ROSE ROCK MIDSTREAM, L.P., 10-K filed on 2/28/2014
Annual Report
Document and Entity Information†(USD $)
12 Months Ended
Dec. 31, 2013
Jun. 28, 2013
Jan. 31, 2014
Capital Unit, Class A [Member]
Jan. 31, 2014
Common Units [Member]
Jan. 31, 2014
Subordinated Units [Member]
Document Type
10-K†
Amendment Flag
false†
Document Period End Date
Dec. 31, 2013†
Document Fiscal Period Focus
FY†
Document Fiscal Year Focus
2013†
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
2,500,000†
18,149,448†
8,389,709†
Entity Well-known Seasoned Issuer
No†
Entity Public Float
$†435,549,936†
Entity Current Reporting Status
Yes†
Entity Voluntary Filers
No†
Consolidated Balance Sheets†(USD $)
In Thousands, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Current assets:
Cash and cash equivalents
$†15,459†
$†108†
Accounts receivable
217,213†
222,862†
Receivable from affiliates
56,220†
57†
Inventories
30,779†
24,840†
Other current assets
1,916†
2,750†
Total current assets
321,587†
250,617†
Property, plant and equipment, net
311,616†
291,530†
Equity method investment
224,095†
0†
Goodwill
28,322†
0†
Other intangible assets, net
5,775†
0†
Other noncurrent assets, net
5,852†
2,579†
Total assets
897,247†
544,726†
Current liabilities:
Accounts payable
211,298†
220,791†
Payable to affiliates
69,274†
2,649†
Accrued liabilities
8,645†
4,681†
Other current liabilities
3,814†
3,722†
Total current liabilities
293,031†
231,843†
Long-term debt
245,088†
4,562†
Commitments and contingencies (Note 9)
  †
  †
Partnersí capital:
General partner
5,995†
6,159†
Total Rose Rock Midstream, L.P. partnersí capital
280,571†
308,321†
Noncontrolling interests in consolidated subsidiaries
78,557†
0†
Total equity
359,128†
308,321†
Total liabilities and partnersí capital
897,247†
544,726†
Common Units [Member] |
Public [Member]
Partnersí capital:
Common units
159,961†
129,134†
SemGroup [Member] |
Capital Unit, Class A [Member]
Partnersí capital:
Common units
40,772†
0†
SemGroup [Member] |
Common Units [Member]
Partnersí capital:
Common units
79,218†
37,992†
SemGroup [Member] |
Subordinated Units [Member]
Partnersí capital:
Common units
$†(5,375)
$†135,036†
Consolidated Balance Sheets (Parenthetical)
Dec. 31, 2013
Dec. 31, 2012
Capital Unit, Class A [Member] |
SemGroup [Member]
Common units, issued
2,500,000†
0†
Common units, outstanding
2,500,000†
0†
Subordinated Units [Member] |
SemGroup [Member]
Common units, issued
8,389,709†
8,389,709†
Common units, outstanding
8,389,709†
8,389,709†
Common Units [Member]
Common units, outstanding
18,149,448†
Common Units [Member] |
Public [Member]
Common units, issued
13,759,739†
7,000,000†
Common units, outstanding
13,759,739†
7,000,000†
Common Units [Member] |
SemGroup [Member]
Common units, issued
4,389,709†
1,389,709†
Common units, outstanding
4,389,709†
1,389,709†
Consolidated Statements of Income†(USD $)
Share data in Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2013
Subordinated Units [Member]
Dec. 31, 2012
Subordinated Units [Member]
Dec. 31, 2011
Subordinated Units [Member]
Dec. 31, 2013
Prior To Initial Public Offering [Member]
Dec. 31, 2012
Prior To Initial Public Offering [Member]
Dec. 31, 2011
Prior To Initial Public Offering [Member]
Dec. 31, 2013
Subsequent To Initial Public Offering [Member]
Dec. 31, 2012
Subsequent To Initial Public Offering [Member]
Dec. 31, 2011
Subsequent To Initial Public Offering [Member]
Dec. 31, 2013
Rose Rock Midstream L P [Member]
Revenues, including revenues from affiliates (Note 14):
Product
$†702,028,000†
$†576,158,000†
$†395,301,000†
Service
64,498,000†
44,318,000†
35,801,000†
Other
0†
(59,000)
219,000†
Total revenues
766,526,000†
620,417,000†
431,321,000†
Expenses, including expenses from affiliates (Note 14):
Costs of products sold, exclusive of depreciation and amortization
663,759,000†
546,966,000†
366,265,000†
Operating
35,795,000†
23,302,000†
18,973,000†
General and administrative
15,287,000†
12,083,000†
9,843,000†
Depreciation and amortization
23,165,000†
12,131,000†
11,379,000†
Total expenses
738,006,000†
594,482,000†
406,460,000†
