sheets. Related margin deposits are recorded to other current assets or other current liabilities on the consolidated balance sheets. Margin deposits have not generally been netted against derivative assets or liabilities at December 31, 2012 and 2011.
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, we estimate 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 our creditworthiness.
We have 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 the product is delivered.
INTERCOMPANY ACCOUNTS – Prior to our initial public offering, we participated in SemGroup’s cash management program. Under this program, cash we received from customers was transferred to SemGroup on a regular basis and when we remitted payments to suppliers, SemGroup transferred cash to us to cover the payments. In addition, SemGroup incurred certain expenses on our behalf that are reported within our consolidated statements of income.
Prior to our initial public offering, we recorded transactions with SemGroup and its other controlled subsidiaries to intercompany accounts. When our intercompany accounts were in a net receivable position, we reported the balance as a reduction to partners’ capital on our consolidated balance sheet. In our consolidated statements of cash flows, we have reported the net change in the intercompany accounts as a financing cash flow within “net distributions to partners”. We have reported the net change in partners’ capital associated with these transactions with SemGroup as “net distributions to SemGroup” in our consolidated statements of changes in partners’ capital.
CONTINGENT LOSSES – We record 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. We record attorneys’ fees incurred in connection with a contingent loss at the time the fees are incurred. We do 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. We record 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 – Under our current operations, product revenues relate primarily to our marketing business in the Bakken Shale area and to certain fixed-margin transactions related to our pipeline system in Kansas and Oklahoma. The fixed-margin transactions are structured such that we purchase crude oil from a producer or supplier at a designated receipt point at an index price less a transportation fee, and simultaneously sell an identical volume of crude oil at a designated delivery point to the same party at the same index price, thereby locking a fixed margin that is, in effect, economically equivalent to a transportation fee. Sales of product are recognized at the time title to the product transfers to the purchaser, which typically occurs upon receipt of the product by the purchaser. Any transportation costs we incur 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). As described in Note 4, product revenues include realized and unrealized gains and losses on commodity derivatives.
Under our current operations, fixed-fee service revenues relate primarily to our storage terminal in Cushing, our pipeline system in Kansas and Oklahoma (excluding transactions whereby we take title to the product while it is in our pipeline system, as described above), and our crude oil truck unloading facility in Platteville, Colorado. Service revenues are recognized at the time the service is performed.
PURCHASES AND SALES OF INVENTORY WITH THE SAME COUNTERPARTY – We routinely enter into transactions to purchase inventory from, and sell inventory to, the same counterparty. Such transactions that are entered into in contemplation of one another are recorded on a net basis.
PREDECESSOR INTEREST EXPENSE – The interest expense reported in our consolidated statements of income prior to our initial public offering consisted of letter of credit fees. SemGroup has been a borrower on several corporate credit agreements (and our assets previously served as collateral under these agreements), but SemGroup did not allocate this debt to its subsidiaries. SemGroup did not charge us interest on the balances in our intercompany accounts.
INCOME TAXES – We are a partnership for income tax purposes and therefore are not subject to federal or state income taxes. The tax on our net income is borne by the individual partners through the allocation of taxable income. Net income for financial statement purposes may differ significantly from taxable income allocated to our partners because of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements of our partnership agreement. The aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each partner’s tax attributes is not available to us.
RECLASSIFICATIONS – Certain reclassifications have been made to conform prior year balances to the current year presentation.
OPERATING SEGMENT – Our operations are similar in geography, nature of the services we provide, and type of customers we serve. We are managed by SemGroup as one operating segment.
COMPREHENSIVE INCOME – Comprehensive income is defined as a change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Rose Rock has no items of comprehensive income, other than net income, in any period presented. Therefore, net income and comprehensive income are the same.
Property, Plant and Equipment
PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands): 
 
December 31,
2012
 
December 31,
2011
Land
$
15,834

 
$
15,759

Pipelines and related facilities
159,736

 
156,263

Storage and terminal facilities
87,430

 
77,036

Linefill
39,333

 
12,126

Office and other property and equipment
3,834

 
2,716

Construction-in-progress
19,943

 
34,957

Property, plant and equipment, gross
326,110

 
298,857

Accumulated depreciation
(34,580
)
 
(22,611
)
Property, plant and equipment, net
$
291,530

 
$
276,246


 
We recorded depreciation expense of $12.1 million, $11.4 million and $10.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.
Financial Instruments
FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK
Commodity derivative contracts
Our results of operations and cash flows are impacted by changes in market prices for petroleum products. This exposure to commodity price risk is managed, in part, by entering into various commodity derivatives.
We seek to manage the price risk associated with our marketing operations by limiting our net open positions through (i) the concurrent purchase and sale of like quantities of crude oil to create back-to-back transactions that are intended to lock in positive margins based on the timing, location or quality of the crude oil purchased and delivered or (ii) derivative contracts. Our storage and transportation assets also can be used to mitigate location and time basis risk. All marketing activities are subject to our Comprehensive Risk Management Policy, which establishes limits in order to manage risk and mitigate financial exposure.
Our commodity derivatives were comprised of crude oil and natural gas liquids forward contracts and futures contracts. These are defined as follows:
Forward contracts – Over the counter ("OTC") 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.
We record commodity derivative assets and liabilities at fair value at each balance sheet date with the exception of commitments which have been designated as normal purchases and sales. The table below summarizes the balances of these assets and liabilities at December 31, 2012 and 2011 (in thousands):
 
 
December 31, 2012
 
December 31, 2011
 
Level 1
 
Netting*
 
Total
 
Level 1
 
Netting*
 
Total
Assets
$
22

 
$
(22
)
 
$

 
$
393

 
$
(231
)
 
$
162

Liabilities
1,056

 
(22
)
 
1,034

 
231

 
(231
)
 

Net assets (liabilities) at fair value
$
(1,034
)
 
$

 
$
(1,034
)
 
$
162

 
$

 
$
162

*
Relates primarily to exchange traded futures. Gain and loss positions on multiple contracts are settled net on a daily basis with the exchange.

“Level 1” measurements use as inputs 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 OTC traded physical fixed priced purchases and sales forward contracts.
 
“Level 3” measurements use as inputs information from a pricing service and internal valuation models incorporating observable and unobservable market data. These include physical fixed price purchases and sales forward contracts with an affiliate for which there is not a highly liquid OTC market, and therefore are not included in Level 1 or Level 2 above.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Our 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. At December 31, 2012 all of our physical fixed price forward purchases and sales contracts were being accounted for as normal purchases and normal sales.
The following table reconciles changes in the fair value of commodity derivatives classified as Level 3 in the fair value hierarchy (in thousands):
 
  
Year Ended December 31, 2012
 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
Beginning balance
$

 
$
1,619

 
$
218

Total gain or loss (realized and unrealized) included in product revenues

 

 
919

Settlements

 
(1,619
)
 
482

Ending balance
$

 
$

 
$
1,619

Amount of total gain or loss included in earnings for the period attributable to the change in unrealized gain or loss relating to assets and liabilities still held at the reporting date
$

 
$

 
$
1,619


The following table sets forth the notional quantities for derivative instruments entered into during the periods indicated (in thousands of barrels):
  
Year Ended December 31, 2012
 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
Sales
1,743