Earnings from equity method investment
17,571,000†
0†
0†
17,571,000†
Operating income
46,091,000†
25,935,000†
24,861,000†
Other expenses (income):
Interest expense
8,100,000†
1,912,000†
1,823,000†
Other expense (income), net
(14,000)
69,000†
(197,000)
Total other expenses (income), net
8,086,000†
1,981,000†
1,626,000†
Net income
38,005,000†
23,954,000†
23,235,000†
Less: net income attributable to noncontrolling interests
1,256,000†
0†
0†
Net income attributable to Rose Rock Midstream, L.P.
36,749,000†
23,954,000†
23,235,000†
0†
0†
22,265,000†
36,749,000†
23,954,000†
970,000†
Earnings per limited partner unit (Note 12)
Net income allocated to general partner
1,218,000†
479,000†
19,000†
Net income (loss) allocated to limited partners
$†35,531,000†1
$†23,475,000†1
$†13,321,000†
$†11,737,500†
$†475,500†
Basic weighted average number of limited partner units outstanding:
Basic weighted average number of limited partner units outstanding:
8,390†
8,390†
8,390†
Diluted weighted average number of limited partner units outstanding:
Diluted weighted average number of limited partner units outstanding:
8,390†
8,390†
8,390†
[1] (**) We calculate net income allocated to limited partners based on the distributions pertaining to the current periodís available cash as defined by our partnership agreement. After adjusting for the appropriate periodís distributions, the remaining undistributed earnings or excess distributions over earnings, if any, are allocated to the general partner, limited partners and participating securities in accordance with the contractual terms of the partnership agreement and as further prescribed under the two-class method. Incentive distribution rights do not participate in undistributed earnings. Class A units do not participate in cash distributions, but are allocated a proportional share of undistributed earnings. As distributions related to current period available cash exceeded net income, the Class A shares reflect a loss.
Consolidated Statements of Changes in Equity†(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 SemGroup [Member]
Common Units SemGroup [Member]
Prior To Initial Public Offering [Member]
Subordinated Units [Member]
Subordinated Units [Member]
Prior To Initial Public Offering [Member]
Class A unitholder [Member]
General Partner [Member]
General Partner [Member]
Prior To Initial Public Offering [Member]
Parent Equity Deficit [Member]
Parent Equity Deficit [Member]
Prior To Contribution of Assets [Member]
Parent Equity Deficit [Member]
Prior To Initial Public Offering [Member]
Noncontrolling Interest [Member]
Total partners' capital [Member]
Total partners' capital [Member]
Prior To Contribution of Assets [Member]
Total partners' capital [Member]
Prior To Initial Public Offering [Member]
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest at Dec. 31, 2010
$†289,988†
$†289,988†
$†289,988†
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest
21,087†
21,087†
21,087†
Net distributions to SemGroup
(20,349)
(20,349)
(20,349)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest at Nov. 29, 2011
290,726†
290,726†
290,726†
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest
1,178†
577†
577†
24†
1,178†
Contribution of deferred organizational costs
3,065†
3,065†
3,065†
Net liabilities of predecessor not contributed to Rose Rock Midstream, L.P.
3,073†
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)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest at Dec. 14, 2011
298,042†
36,420†
125,522†
5,900†
130,200†
298,042†
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest
970†
397†
78†
476†
19†
970†
Net distributions to SemGroup
(130,200)
(130,200)
(130,200)
Issuance of common units to the public, net of underwriters' discount and fees
127,134†
127,134†
127,134†
Transfer liability to SemGroup
8,908†
1,241†
7,489†
178†
8,908†
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest at Dec. 31, 2011
304,854†
127,531†
37,739†
133,487†
6,097†
304,854†
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest
23,954†
9,797†
1,940†
11,738†