 
6,309

 
6,313

Purchases
1,636

 
6,457

 
6,168


We have not designated any of our commodity derivative instruments as accounting hedges. We record the fair value of the derivative instruments on our consolidated balance sheets in other current assets and other current liabilities. The fair value of our commodity derivative assets and liabilities recorded to other current assets and other current liabilities was as follows (in thousands): 
December 31, 2012
 
December 31, 2011
Assets
 
Liabilities
 
Assets
 
Liabilities
$

 
$
1,034

 
$
162

 
$


Realized and unrealized gains (losses) from our commodity derivatives were recorded to product revenue in the following amounts (in thousands):
 
Year Ended
 
Year Ended
 
Year Ended
December 31, 2012
 
December 31, 2011
 
December 31, 2010
$
149

 
$
(386
)
 
$
(1,929
)

Concentrations of risk
During the year ended December 31, 2012, we generated approximately $240 million of revenue from three third party customers, which represented approximately 39% of our consolidated revenue. We purchased approximately $293 million of product from four third party suppliers, which represented approximately 46% of our costs of products sold. At December 31, 2012, three third party customers accounted for 54% of our consolidated accounts receivable.
During the year ended December 31, 2011, we generated approximately $334 million of revenue from five third party customers, which represented approximately 78% of our consolidated revenue. We purchased approximately $35 million of product from one third party supplier, which represented approximately 10% of our costs of products sold. At December 31, 2011, four third party customers accounted for 62% of our consolidated accounts receivable.
During the year ended December 31, 2010, we generated approximately $88 million of revenue from a third party, which represented approximately 42% of our consolidated revenue. We purchased approximately $18 million of product from one third party supplier, which represented approximately 12% of our costs of products sold. At December 31, 2010, two third party customers accounted for 41% of our consolidated accounts receivable.
As described in Note 11, we also generated revenues and expenses during the periods from 2010 through 2012 from other subsidiaries of SemGroup.
Long-Term Debt
LONG TERM DEBT
LONG-TERM DEBT
On November 10, 2011, we entered into a five-year senior secured revolving credit facility agreement. The credit facility under this agreement became effective upon completion of our initial public offering on December 14, 2011.
 
The credit agreement initially provided for a revolving credit facility of $150 million. In September 2012, we amended the credit agreement such that the revolving credit facility may under certain conditions be increased by up to an additional $400 million. The previous agreement provided for an increase of up to $200 million. The credit facility includes a $75 million sub-limit for the issuance of letters of credit. All amounts outstanding under the agreement will be due and payable on December 14, 2016.
At our option, amounts borrowed under the credit agreement will bear interest at either the Eurodollar rate or an alternate base rate (“ABR”), plus, in each case, an applicable margin. The applicable margin will range from 2.25% to 3.25% in the case of a Eurodollar rate loan, and from 1.25% to 2.25% in the case of an ABR loan, in each case, based on a leverage ratio specified in the credit agreement. At December 31, 2012, we had outstanding borrowings of $4.5 million which incurred interest at the ABR plus an applicable margin. The interest rate at December 31, 2012 was 4.50% .
Fees are charged on any outstanding letters of credit at a rate that ranges from 2.25% to 3.25%, depending on a leverage ratio. At December 31, 2012, there were $41.1 million in outstanding letters of credit, and the rate in effect was 2.25%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit.
A commitment fee that ranges from 0.375% to 0.50%, depending on a leverage ratio, is charged on any unused capacity of the revolving credit facility. In addition, we are charged an annual administrative fee of $0.1 million. The credit facility also allows for the use of Secured Bilateral Letters of Credit, which are issued external to the credit facility and do not reduce revolver availability. At December 31, 2012, we had $2.7 million of Bilateral Letters of Credit outstanding and the interest rate in effect was 1.75%.
We paid $0.2 million and $1.7 million of fees to lenders and advisers during the years ended December 31, 2012 and 2011, respectively, which was recorded in other noncurrent assets and is being amortized over the life of the agreement. We recorded $0.1 million of interest expense during December 2011 related to this facility, including amortization of debt issuance costs. We recorded $1.9 million of interest expense for year ended December 31, 2012 related to this facility, including amortization of debt issuance costs.
The credit agreement includes customary representations and warranties and affirmative and negative covenants. The covenants in the agreement include limitations on creation of new indebtedness and liens, entry into sale and lease-back transactions, investments, and fundamental changes including mergers and consolidations, dividends and other distributions, material changes in our business and modifying certain documents. The agreement also requires the maintenance of a specified consolidated leverage ratio and an interest coverage ratio. In addition, the agreement prohibits any commodity transactions that are not permitted by our Comprehensive Risk Management Policy.
The credit agreement includes customary events of default, including events of default relating to non-payment of principal and other amounts owing under the agreement from time to time, including in respect of letter of credit disbursement obligations, inaccuracy of representations and warranties in any material respect when made or when deemed made, violation of covenants, cross payment-defaults of us and our restricted subsidiaries to any material indebtedness, cross acceleration to any material indebtedness, bankruptcy and insolvency events, the occurrence of a change of control, certain unsatisfied judgments, certain ERISA events, certain environmental matters and certain assertions of or actual invalidity of certain loan documents. A default under the credit agreement would permit the participating banks to terminate commitments, require immediate repayment of any outstanding loans with interest and any unpaid accrued fees, and require the cash collateralization of outstanding letter of credit obligations.
 
The credit agreement restricts our ability to make certain types of payments relating to our units, including the declaration or payment of cash distributions; provided that we may make quarterly distributions of available cash so long as no default under the agreement then exists or would result therefrom. The agreement is guaranteed by all of our material subsidiaries and secured by a lien on substantially all of our property and assets, subject to customary exceptions. At December 31, 2012, we were in compliance with the terms of the credit agreement.

Fair value
We estimate that the fair value of our long-term debt was not materially different than the recorded values at December 31, 2012, as our debt relates to recent borrowings on our revolving credit facility, which are based on market rates plus a margin based on a leverage ratio. This is considered Level 3 in the fair value hierarchy.
At December 31, 2012, we had $62 thousand of capital lease obligations reported as long-term debt on the consolidated balance sheet.
On January, 11, 2013, the credit facility capacity was increased to $385 million and we borrowed $133.5 million in connection with the purchase of a one-third interest in SemCrude Pipeline, L.L.C. from SemGroup and to pay transaction related expenses. See Note 13 for additional information.
Commitments and Contingencies
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
Bankruptcy matters
On July 22, 2008 (the “Petition Date”), SemGroup, L.P., SemCrude, and Eaglwing 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”). 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, SemCrude, and Eaglwing emerged from bankruptcy protection on November 30, 2009 (the “Emergence Date”).
(a)
Confirmation order appeals
Luke Oil appeal. On October 21, 2009, Luke Oil Company, C&S Oil/Cross Properties, Inc., Wayne Thomas Oil and Gas and William R. Earnhardt Company (collectively, “Luke Oil”) filed an objection to the Plan of Reorganization “to the extent that the Plan of Reorganization may alter, impair, or otherwise adversely affect Luke Oil’s legal rights or other interests.” On October 28, 2009, the bankruptcy court overruled the Luke Oil objection and entered the confirmation order. On November 6, 2009, Luke Oil filed a notice of appeal. On December 23, 2009, Luke Oil’s appeal was docketed in the United States District Court for the District of Delaware. SemGroup filed a motion to dismiss the appeal as equitably moot. On May 21, 2012, the District Court entered an order granting our motion to dismiss Luke Oil’s appeal of the confirmation order. On June 18, 2012, Luke Oil filed its Notice of Appeal, notifying the District Court and the parties to the lawsuit that it was appealing the decision of the District Court to the United States Court of Appeals for the Third Circuit. While SemGroup believes that this action is without merit and is vigorously defending this matter on appeal, an adverse ruling on this account could have a material adverse impact on us. We are indemnified by SemGroup against any loss in this matter pursuant to the terms of the omnibus agreement.