479†
23,954†
Distributions
(20,795)
(8,502)
(1,687)
(10,189)
(417)
(20,795)
Non-cash equity compensation
308†
308†
308†
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest at Dec. 31, 2012
308,321†
129,134†
37,992†
135,036†
6,159†
308,321†
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest
38,005†
17,710†
4,991†
13,321†
(491)
1,218†
1,256†
36,749†
Consolidation of SemCrude Pipeline
77,301†
77,301†
Distributions
(38,076)
(17,647)
(4,977)
(14,451)
(1,001)
(38,076)
Non-cash equity compensation
806†
806†
806†
Equity issuance
387,131†
210,226†
98,895†
70,105†
7,905†
387,131†
Purchase price in excess of historical cost in common control transaction, including non-cash consideration
(414,308)
(180,216)
(57,683)
(139,281)
(28,842)
(8,286)
(414,308)
Unvested distribution equivalent rights
(52)
(52)
(52)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest at Dec. 31, 2013
$†359,128†
$†159,961†
$†79,218†
$†(5,375)
$†40,772†
$†5,995†
$†78,557†
$†280,571†
Consolidated Statements of Changes in Equity (Parenthetical)
12 Months Ended
Dec. 31, 2013
General partners' interest
2.00%†
General Partner [Member]
General partners' interest
2.00%†
Consolidated Statements of Cash Flows†(USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest
$†38,005†
$†23,954†
$†23,235†
Cash flows from operating activities:
Depreciation and amortization
23,165†
12,131†
11,379†
Adjustments to reconcile net income to net cash provided by operating activities:
(Gain) loss on disposal of long-lived assets, net
(31)
(1)
64†
Earnings from equity method investment
(17,571)
0†
0†
Distributions from equity investment
16,999†
0†
0†
Amortization of debt issuance costs
811†
359†
28†
Provision for (recovery of) uncollectible accounts receivable
0†
0†
(916)
Non-cash equity compensation
806†
308†
0†
Net unrealized (gain) loss related to derivative instruments
(974)
1,196†
(787)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable
13,549†
(91,207)
(57,352)
Decrease (increase) in receivable from affiliates
(56,163)
2,153†
(2,130)
Decrease (increase) in inventories
(7,465)
(3,251)
44†
Decrease (increase) in margin deposits
1,012†
(1,254)
1,410†
Decrease (increase) in other current assets
(179)
(453)
208†
Decrease (increase) in other assets
(7)
(20)
1,270†
Increase (decrease) in accounts payable and accrued liabilities
(6,107)
96,524†
66,643†
Increase (decrease) in payable to affiliates
66,625†
(5,342)
7,989†
Net cash provided by operating activities
72,475†
35,097†
51,085†
Cash flows from investing activities:
Capital expenditures
(25,223)
(28,370)
(31,635)
Proceeds from sale of long-lived assets
38†
244†
4†
Investments in non-consolidated affiliate
(31,832)
0†
0†
Acquisition of Barcas Field Services, L.L.C.
(48,969)
0†
0†
Acquisition of SemCrude Pipeline, L.L.C.
(122,289)
0†
0†
Net cash used in investing activities
(228,275)
(28,126)
(31,631)
Cash flows from financing activities:
Debt issuance costs
(4,069)
(252)
(1,666)
Borrowings on credit facility
558,000†
91,000†
0†
Principal payments on credit facility
(317,500)
(86,525)
0†
Principal payments on capital lease obligations
(27)
0†
(13)
Proceeds from common L.P. unit issuance, net of offering costs
210,226†
0†
127,134†
Contributions from general partner
3,242†
0†
0†
Cash consideration in excess of historical cost of interest in SemCrude Pipeline, L.L.C.
(240,645)
0†
0†
Net distributions to partners
(38,076)
(20,795)
(135,503)
Net cash used in financing activities
171,151†
(16,572)
(10,048)
Net increase (decrease) in cash and cash equivalents
15,351†
(9,601)
9,406†
Cash and cash equivalents at beginning of period
108†
9,709†
303†
Cash and cash equivalents at end of period
$†15,459†
$†108†
$†9,709†
Overview
OVERVIEW
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 common units representing limited partner interests.
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.
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.
Rose Rock Midstream, L.P. is a Delaware limited partnership. Its operations include the following:
7.35 million barrels of crude oil storage capacity in Cushing, Oklahoma;