(b)
Claims reconciliation process
A large number of parties have made claims against us for obligations alleged to have been incurred prior to the Petition Date. On September 15, 2010, the bankruptcy court entered an order estimating the contingent, unliquidated and disputed claims and authorizing distributions to holders of allowed claims. Pursuant to that order SemGroup has begun making distributions to the claimants. SemGroup continues to attempt to settle unresolved claims.
 
Pursuant to the Plan of Reorganization, SemGroup committed to settle all pre-petition claims by paying a specified amount of cash, issuing a specified number of warrants, and issuing a specified number of shares of SemGroup Corporation common stock. The resolution of most of the outstanding claims will not impact the total amount of consideration SemGroup will give to the claimants; instead, the resolution of the claims will impact the relative share of the total consideration that each claimant receives.
However, there is a specified group of claims for which SemGroup could be required to pay additional funds to settle. Pursuant to the Plan of Reorganization, SemGroup set aside a specified amount of restricted cash at the Emergence Date, which SemGroup expected to be sufficient to settle this group of claims. Since the Emergence Date, SemGroup has made significant progress in resolving these claims, and continues to believe that the cash set aside at the Emergence Date will be sufficient to pay these claims. However, SemGroup has not yet reached a resolution of all of these claims, and if the total settlement amount of these claims exceeds the specified amount, SemGroup will be required to pay additional funds to these claimants, and we could be required to share in this expense. We are indemnified by SemGroup against any loss in this matter pursuant to the terms of the omnibus agreement.

Blueknight claim
Blueknight Energy Partners, L.P. (“Blueknight”), which was formerly a subsidiary of SemGroup, together with other entities related to Blueknight, entered into a Shared Services Agreement on April 7, 2009, with SemCrude and SemManagement, L.L.C. (which are currently subsidiaries of SemGroup). The services provided by SemCrude to Blueknight under this agreement included the coordination of movement of crude oil belonging to Blueknight’s customers and the operation of Blueknight’s Oklahoma pipeline system and its Cushing, Oklahoma terminal. Under the subsequent amendments to the agreements beginning in May 2010, certain of these services were phased out and Blueknight began to manage the movement of its crude oil and the operation of its Cushing terminal.
In a letter dated August 18, 2011, Blueknight claimed that SemCrude owes Blueknight approximately 141,000 barrels of crude oil. SemGroup responded to Blueknight’s letter denying their charges and requesting documentation from Blueknight of its claim. On February 14, 2012, after months of interaction between the parties through which SemGroup requested Blueknight to substantiate its claim, Blueknight filed suit against SemGroup in the District Court of Oklahoma County, Oklahoma. On May 1, 2012, the court approved SemGroup’s motion to transfer this case to Tulsa County, Oklahoma. On July 2, 2012, the Tulsa County District Court appointed a Special Master to conduct a review of whether Blueknight is missing 141,000 barrels of crude oil from operations occurring during the months of April through June, 2010. The Special Master will prepare an advisory report to the Court of her findings and conclusions. SemGroup believes this matter is without merit and will vigorously defend their position; however, they cannot predict the outcome. We are indemnified by SemGroup against any loss in this matter pursuant to the terms of the omnibus agreement.
Other matters
We are party to various other claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of our 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 our consolidated 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.
Environmental
We may from time to time experience leaks of petroleum products from our facilities, as a result of which we may incur remediation obligations or property damage claims. In addition, we are subject to numerous environmental regulations. Failure to comply with these regulations could result in the assessment of fines or penalties by regulatory authorities.
The Kansas Department of Health and Environment (“KDHE”) initiated discussions during SemGroup’s bankruptcy proceeding regarding five of our sites in Kansas that KDHE believed, based on their historical use, may have soil or groundwater contamination in excess of state standards. KDHE sought our agreement to undertake assessments of these sites to determine whether they are contaminated. SemGroup entered into a Consent Agreement and Final Order with KDHE to conduct environmental assessments on the sites and to pay KDHE’s costs associated with their oversight of this matter. SemGroup has conducted Phase II investigations at all sites. Three of the five sites have limited amounts of soil contamination that will be excavated and/or remediated on site. Three of the five sites appear to have ground water contamination that may require further delineation and/or on-going monitoring. Work plans have been submitted to, and approved by, the KDHE. SemGroup does not anticipate any penalties or fines for these historical sites. We are indemnified by SemGroup against any loss in this matter pursuant to the terms of the omnibus agreement.
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.
Leases
We have entered into operating lease agreements for office space, office equipment, land, trucks and tank storage. Future minimum payments required under operating leases that have initial or remaining non-cancellable lease terms in excess of one year at December 31, 2012 are as follows (in thousands):
 
For twelve months ending:
 
December 31, 2013
$
567

December 31, 2014
506

December 31, 2015
352

December 31, 2016
267

December 31, 2017
273

Thereafter
418

Total future minimum lease payments
$
2,383

We recorded lease and rental expenses of $1.0 million, $1.0 million and $0.7 million for the years ended December 31, 2012, 2011 and 2010, respectively.
 
Purchase and sale commitments
We routinely enter into agreements to purchase and sell petroleum products at specified future dates. We create a margin for these purchases by entering into various types of physical and financial sales and exchange transactions through which we seek to maintain a position that is substantially balanced between purchases on the one hand and sales and future delivery obligations on the other. We account for derivatives at fair value with the exception of commitments which have been designated as normal purchases and sales for which we do not record assets or liabilities related to these agreements until the product is purchased or sold. At December 31, 2012, such commitments included the following (in thousands):
 
Volume
(barrels)
 
Value
Fixed price purchases
169

 
$
14,630

Fixed price sales
169

 
$
14,927

Floating price purchases
22,339

 
$
2,108,387

Floating price sales
22,079

 
$
2,110,754


Certain of the commitments shown in the table above relate to agreements to purchase product from a counterparty and to sell a similar amount of product (at a different location) to the same counterparty. Many of the commitments shown in the table above are cancellable by either party, as long as notice is given within the time frame specified in the agreement (generally 30 to 120 days).
Capital contribution requirements
See Note 13 for information related to capital funding requirements assumed in 2013.
Employee Benefits and Equity-Based Compensation
EMPLOYEE BENEFITS AND EQUITY-BASED COMPENSATION
EMPLOYEE BENEFITS AND EQUITY-BASED COMPENSATION
We do not directly employ any persons to manage or operate our business, as these functions are performed by employees of SemGroup. At December 31, 2012, SemGroup had approximately 85 employees who were dedicated primarily to the management and operation of our business. None of these employees are represented by labor unions, and none are subject to collective bargaining agreements.
Equity incentive plan
On December 8, 2011, the board of directors of our general partner adopted the Rose Rock Midstream Equity Incentive Plan (the “Incentive Plan”). We have reserved 840,000 limited partner common units for issuance to non-management directors and employees under the Incentive Plan. At December 31, 2012, there are 43,960 unvested restricted unit awards that have been granted pursuant to the Incentive Plan. Generally, the awards vest three years after the date of grant for employees and one year after the date of grant for non-managerial directors, contingent upon the continued service of the recipients and may be subject to accelerated vesting in the event of involuntary terminations. Awards are valued based on the grant date closing price listed on the New York Stock Exchange. Compensation expense is recognized over the vesting period and is discounted for estimated forfeitures.
The holders of these restricted units are entitled to equivalent distributions (“Unvested Unit Distributions” or “UUD’s”) to be received upon vesting of the restricted unit awards. The distributions will be settled in common units based on the market price of our limited partner common units as of the close of business on the vesting date. The UUD’s are subject to the same forfeiture and acceleration conditions as the associated restricted units. At December 31, 2012, the value of the UUD’s was approximately $47 thousand. This is equivalent to approximately 1,480 common units based on the market price at the close of business on December 31, 2012 of our common units of $31.47 per unit. The 2012 activity related to these awards is summarized below:
 
Unvested Units
 
Average Grant Date Fair Value
Outstanding at December 31, 2011
 
$

Awards granted
46,069
 
$
21.97

Awards vested
 
$

Awards forfeited
(2,109)
 
$
20.60

Outstanding at December 31, 2012
43,960
 
$
21.91


The following table summarizes the scheduled vesting of awards outstanding as of December 31, 2012:
Year ended December 31, 2013
9,333

units
Year ended December 31, 2014

units
Year ended December 31, 2015
34,627

units

Approximately 3,700 of these awards vested in January 2013.
The following table summarizes the expense we have recorded and expect to record related to awards that have been granted through December 31, 2012 (in thousands):
Year ended December 31, 2012
$
308

Year ended December 31, 2013 (estimated)
$
404

Year ended December 31, 2014 (estimated)
$
235

Year ended December 31, 2015 (estimated)
$
12


SemGroup stock-based compensation
Certain of SemGroup’s employees who support us participate in SemGroup’s equity-based compensation program. Awards under this program generally represent awards of restricted stock of SemGroup, which are subject to specified vesting periods. SemGroup charged us $0.6 million, $0.5 million and $0.4 million during the years ended December 31, 2012, 2011 and 2010, respectively, related to such equity-based compensation. We estimate that we will record expense of $0.3 million, $0.2 million, and $0.2 million during the years ended December 31, 2013, 2014 and 2015, respectively related to such awards that had been granted as of December 31, 2012.
Certain of SemGroup’s employees who support us were granted retention awards by SemGroup. These awards vested in December 2011 and were paid in SemGroup stock. SemGroup charged us $0.4 million during the year ended December 31, 2011 and $0.3 million during the year ended December 31, 2010 related to these awards.
 
Defined contribution plan
Most of the employees of SemGroup who support us participate in one of SemGroup’s defined contribution plans. SemGroup charged us $0.3 million, $0.3 million and $0.3 million during the years ended December 31, 2012, 2011 and 2010, respectively, for contributions made by SemGroup to this plan.
Allocated employee compensation expenses
As described in Note 11, SemGroup allocated certain corporate general and administrative expenses to us. These allocated expenses included equity-based compensation, retention awards, and defined contribution plan benefits for corporate employees, and such expenses are in addition to the expenses described above for employees who directly support our operations.
Partners' Capital and Distributions
PARTNERS' CAPITAL AND DISTRIBUTIONS
PARTNERS’ CAPITAL AND DISTRIBUTIONS
General partner
SemGroup owns the 2% general partner interest in us, and, through this general partner interest, has the right to manage and operate us. SemGroup may not be removed as general partner except by a vote of the holders of at least 66 2/3% of the outstanding limited partner units voting together as a single class, including any limited partner units owned by our general partner and its affiliates, including SemGroup.
Limited partner interests—common units
Limited partners have the right to vote on certain matters. For example, a unit majority is required to make certain types of amendments to the partnership agreement, to allow the sale of substantially all of our assets, or to dissolve the Partnership. Limited partners also have certain distribution rights, as summarized below.
Limited partner interests – subordinated units
The holders of subordinated limited partner units have similar voting rights to holders of common limited partner units. However, as described below, the distribution rights for holders of subordinated units are different than those of common units. The subordinated units will be converted to common units upon the achievement of certain targets specified in our partnership agreement.
Distribution rights
We intend to pay a minimum quarterly distribution of $0.3625 per unit to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We refer to this cash as “available cash,” and it is defined in our partnership agreement. Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors.
Our partnership agreement requires that we distribute all of our available cash (as defined by the partnership agreement) each quarter in the following manner:
first, 98.0% to the holders of common units and 2.0% to our general partner, until each common unit has received the minimum quarterly distribution of $0.3625, plus any arrearages from prior quarters;
second, 98.0% to the holders of subordinated units and 2.0% to our general partner, until each subordinated unit has received the minimum quarterly distribution of $0.3625; and
third, 98.0% to all common and subordinated unitholders, pro rata, and 2.0% to our general partner, until each unit has received a distribution of $0.416875.
 
If cash distributions to our unitholders exceed $0.416875 per unit in any quarter, our general partner will receive, in addition to distributions on its 2.0% general partner interest, increasing percentages, up to 48.0%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” The following table summarizes the incentive distribution levels: 
 
 
 
Marginal Percentage
Interest in Distributions
 
Total Quarterly Distribution
Per Unit Target Amount
 
Unitholders
 
General
Partner
Interest
 
Incentive
Distribution
Rights
Minimum Quarterly Distribution
 
 
 
 

 
$
0.362500

 
98.0%
 
2.0%
 
%
First Target Distribution
above
 
$
0.362500

 
up to
 
$
0.416875

 
98.0%
 
2.0%
 
%
Second Target Distribution
above
 
$
0.416875

 
up to
 
$
0.453125

 
85.0%
 
2.0%
 
13.0
%
Third Target Distribution
above
 
$
0.453125

 
up to
 
$
0.543750

 
75.0%
 
2.0%
 
23.0
%
Thereafter
 
 
 
 
above
 
$
0.543750

 
50.0%
 
2.0%
 
48.0
%

Distributions paid in 2012 and 2013
The following table shows distributions paid in 2012 and 2013:
Quarter Ended
 