a 624-mile crude oil gathering and transportation pipeline system with over 620,000 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, Oklahoma;
a crude oil gathering, storage, transportation and marketing business in the Bakken Shale in North Dakota and Montana;
a crude oil trucking fleet of over 130 transport trucks and 150 trailers;
a two-thirds interest in SemCrude Pipeline, L.L.C., which holds a 51% ownership interest in White Cliffs Pipeline, L.L.C. (“White Cliffs”), which owns a 527-mile pipeline that transports crude oil from Platteville, Colorado to Cushing, Oklahoma (“the White Cliffs Pipeline”). The remaining one-third noncontrolling interest is retained by SemGroup; and
a 12-mile crude oil pipeline that connects our Platteville, Colorado crude oil terminal to the Tampa, Colorado crude oil market; 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.
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 (exclusive of SemCrude’s ownership interests in SemCrude Pipeline, L.L.C., which holds a 51% ownership interest in 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.
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. Outside ownership interests in consolidated subsidiaries are reported as noncontrolling interests in the consolidated financial statements. Our ownership interest in White Cliffs is reflected as an equity method investment as the other owners have substantive rights to participate in the management of White Cliffs.
Ownership
Our partnership interests include the following at December 31, 2013:
18,149,448 common units representing limited partner interests (of which 4,389,709 units are held by SemGroup)
8,389,709 subordinated units representing limited partner interests (all of which are held by SemGroup);
2,500,000 Class A units representing limited partner interests (all of which are held by SemGroup), which do not participate in cash distributions until conversion to common units; and
a 2% general partner interest (which is held by SemGroup).
OVERVIEW
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 common units representing limited partner interests.
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.
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.
Rose Rock Midstream, L.P. is a Delaware limited partnership. Its operations include the following:
7.35 million barrels of crude oil storage capacity in Cushing, Oklahoma;
a 624-mile crude oil gathering and transportation pipeline system with over 620,000 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, Oklahoma;
a crude oil gathering, storage, transportation and marketing business in the Bakken Shale in North Dakota and Montana;
a crude oil trucking fleet of over 130 transport trucks and 150 trailers;
a two-thirds interest in SemCrude Pipeline, L.L.C., which holds a 51% ownership interest in White Cliffs Pipeline, L.L.C. (“White Cliffs”), which owns a 527-mile pipeline that transports crude oil from Platteville, Colorado to Cushing, Oklahoma (“the White Cliffs Pipeline”). The remaining one-third noncontrolling interest is retained by SemGroup; and
a 12-mile crude oil pipeline that connects our Platteville, Colorado crude oil terminal to the Tampa, Colorado crude oil market; 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.
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 (exclusive of SemCrude’s ownership interests in SemCrude Pipeline, L.L.C., which holds a 51% ownership interest in 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.
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. Outside ownership interests in consolidated subsidiaries are reported as noncontrolling interests in the consolidated financial statements. Our ownership interest in White Cliffs is reflected as an equity method investment as the other owners have substantive rights to participate in the management of White Cliffs.
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 at December 31, 2013 and 2012.
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

Construction in process is reclassified to the fixed asset categories above and depreciation commences once the asset has been placed in-service.
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.
GOODWILL — We test goodwill for impairment on an annual basis, or more often if circumstances warrant, by estimating the fair value of the asset group to which the goodwill relates and comparing this fair value to the net book value of the asset group. If fair value is less than net book value, we estimate the implied fair value of goodwill, reduce the book value of the goodwill to the implied fair value, and record a corresponding impairment loss. Our policy is to test goodwill for impairment on October 1 of each year.
INTANGIBLE ASSETS — Intangible assets are stated at cost, net of accumulated amortization, which is recorded on a straight-line basis over the life of the asset. We review amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If such a review should indicate that the carrying amount of amortizable intangible assets is not recoverable, we reduce the carrying amount of such assets to fair value.
EQUITY METHOD INVESTMENTS — We account for an investment under the equity method when we have significant influence over, but not control of, the significant operating decisions of the investee. Under the equity method, we record in the consolidated statements of income our share of the earnings or losses of the investee, with a corresponding adjustment to the investment balance on our consolidated balance sheet. When we receive a distribution from an equity method investee, we record a corresponding reduction to the investment balance.
DEBT ISSUANCE COSTS — Costs incurred in connection with the issuance of long-term debt are reported as other noncurrent assets and are amortized to interest expense using the straight-line method over the term of the related debt. Use of the straight-line method of amortization does not differ materially from the “effective interest” method.
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 6, the fair value of derivatives at December 31, 2013 and 2012 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, 2013 and 2012.
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.
On January 31, 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2013-01, "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," which clarifies the scope of the offsetting disclosure requirements in ASU 2011-11, "Disclosures About Offsetting Assets and Liabilities." Under ASU 2013-01, the disclosure requirements apply to derivative instruments accounted for in accordance with Accounting Standards Codification ("ASC") 815, "Derivatives and Hedging," including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending arrangements that are either offset on the balance sheet or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those years. Retrospective application is required for all comparative periods presented. We adopted this guidance in the first quarter of 2013. The impact of adoption was not material.
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 products sold. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis (excluded from revenue). As described in Note 6, 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), our crude oil truck unloading facility in Platteville, Colorado and our truck transportation assets. Service revenues are recognized at the time the service is performed.
COSTS OF PRODUCTS SOLD — Costs of products sold consists of the cost to purchase the product and any third-party cost incurred to transport the product to the point of sale and to store the product until it is sold.
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.
EARNINGS PER 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, such as incentive distributions that are allocated to the general partner, which are declared and paid following the close of each quarter.
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.
COMMON CONTROL TRANSACTIONS – Entities and assets acquired from SemGroup and its affiliates are accounted for as common control transactions whereby the net assets acquired are recorded at their historical amounts. Any consideration received in excess of the historical amount is treated as an equity transaction, similar to a dividend, which reduces the partners' equity accounts pro-rata based on their relative ownership percentages. Cash consideration up to the carrying value of net assets acquired is presented as an investing activity in our consolidated statements of cash flows. Cash consideration in excess of the carrying value of net assets acquired is presented as a financing activity.
NONCONTROLLING INTERESTS IN CONSOLIDATED SUBSIDIARIES – Noncontrolling interests represents the ownership interest in our consolidated subsidiary, SemCrude Pipeline, which is retained by SemGroup. Income is allocated to noncontrolling interests pro-rata based on relative ownership interests in SemCrude Pipeline.
RECLASSIFICATIONS – Certain reclassifications have been made to conform prior year balances to the current year presentation.
EQUITY-BASED COMPENSATION—We grant certain of our employees equity-based compensation awards which vest contingent on continued service of the recipient. We record compensation expense for these outstanding awards over applicable service periods based on their grant date fair value with a corresponding increase to partners' capital. The expense to be recorded over the life of the awards is discounted for expected forfeitures during the vesting period.
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.
Acquisitions
Mergers, Acquisitions and Dispositions Disclosures [Text Block]
ACQUISITIONS
SemCrude Pipeline, L.L.C
On January 11, 2013, we acquired a 33% 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 2% general partner interest in us. SCPL owns a 51% membership interest in White Cliffs.
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 volume on the White Cliffs Pipeline for such month is 125,000 barrels per day or greater. Upon such date, the Class A units will automatically convert into common units.
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 on January 11, 2013. 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.
On December 16, 2013, we acquired an additional 33% interest in SCPL from SemGroup in exchange for (i) cash of approximately $173.1 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 2% general partner interest in us.
The cash consideration was funded through a borrowing under our credit facility. The 1.5 million common units were valued at $36.30 per unit, or $54.5 million, based on the December 11, 2013 closing price. The Class A units were valued at $36.30 per unit discounted for the expected forbearance of distributions, or $39.6 million. The contribution to the general partner's capital account was made in the amount of $1.9 million.
In conjunction with the SCPL transactions, we incurred $4.1 million of cost, of which $1.6 million of equity issuance costs were offset against proceeds, $1.6 million was related to the borrowing and was deferred, and $0.9 million was expensed as general and administrative expense in the consolidated statement of income.
Subsequent to the December 16, 2013 transaction, we have consolidated SCPL and recorded a noncontrolling interest representing the ownership retained by SemGroup. Subsequent to the transaction our consolidated financial statements reflect our ownership of White Cliffs under the equity method. As the transaction was between entities under common control, we recorded our investment in White Cliffs based on SemGroup's historical cost. The purchase price in excess of historical cost was treated as an equity transaction with SemGroup, which reduced the partners' capital accounts of our general and limited partners on a pro-rata basis.
Common Unit Purchase Agreement
On January 8, 2013, we entered into a Common Unit Purchase Agreement with certain purchasers (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 the initial 33% 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 were 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.
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. If the Purchasers become prohibited from using the Registration Statement under certain circumstances, or if the Registration Statement ceases to be effective or unusable for certain periods of time, we could be liable to the Purchasers for liquidated damages calculated in accordance with a formula, and subject to the limitations set forth in the Registration Rights Agreement.