Record Date
 
Payment Date
 
Distribution Per Unit
 
Total
Distributions
(in thousands)
December 31, 2011
*
February 3, 2012
 
February 13, 2012
 
$
0.0670

$
1,147

March 31, 2012
 
May 7, 2012
 
May 15, 2012
 
$
0.3725

  
$
6,377

June 30, 2012
 
August 6, 2012
 
August 14, 2012
 
$
0.3825

 
$
6,550

September 30, 2012
 
November 5, 2012
 
November 14, 2012

$
0.3925

 
$
6,721

December 31, 2012
 
February 4, 2013
 
February 14, 2013

$
0.4025


$
8,331

*Minimum quarterly distribution for quarter ended December 31, 2011 was prorated for the period beginning immediately after the closing of Rose Rock’s IPO, December 14, 2011 through December 31, 2011.
Earnings Per Limited Partner Unit
EARNINGS PER LIMITED PARTNER UNIT
EARNINGS PER LIMITED PARTNER UNIT
Net income is allocated to the general partner and the limited partners in accordance with their respective partnership percentages, after giving effect to any priority income allocations for incentive distributions that are allocated to the general partner.
Basic and diluted earnings per limited partner unit is determined by dividing net income allocated to the limited partners, by the weighted average number of limited partner units for such class outstanding during the period. Diluted earnings per limited partner unit reflects, where applicable, the potential dilution that could occur if securities or other agreements to issue additional units of a limited partner class, such as restricted unit awards, were exercised, settled or converted into such units.
The following tables set forth the computation of basic and diluted earnings per limited partner unit for the year ended December 31, 2012 and the period from December 15, 2011 (the day following the closing of our IPO) through December 31, 2011 (in thousands, except per unit data):
 
 
Year Ended December 31, 2012
Net income
$
23,954

Less: General partner’s incentive distribution earned (1)

Less: General partner’s 2.0% ownership
479

Net income allocated to limited partners
$
23,475

Numerator for basic and diluted earnings per limited partner unit:
 
Allocation of net income among limited partner interests:
 
Net income allocable to common units
$
11,737.5

Net income allocable to subordinated units
11,737.5

Net income allocated to limited partners
$
23,475

Denominator for basic and diluted earnings per limited partner unit:
 
Basic weighted average number of limited partner common units outstanding
8,390

Effect of dilutive securities
16

Diluted weighted average number of limited partner common units outstanding
8,406

Basic and diluted weighted average number of subordinated units outstanding
8,390

Basis and diluted net income per limited partner unit:
 
Common Units
$
1.40

Subordinated Units
$
1.40

(1)
Based on the amount of the distribution declared per common and subordinated unit related to earnings for the year ended December 31, 2012, our general partner was not entitled to receive any incentive distribution for the year.

The table above does not include the impact of common units and Class A units issued in January 2013. See Note 13 for additional information.
 
December 15,  2011
through
December 31, 2011
Net income (1)
$
970

Less: General partner’s incentive distribution earned (2)

Less: General partner’s 2.0% ownership
19

Net income allocated to limited partners
$
951

Numerator for basic and diluted earnings per limited partner unit:
 
Allocation of net income among limited partner interests:
 
Net income allocable to common units
$
475.5

Net income allocable to subordinated units
475.5

Net income allocated to limited partners
$
951

Denominator for basic and diluted earnings per limited partner unit:
 
Basic and diluted weighted average number of limited partner units outstanding:
 
Common units
8,390

Subordinated units
8,390

Basic and diluted net income per limited partner unit:
 
Common units
$
0.06

Subordinated units
$
0.06

(1)
Represents December net income adjusted for the impact of certain accruals and prorated for 17 days, representing the period subsequent to our IPO.
(2)
Based on the amount of the distribution declared per common and subordinated unit related to earnings for the period from December 15, 2011 through December 31, 2011, our general partner was not entitled to receive any incentive distribution for this period.
Supplemental Information - Statements Of Cash Flows
Supplemental Information - Statements of Cash Flows
SUPPLEMENTAL INFORMATION —STATEMENTS OF CASH FLOWS
On December 15, 2011, we transferred a liability to SemGroup after receiving an indemnification against any loss pursuant to the terms of an omnibus agreement between Rose Rock and SemGroup. This liability related to revenue which was deferred pending resolution of a dispute which arose in connection to a sale of crude oil in June 2011. The transfer of this liability to SemGroup is a non-cash transaction which is not reflected in our consolidated statement of cash flows for the year ended December 31, 2011.
We paid cash for interest totaling $1.2 million, $1.8 million and $0.5 million during the years ended December 31, 2012, 2011 and 2010, respectively. We also accrued $75 thousand and $1.0 million for purchases of property, plant and equipment at December 31, 2012 and 2011, respectively .
Related Party Transactions
Related Party Transactions
RELATED PARTY TRANSACTIONS
 
Direct employee expenses
We do not directly employ any persons to manage or operate our business. These functions are performed by employees of SemGroup. SemGroup charged us $12.1 million, $11.3 million and $8.2 million during the years ended December 31, 2012, 2011 and 2010, respectively, for direct employee costs. These expenses were recorded to operating expenses and general and administrative expenses in our consolidated statements of income.
Allocated expenses
SemGroup incurs expenses to provide certain indirect corporate general and administrative services to its subsidiaries. Such expenses include employee compensation costs, professional fees and rental fees for office space, among other expenses. The allocation of expenses is determined based on a transfer pricing analysis which is periodically updated. The most recent update occurred in September 2012.
SemGroup charged us $6.4 million, $4.5 million during the and $4.9 million during the years ended December 31, 2012, 2011 and 2010, respectively, for such allocated costs. These expenses were recorded to general and administrative expenses in our consolidated statements of income.
SemGroup credit facilities
SemGroup was a borrower under various credit agreements during the periods included in these financial statements. Prior to our IPO, SemCrude and Eaglwing, along with other subsidiaries of SemGroup, served as subsidiary guarantors under certain of these agreements. SemGroup did not allocate this debt to its subsidiaries, and our statements of income do not include any allocated interest expense, prior to our initial public offering. SemGroup did not charge us interest expense on intercompany payables.
Prior to our IPO, we utilized letters of credit under SemGroup’s credit facilities. Our statements of income include direct charges from SemGroup for letter of credit usage, which is reported within interest expense.
Subsequent to our IPO, which was completed on December 14, 2011, our assets no longer serve as collateral under SemGroup’s credit agreement.
 
Predecessor cash management
Prior to our IPO, we participated in SemGroup’s cash management program. Under this program, cash we received from customers was transferred to SemGroup on a regular basis and when we remitted payments to suppliers, SemGroup transferred cash to us to cover the payments. As described in Note 2, such cash transfers were recorded to intercompany accounts.
NGL Energy
SemGroup acquired certain ownership interests in NGL Energy Partners LP (“NGL Energy”) and its general partner on November 1, 2011 in exchange for SemStream assets. Subsequent to that date and up through December 31, 2011, we made purchases of condensate from NGL Energy in the amount of $8.9 million. For the year ending December 31, 2012, we made purchases of condensate from NGL Energy in the amount of $42.7 million.
SemStream
Prior to NGL Energy's acquisition of SemStream assets in 2011, we purchased condensate from SemStream, L.P. (“SemStream”), a wholly-owned subsidiary of SemGroup. Certain of these purchases were fixed price forward purchases, which we recorded at fair value at each balance sheet date, with the unrealized gains being recorded to revenue. Our transactions with SemStream consisted of the following (in thousands):
 
 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
Revenues
$
0

 
$
1,401

Purchases
$
46,738

 
$
36,811


SemGas
We purchase condensate from SemGas, L.P. (“SemGas”), which is also a wholly-owned subsidiary of SemGroup. Our purchases from SemGas included the following (in thousands):
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
Purchases
$
10,606

 
$
6,547

 
$
4,427


White Cliffs
SemGroup owned 99% of White Cliffs and controlled it until September 30, 2010. Subsequent to that date, SemGroup owns 51% of White Cliffs and exercises significant influence over it. We provide leased storage and management services to White Cliffs. We generated revenues from White Cliffs of $2.5 million, $2.2 million and $1.9 million for the years ended December 31, 2012, 2011 and 2010, respectively.
 
SemCanada Crude
We conduct a crude oil marketing business in the northern United States. For most of the time during 2010, we conducted this business along with SemCanada Crude Company (“SemCanada Crude”),a wholly-owned subsidiary of SemGroup. SemCanada Crude would purchase crude oil and sell it to us; we would transport the product and sell it back to SemCanada Crude, which would sell the crude to third parties. Sales to and purchases from SemCanada Crude were recorded within product revenues and costs of goods sold in our consolidated statements of income. The amounts were as follows (in thousands):

 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
Sales
$

 
$
21,526

Purchases
$
45

 
$
11,587



During 2010, SemGroup began winding down the operations of SemCanada Crude. Subsequent to 2011, we have continued this marketing operation without the participation of SemCanada Crude.
Legal services
The law firm of Conner & Winters, LLP, of which Mark D. Berman is a partner, performs legal services for us. Mr. Berman is the spouse of Candice L. Cheeseman, General Counsel and Secretary. Mr. Berman does not perform any legal services for us. We paid $0.6 million, $0.3 million and $0.2 million in legal fees and related expenses to this law firm during the years ended December 31, 2012, 2011 and 2010, respectively.
Quarterly Financial Data
Quarterly Financial Data
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized information on the unaudited consolidated net income of Rose Rock Midstream, L.P. for the quarters during the year ended December 31, 2012, is shown below (in thousands) and includes all normal recurring adjustments that management considers necessary for fair presentation:
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 

Total
Total revenues
$
179,715

 
$
157,418

 
$
131,554

 
$
151,730

 
$
620,417

Total expenses
171,405

 
151,815

 
124,635

 
146,627

 
594,482

Operating income
8,310

 
5,603

 
6,919

 
5,103

 
25,935

Other expenses, net
552

 
477

 
450

 
502

 
1,981

Net income
$
7,758

 
$
5,126

 
$
6,469

 
$
4,601

 
$
23,954

Earnings per limited partner unit
 
 
 
 
 
 
 
 
 
Common units (basic and diluted)
$
0.45

 
$
0.30

 
$
0.38

 
$
0.27

 
$
1.40

Subordinated units (basic and diluted)
$
0.45

 
$
0.30

 
$
0.38

 
$
0.27

 
$
1.40

Summarized information on the consolidated net income of Rose Rock Midstream, L.P. for the quarters during the year ended December 31, 2011, is shown below (in thousands) and includes all normal recurring adjustments that management considers necessary for fair presentation:

 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 

Total
Total revenues
$
83,791

 
$
110,714

 
$
104,616

 
$
132,200

 
$
431,321

Total expenses
75,704

 
105,455

 
100,352

 
124,949

 
406,460

Operating income
8,087

 
5,259

 
4,264

 
7,251

 
24,861

Other expenses, net
483

 
286

 
434

 
423

 
1,626

Net income
$
7,604

 
$
4,973

 
$
3,830

 
$
6,828

 
$
23,235


For the quarter ended December 31, 2011, prorated for the period beginning immediately after the closing of Rose Rock's IPO, December 14, 2011 through December 31, 2011, basic and diluted earnings per limited partner unit were $0.06.
Subsequent Events
Subsequent Events
SUBSEQUENT EVENTS
Contribution Agreement
On January 8, 2013, we entered into a Contribution Agreement (the “Contribution Agreement”) with SemGroup and certain of its subsidiaries. Pursuant to the terms of the Contribution Agreement, on January 11, 2013, we acquired a one-third interest in SemCrude Pipeline, L.L.C. (“SCPL”) from SemGroup in exchange for (i) cash of approximately $189.5 million, (ii) the issuance of 1.5 million common units, (iii) the issuance of 1.25 million Class A units and (iv) an increase of the capital account of our general partner and a related issuance of general partner interest, to allow our general partner to maintain its two percent general partner interest in us. The Class A units are not entitled to receive any distributions of available cash (other than upon liquidation) prior to the first day of the month immediately following the first month for which the average daily throughput volumes on the White Cliffs Pipeline for such month are 125,000 barrels per day or greater. Upon such date, the Class A units will automatically convert into common units. SCPL owns a 51 percent membership interest in White Cliffs, which owns the 527-mile White Cliffs Pipeline system that transports crude oil from Platteville, Colorado in the Denver-Julesburg Basin to Cushing, Oklahoma.
The cash consideration was funded through a borrowing under our credit facility of approximately $130.3 million and the sale of 2.0 million common units through a private placement, as described below. The 1.5 million common units were valued at $29.63 per unit, or $44.4 million, based on the sales price to third-parties in the private placement. The Class A Units were valued at $29.63 per unit discounted for the expected forbearance of distributions, or $30.5 million. The contribution to the general partner's capital account was made in the amount of $2.7 million. Subsequent to the transaction, SemGroup holds the 2% general partner interest and a 58.2% limited partnership interest in Rose Rock. We incurred approximately $3.2 million of expense, of which approximately $1.2 million of equity issuance costs were offset against proceeds, $1.5 million were related to the borrowing and were deferred, and $0.5 million were expensed.
We own a one-third interest in SCPL, which is effectively a 17% interest in White Cliffs. We will account for our ownership in SCPL as an equity method investment. We will be required to fund one-third of SCPL's capital contribution requirements for White Cliffs. This amount is expected to be $40 million in 2013 and $9.8 million in 2014, related to an expansion project to add a 12" line from Platteville, Colorado to Cushing, Oklahoma. As the transaction was between entities under common control, we will record the investment in SCPL based on SemGroup's historical cost.
Common Unit Purchase Agreement
On January 8, 2013, we entered into a Common Unit Purchase Agreement with certain purchasers identified therein (the “Purchasers”), pursuant to which, on January 11, 2013, 2.0 million common units were issued and sold to the Purchasers in a private placement at a price of $29.63 per common unit for aggregate consideration of approximately $59.3 million (the “Private Placement”). The Partnership used the net proceeds from the Private Placement to fund a portion of the purchase of a one-third interest in SCPL.
Registration Rights Agreement
In connection with the closing of the Private Placement, on January 11, 2013, we entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Purchasers. Pursuant to the terms of the Registration Rights Agreement, within 30 days following the closing of the Private Placement, we are required to prepare and file a registration statement (the “Registration Statement”) to permit the public resale of the common units sold to the Purchasers in the Private Placement, as well as any common units issued in lieu of cash as liquidated damages under the Registration Rights Agreement, and to use our commercially reasonable efforts to cause the Registration Statement to become effective as soon as practicable thereafter.
If the Registration Statement is not declared effective within 90 days after the closing of the Private Placement, then we will be liable to the Purchasers for liquidated damages in accordance with a formula, and subject to the limitations, set forth in the Registration Rights Agreement. The liquidated damages are payable in cash or, if payment in cash would cause a breach under our credit agreement or any other debt instrument filed by Rose Rock as an exhibit to a report filed with the Securities and Exchange Commission ("SEC"), common units. In addition, the Registration Rights Agreement grants the Purchasers piggyback registration rights under certain circumstances. These registration rights are transferable to affiliates of the Purchasers and, in certain circumstances, to third parties.
On February 5, 2013, we filed the Registration Statement with the SEC. The Registration Statement was declared effective by the SEC at 9:00 a.m. (Washington, D.C. time) on February 13, 2013.
Summary of Significant Accounting Policies (Policies)
Basis of presentation
These consolidated financial statements of Rose Rock Midstream, L.P. include the activity of its predecessor prior to November 29, 2011. The predecessor included SemCrude, L.P. (exclusive of SemCrude’s ownership interests in SemCrude Pipeline, L.L.C., which holds a 51% ownership interest in White Cliffs Pipeline, L.L.C. ("White Cliffs")), and Eaglwing, L.P. (“Eaglwing”), which is also a wholly-owned subsidiary of SemGroup Corporation. Although Eaglwing is not currently conducting any revenue-generating operations and was not contributed to Rose Rock Midstream, L.P., it was included in the financial statements of the predecessor because it previously conducted operations that were similar to those of SemCrude. Eaglwing did not have a significant impact on these financial statements during the periods presented. Subsequent to November 29, 2011, these consolidated financial statements include the accounts of Rose Rock Midstream, L.P. and its controlled subsidiaries, which include SemCrude, L.P.
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. All significant transactions between Rose Rock Midstream, L.P. and its consolidated subsidiaries have been eliminated. All significant transactions between SemCrude and Eaglwing have been eliminated.
The terms “we”, “our”, “us”, “Rose Rock”, the “Partnership” and similar language used in these notes to the consolidated financial statements refer to Rose Rock Midstream, L.P, its subsidiaries, and its predecessor. The term “SemGroup” refers to SemGroup Corporation, SemGroup, L.P., and their other controlled subsidiaries, including Rose Rock Midstream GP, LLC.
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. Our 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 used in impairment tests; (4) fair values of derivative instruments; and (5) accrual and disclosure of contingent losses. Although management believes these estimates are reasonable, actual results could differ materially from these estimates.
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. Our assessment of the allowance for doubtful accounts is based on several factors, including the overall creditworthiness of our customers, existing economic conditions, and the amount and age of past due accounts. We enter 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.
The allowance for doubtful accounts was $0 and $0.2 million at December 31, 2012 and 2011, respectively. At December 31, 2010, our predecessor had a receivable from a customer in the amount of $3.3 million, on which a full valuation allowance had been recorded. During 2011, our predecessor collected $1.1 million of this receivable, which was recorded as a reduction to operating expense in the consolidated statement of income. SemGroup did not contribute the receivable to Rose Rock, so we are not entitled to the benefit of any additional collections SemGroup may receive on this receivable.
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.
We enter into exchanges with third parties whereby we acquire products that differ in location, grade, or delivery date from products we have available for sale. These exchanges are valued at cost, and although a transportation, location or product differential may be recorded, generally no gain or loss is recognized.
PROPERTY, PLANT AND EQUIPMENT – Property, plant and equipment is recorded at cost. We capitalize costs that extend or increase the future economic benefits of property, plant and equipment, and expense 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 consolidated statements of income.
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 us in facilities operated by us is recorded at historical cost, is included in property, plant and equipment in the consolidated balance sheets, and is not depreciated. We also own linefill in third party facilities, which is included in inventory on the consolidated balance sheets.
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.
COMMODITY DERIVATIVE INSTRUMENTS – We generally record the fair value of derivative instruments on the consolidated balance sheets and the change in fair value as an increase or decrease to product revenue. As shown in Note 4, the fair value of derivatives at December 31, 2012 and 2011 are recorded to other current assets or other current liabilities on the consolidated balance sheets. Related margin deposits are recorded to other current assets or other current liabilities on the consolidated balance sheets. Margin deposits have not generally been netted against derivative assets or liabilities at December 31, 2012 and 2011.
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, we estimate 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 our creditworthiness.
We have 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 the product is delivered.
INTERCOMPANY ACCOUNTS – Prior to our initial public offering, we participated in SemGroup’s cash management program. Under this program, cash we received from customers was transferred to SemGroup on a regular basis and when we remitted payments to suppliers, SemGroup transferred cash to us to cover the payments. In addition, SemGroup incurred certain expenses on our behalf that are reported within our consolidated statements of income.
Prior to our initial public offering, we recorded transactions with SemGroup and its other controlled subsidiaries to intercompany accounts. When our intercompany accounts were in a net receivable position, we reported the balance as a reduction to partners’ capital on our consolidated balance sheet. In our consolidated statements of cash flows, we have reported the net change in the intercompany accounts as a financing cash flow within “net distributions to partners”. We have reported the net change in partners’ capital associated with these transactions with SemGroup as “net distributions to SemGroup” in our consolidated statements of changes in partners’ capital.
CONTINGENT LOSSES – We record 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. We record attorneys’ fees incurred in connection with a contingent loss at the time the fees are incurred. We do 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. We record 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 – Under our current operations, product revenues relate primarily to our marketing business in the Bakken Shale area and to certain fixed-margin transactions related to our pipeline system in Kansas and Oklahoma. The fixed-margin transactions are structured such that we purchase crude oil from a producer or supplier at a designated receipt point at an index price less a transportation fee, and simultaneously sell an identical volume of crude oil at a designated delivery point to the same party at the same index price, thereby locking a fixed margin that is, in effect, economically equivalent to a transportation fee. Sales of product are recognized at the time title to the product transfers to the purchaser, which typically occurs upon receipt of the product by the purchaser. Any transportation costs we incur 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). As described in Note 4, product revenues include realized and unrealized gains and losses on commodity derivatives.
Under our current operations, fixed-fee service revenues relate primarily to our storage terminal in Cushing, our pipeline system in Kansas and Oklahoma (excluding transactions whereby we take title to the product while it is in our pipeline system, as described above), and our crude oil truck unloading facility in Platteville, Colorado. Service revenues are recognized at the time the service is performed.
PURCHASES AND SALES OF INVENTORY WITH THE SAME COUNTERPARTY – We routinely enter into transactions to purchase inventory from, and sell inventory to, the same counterparty. Such transactions that are entered into in contemplation of one another are recorded on a net basis.
PREDECESSOR INTEREST EXPENSE – The interest expense reported in our consolidated statements of income prior to our initial public offering consisted of letter of credit fees. SemGroup has been a borrower on several corporate credit agreements (and our assets previously served as collateral under these agreements), but SemGroup did not allocate this debt to its subsidiaries. SemGroup did not charge us interest on the balances in our intercompany accounts.
INCOME TAXES – We are a partnership for income tax purposes and therefore are not subject to federal or state income taxes. The tax on our net income is borne by the individual partners through the allocation of taxable income. Net income for financial statement purposes may differ significantly from taxable income allocated to our partners because of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements of our partnership agreement. The aggregate difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each partner’s tax attributes is not available to us.
RECLASSIFICATIONS – Certain reclassifications have been made to conform prior year balances to the current year presentation.
OPERATING SEGMENT – Our operations are similar in geography, nature of the services we provide, and type of customers we serve. We are managed by SemGroup as one operating segment.
COMPREHENSIVE INCOME – Comprehensive income is defined as a change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Rose Rock has no items of comprehensive income, other than net income, in any period presented. Therefore, net income and comprehensive income are the same.
Property, Plant and Equipment (Tables)
Property, plant and equipment
Property, plant and equipment consists of the following (in thousands): 
 