Barcas Field Services, LLC

On August 1, 2013, we executed a definitive agreement to acquire the assets of Barcas Field Services, LLC ("Barcas"), which owns and operates a crude oil trucking fleet for $49.0 million in cash. The transaction closed on September 1, 2013. Highlights of the acquisition include the following:

114 trucks, 120 trailers and miscellaneous equipment; and
a long-term take-or-pay customer transportation agreement.

We have included Barcas in our consolidated financial statements as of September 1, 2013. During the year ended December 31, 2013, our consolidated statements of income did not include material amounts of revenue or operating income related to Barcas. The proforma impact to comparative prior year periods, had the acquisition occurred at the beginning of the comparative prior year period, is not significant. During 2013, the acquisition price was decreased by approximately $1.0 million due to a computer system which was ultimately not purchased.

We have received an independent appraisal of the fair value of the assets acquired in the Barcas acquisition and have recorded the following acquisition date fair values of the assets acquired (in thousands):

Property, plant and equipment
$
13,717

Customer contract intangible
6,930

Goodwill
28,322

Total assets acquired
$
48,969



Goodwill represents the excess of the consideration paid for the acquired business over the fair value of the individual assets acquired. Goodwill primarily represents the value of synergies between the acquired entity and the Partnership, the opportunity to use the acquired business as a platform for growth and the acquired assembled workforce.

Tampa Pipeline

On November 8, 2013, we acquired a 12-mile, 12-inch crude oil pipeline from Noble Energy, Inc. that extends from Platteville, Colorado to Tampa, Colorado for a purchase price of $8.2 million. The pipeline was recently constructed by Noble Energy, Inc. and placed into service with the acquisition. The pipeline connects our Platteville, Colorado crude oil terminal to the Tampa, Colorado crude oil market.
Investments in nonconsolidated affiliates
Equity Method Investments [Text Block]
INVESTMENT IN NON-CONSOLIDATED AFFILIATE
SemCrude Pipeline, L.L.C.
Prior to our December 16, 2013 acquisition of additional ownership interests in SCPL (Note 3), we accounted for our interest in SCPL under the equity method. Under the equity method, we did not report the individual assets and liabilities of SCPL on our consolidated balance sheets. Instead, our membership interest was reflected in one line as a noncurrent asset on our consolidated balance sheets. Subsequent to our acquisition of additional ownership interest, we have consolidated SCPL and report a noncontrolling interest for the ownership interest in SCPL which was retained by SemGroup. Our consolidated income statement for the year ended December 31, 2013 includes $13.8 million of equity earnings from SCPL prior to consolidation. For the year ended December 31, 2013, we received cash distributions from SCPL of $17.0 million.
SCPL's only substantial asset is a 51% interest in White Cliffs, which is accounted for under the equity method.
White Cliffs Pipeline, L.L.C.
Under the equity method, we do not report the individual assets and liabilities of White Cliffs on our consolidated balance sheets. Instead, our membership interest is reflected in one line as a noncurrent asset on our consolidated balance sheets.
For the year ended December 31, 2013, we recorded equity in earnings of White Cliffs of $3.8 million, which represents one month of earnings subsequent to our consolidation of SCPL. No distributions were received from White Cliffs for the year ended December 31, 2013, as distributions are paid on a one-month lag. Our distribution of earnings related to December 2013 was received in January 2014.
Certain summarized balance sheet information of White Cliffs as of December 31, 2013 is shown below (in thousands):
 
 
December 31, 2013
Current assets
 
$
98,457

Property, plant and equipment, net
 
312,831

Goodwill
 
17,000

Other intangible assets, net
 
20,802

Total assets
 
$
449,090

Current liabilities
 
$
9,648

Members’ equity
 
439,442

Total liabilities and members’ equity
 
$
449,090

Certain summarized income statement information of White Cliffs for the year ended December 31, 2013 is shown below (in thousands):
 
 
Year Ended December 31, 2013
Revenue
 
$
133,310

Operating, general and administrative expenses
 
$
23,825

Depreciation and amortization expense
 
$
18,668

Net income
 
$
90,817


The equity in earnings of White Cliffs for the year ended December 31, 2013, recorded by SCPL, is less than 51% of the net income of White Cliffs for the same period. This is due to certain general and administrative expenses incurred in managing the operations of White Cliffs that the other members are not obligated to share. Such expenses are recorded by White Cliffs and are allocated to our membership interest. White Cliffs recorded $1.8 million of such general and administrative expense for the year ended December 31, 2013.
The members of SCPL are required to fund SCPL's capital contribution requirements for White Cliffs related to an expansion project adding a 12-inch line from Platteville, Colorado to Cushing, Oklahoma. For the year ended December 31, 2013, we contributed $31.8 million related to our interest in SCPL. Remaining contributions will be made in 2014 and are expected to total $53.3 million for SCPL, of which one-third will be funded directly by SemGroup which holds the noncontrolling interest in SCPL.
Our membership interest in White Cliffs is significant as defined by Securities and Exchange Commission’s Regulation S-X Rule 1-02(w). Accordingly, as required by Regulation S-X Rule 3-09, we have included the audited financial statements of White Cliffs as of December 31, 2013 and 2012 and for each of the three years in the period ended December 31, 2013 as an exhibit to this Form 10-K.
Property, Plant and Equipment
PROPERTY, PLANT AND EQUIPMENT
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands): 
 
December 31,
2013
 
December 31,
2012
Land
$
17,058

 
$
15,834

Pipelines and related facilities
181,697

 
159,736

Storage and terminal facilities
118,864

 
114,423

Linefill
13,866

 
12,340

Trucking equipment and other
19,089

 
3,834

Construction-in-progress
17,575

 
19,943

Property, plant and equipment, gross
368,149

 
326,110

Accumulated depreciation
(56,533
)
 
(34,580
)
Property, plant and equipment, net
$
311,616

 
$
291,530


 
We recorded depreciation expense of $22.0 million, $12.1 million and $11.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

We include within the cost of property, plant and equipment interest costs incurred while an asset is being constructed. We capitalized $0.7 million of interest costs during the year ended December 31, 2013. We did not capitalize any interest during the year ended December 31, 2012.
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 can be 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, 2013 and 2012 (in thousands):
 
 
December 31, 2013
 
December 31, 2012
 
Level 1
 
Netting*
 
Total
 
Level 1
 
Netting*
 
Total
Assets
$
36

 
$
(36
)
 
$

 
$
22

 
$
(22
)
 
$

Liabilities
96

 
(36
)
 
60

 
1,056

 
(22
)
 
1,034

Net assets (liabilities) at fair value
$
(60
)
 
$

 
$
(60
)
 
$
(1,034
)
 
$

 
$
(1,034
)
*
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 are based on inputs consisting of unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. These include commodity futures contracts that are traded on an exchange.
“Level 2” measurements are based on inputs consisting of 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 are based on inputs from a pricing service and/or internal valuation models incorporating observable and unobservable market data.
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, 2013, 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, 2013
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
Beginning balance
$

 
$

 
$
1,619

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

 

 

Settlements

 

 
(1,619
)
Ending balance
$

 
$

 
$

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
$

 
$

 
$


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, 2013
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
Sales
2,595

 
1,743

 
6,309

Purchases
2,575

 
1,636

 
6,457


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, 2013
 
December 31, 2012
Assets
 
Liabilities
 
Assets
 
Liabilities
$

 
$
60

 
$

 
$
1,034


We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. Our margin deposit balance was $0.8 million and $1.9 million at December 31, 2013 and 2012, respectively. These margin account balances have not been offset against our net commodity derivative instrument (contract) positions. Had these margin account balances been netted against our net commodity derivative instrument (contract) positions as of December 31, 2013 and 2012, we would have had net asset positions of $0.8 million and $0.8 million, respectively.
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, 2013
 
December 31, 2012
 
December 31, 2011
$
(1,593
)
 
$
149

 
$
(386
)

Concentrations of risk
During the year ended December 31, 2013, we generated approximately $354 million of revenue from two third-party customers, which represented approximately 46% of our consolidated revenue. We purchased approximately $320 million of product from three third-party suppliers, which represented approximately 48% of our costs of products sold. At December 31, 2013, two third-party customers and one related party accounted for 46% of our consolidated accounts receivable.
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 one third party supplier, 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.
As described in Note 14, we also generated revenues and expenses during the periods from 2011 through 2013 from other subsidiaries of SemGroup.
Goodwill and other intangibles
Goodwill and Intangible Assets Disclosure [Text Block]
7.
GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill
In connection with the acquisition of Barcas (Note 3), we recorded $28.3 million of goodwill. Goodwill represents the excess of the estimated consideration paid for the acquired business over the fair value of the individual assets acquired. Goodwill primarily represents the value of synergies between the acquired entity and the Partnership, the opportunity to use the acquired business as a platform for growth and the acquired assembled workforce. We estimate that all of the goodwill will be deductible for federal income tax purposes and will be amortized on a straight-line basis over 15 years for tax purposes.

Other Intangible Assets
We recorded a $6.9 million customer contract intangible asset related to the Barcas acquisition (Note 3). The intangible is being amortized on a straight-line basis over 24 months. Changes in other intangible assets are shown below (in thousands):
Balance at December 31, 2012
$

Barcas acquisition
6,930

Amortization
(1,155
)
Balance at December 31, 2013
$
5,775


We estimate that future amortization of other intangible assets will be as follows (in thousands):
For the year ending:
 