December 31,
2012
 
December 31,
2011
Land
$
15,834

 
$
15,759

Pipelines and related facilities
159,736

 
156,263

Storage and terminal facilities
87,430

 
77,036

Linefill
39,333

 
12,126

Office and other property and equipment
3,834

 
2,716

Construction-in-progress
19,943

 
34,957

Property, plant and equipment, gross
326,110

 
298,857

Accumulated depreciation
(34,580
)
 
(22,611
)
Property, plant and equipment, net
$
291,530

 
$
276,246

Financial Instruments (Tables)
We record commodity derivative assets and liabilities at fair value at each balance sheet date with the exception of commitments which have been designated as normal purchases and sales. The table below summarizes the balances of these assets and liabilities at December 31, 2012 and 2011 (in thousands):
 
 
December 31, 2012
 
December 31, 2011
 
Level 1
 
Netting*
 
Total
 
Level 1
 
Netting*
 
Total
Assets
$
22

 
$
(22
)
 
$

 
$
393

 
$
(231
)
 
$
162

Liabilities
1,056

 
(22
)
 
1,034

 
231

 
(231
)
 

Net assets (liabilities) at fair value
$
(1,034
)
 
$

 
$
(1,034
)
 
$
162

 
$

 
$
162

*
Relates primarily to exchange traded futures. Gain and loss positions on multiple contracts are settled net on a daily basis with the exchange.
The following table reconciles changes in the fair value of commodity derivatives classified as Level 3 in the fair value hierarchy (in thousands):
 
  
Year Ended December 31, 2012
 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
Beginning balance
$

 
$
1,619

 
$
218

Total gain or loss (realized and unrealized) included in product revenues

 

 
919

Settlements

 
(1,619
)
 
482

Ending balance
$

 
$

 
$
1,619

Amount of total gain or loss included in earnings for the period attributable to the change in unrealized gain or loss relating to assets and liabilities still held at the reporting date
$

 
$

 
$
1,619

The following table sets forth the notional quantities for derivative instruments entered into during the periods indicated (in thousands of barrels):
  
Year Ended December 31, 2012
 
Year Ended December 31, 2011
 
Year Ended December 31, 2010
Sales
1,743

 
6,309

 
6,313

Purchases
1,636

 
6,457

 
6,168

The fair value of our commodity derivative assets and liabilities recorded to other current assets and other current liabilities was as follows (in thousands): 
December 31, 2012
 
December 31, 2011
Assets
 
Liabilities
 
Assets
 
Liabilities
$

 
$
1,034

 
$
162

 
$

Realized and unrealized gains (losses) from our commodity derivatives were recorded to product revenue in the following amounts (in thousands):
 
Year Ended
 
Year Ended
 
Year Ended
December 31, 2012
 
December 31, 2011
 
December 31, 2010
$
149

 
$
(386
)
 
$
(1,929
)
Commitments and Contingencies (Tables)
We have entered into operating lease agreements for office space, office equipment, land, trucks and tank storage. Future minimum payments required under operating leases that have initial or remaining non-cancellable lease terms in excess of one year at December 31, 2012 are as follows (in thousands):
 
For twelve months ending:
 
December 31, 2013
$
567

December 31, 2014
506

December 31, 2015
352

December 31, 2016
267

December 31, 2017
273

Thereafter
418

Total future minimum lease payments
$
2,383

We record
At December 31, 2012, such commitments included the following (in thousands):
 
Volume
(barrels)
 
Value
Fixed price purchases
169

 
$
14,630

Fixed price sales
169

 
$
14,927

Floating price purchases
22,339

 
$
2,108,387

Floating price sales
22,079

 
$
2,110,754

Employee Benefits and Equity-Based Compensation (Tables)
The 2012 activity related to these awards is summarized below:
 
Unvested Units
 
Average Grant Date Fair Value
Outstanding at December 31, 2011
 
$

Awards granted
46,069
 
$
21.97

Awards vested
 
$

Awards forfeited
(2,109)
 
$
20.60

Outstanding at December 31, 2012
43,960
 
$
21.91

The following table summarizes the scheduled vesting of awards outstanding as of December 31, 2012:
Year ended December 31, 2013
9,333

units
Year ended December 31, 2014

units
Year ended December 31, 2015
34,627

units
The following table summarizes the expense we have recorded and expect to record related to awards that have been granted through December 31, 2012 (in thousands):
Year ended December 31, 2012
$
308

Year ended December 31, 2013 (estimated)
$
404

Year ended December 31, 2014 (estimated)
$
235

Year ended December 31, 2015 (estimated)
$
12

Partners' Capital and Distributions (Tables)
The following table summarizes the incentive distribution levels: 
 
 
 
Marginal Percentage
Interest in Distributions
 
Total Quarterly Distribution
Per Unit Target Amount
 
Unitholders
 
General
Partner
Interest
 
Incentive
Distribution
Rights
Minimum Quarterly Distribution
 
 
 
 

 
$
0.362500

 
98.0%
 
2.0%
 
%
First Target Distribution
above
 
$
0.362500

 
up to
 
$
0.416875

 
98.0%
 
2.0%
 
%
Second Target Distribution
above
 
$
0.416875

 
up to
 
$
0.453125

 
85.0%
 
2.0%
 
13.0
%
Third Target Distribution
above
 
$
0.453125

 
up to
 
$
0.543750

 
75.0%
 
2.0%
 
23.0
%
Thereafter
 
 
 
 
above
 
$
0.543750

 
50.0%
 
2.0%
 
48.0
%
The following table shows distributions paid in 2012 and 2013:
Quarter Ended
 
Record Date
 
Payment Date
 
Distribution Per Unit
 
Total
Distributions
(in thousands)
December 31, 2011
*
February 3, 2012
 
February 13, 2012
 
$
0.0670

$
1,147

March 31, 2012
 
May 7, 2012
 
May 15, 2012
 
$
0.3725

  
$
6,377

June 30, 2012
 
August 6, 2012
 
August 14, 2012
 
$
0.3825

 
$
6,550

September 30, 2012
 
November 5, 2012
 
November 14, 2012

$
0.3925

 
$
6,721

December 31, 2012
 
February 4, 2013
 
February 14, 2013

$
0.4025


$
8,331

*Minimum quarterly distribution for quarter ended December 31, 2011 was prorated for the period beginning immediately after the closing of Rose Rock’s IPO, December 14, 2011 through December 31, 2011.
Earnings Per Limited Partner Unit (Tables)
Computation of basic and diluted earnings
The following tables set forth the computation of basic and diluted earnings per limited partner unit for the year ended December 31, 2012 and the period from December 15, 2011 (the day following the closing of our IPO) through December 31, 2011 (in thousands, except per unit data):
 
 
Year Ended December 31, 2012
Net income
$
23,954

Less: General partner’s incentive distribution earned (1)

Less: General partner’s 2.0% ownership
479

Net income allocated to limited partners
$
23,475

Numerator for basic and diluted earnings per limited partner unit:
 
Allocation of net income among limited partner interests:
 
Net income allocable to common units
$