December 31, 2014
$
3,465

December 31, 2015
2,310

Total estimated amortization expense
$
5,775

Long-Term Debt
LONG TERM DEBT
LONG-TERM DEBT
On November 10, 2011, we entered into a senior secured revolving credit facility agreement. This credit facility became effective upon completion of our IPO on December 14, 2011. Subsequent to amendments in 2013, this credit agreement provides for a revolving credit facility of $585 million and includes a $150 million sub-limit for letters of credit. The credit agreement was amended to extend the agreement to September 20, 2018, when all amounts owed will be due, and permit the increase of the facility by not more than $200 million, subject to certain conditions. The amended agreement allows us to incur unsecured or subordinated debt without limitation, subject to certain conditions, and provides alternative financial performance covenants at our election after the issuance of $200 million or more unsecured or subordinated debt, in the aggregate. Additionally, the interest rate and commitment fees related to the revolving facility were lowered.
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 1.75% to 3.00% in the case of a Eurodollar rate loan, and from 0.75% to 2.00% in the case of an ABR loan, in each case, based on a leverage ratio specified in the credit agreement. At December 31, 2013, we had outstanding borrowings of $245.0 million which incurred interest at the Eurodollar rate plus an applicable margin. The interest rate at December 31, 2013 was 1.92% .
Fees are charged on any outstanding letters of credit at a rate that ranges from 1.75% to 3.00%, depending on a leverage ratio specified in the credit agreement. At December 31, 2013, there were $34.5 million in outstanding letters of credit, and the rate in effect was 1.75%. 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 specified in the credit agreement, 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, 2013, we had $61.3 million of secured bilateral letters of credit outstanding and the interest rate in effect was 1.75%.
At December 31, 2013, we had $4.8 million in capitalized loan fees, net of accumulated amortization, which is recorded in other noncurrent assets and is being amortized over the life of the agreement.
The credit agreement contains representations and warranties and affirmative and negative covenants. The negative covenants limit or restrict our ability (as well as the ability of our Restricted Subsidiaries, as defined in the credit facility) to:
permit the ratio of our consolidated EBITDA to our consolidated cash interest expense at the end of any fiscal quarter, for the immediately preceding four quarter period, to be less than 2.50 to 1.00;
permit the ratio of our consolidated net debt to our consolidated EBITDA at the end of any fiscal quarter, for the immediately preceding four quarter period, to be greater than 5.00 to 1.00 (or 5.50 to 1.00 during a temporary period from the date of funding of the purchase price of certain acquisitions (as described in the credit facility) until the last day of the third fiscal quarter following such acquisitions);
incur additional debt, subject to customary carve outs for certain permitted additional debt, incur certain liens on assets, subject to customary carve outs for certain permitted liens, or enter into certain sale and leaseback transactions;
make investments in or make loans or advances to persons that are not Restricted Subsidiaries, subject to customary carve out for certain permitted investments, loans and advances;
make certain cash distributions, provided that we may make distributions of available cash so long as no default under the credit agreement then exists or would result therefrom;
dispose of assets in excess of an annual threshold amount;
make certain amendments, modifications or supplements to organization documents, our risk management policy, other material indebtedness documents and material contracts or enter into certain restrictive agreements or make certain payments on subordinated indebtedness;
engage in business activities other than our business as described in the credit agreement, incidental or related thereto or a reasonable extension of the foregoing;
enter into hedging agreements, subject to a customary carve out for agreements entered into in the ordinary course of business for non-speculative purposes;
make changes to our fiscal year or other significant changes to our accounting treatment and reporting practices;
engage in certain mergers or consolidations and transfers of assets; and
enter into transactions with affiliates unless the terms are not less favorable, taken as a whole, than would be obtained in an arms-length transaction, subject to customary exceptions.
 
Upon the initial incurrence of at least $200 million of unsecured debt in accordance with the credit facility, we will have a one-time option to elect to comply with the ratio of our consolidated EBITDA to our consolidated cash interest expense and the ratio of our consolidated net debt to our consolidated EBITDA as detailed above or the following alternative covenants:
a minimum ratio of our consolidated EBITDA to our consolidated cash interest expense at the end of any fiscal quarter, for the immediately preceding four quarter period, of 2.50 to 1.00;
a maximum ratio of our consolidated net debt to our consolidated EBITDA at the end of any fiscal quarter, for the immediately preceding four quarter period, of 5.50 to 1.00; and
a maximum ratio of senior secured debt to our consolidated EBITDA of 3.50 to 1.00.
The credit agreement defines 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, 2013, we were in compliance with the terms of the credit agreement.
Capital lease obligations
At December 31, 2013, we had $88 thousand ($125 thousand including current portion) of capital lease obligations reported as long-term debt on the consolidated balance sheet.
Fair value
We estimate that the fair value of our long-term debt was not materially different than the reported values at December 31, 2013, and is categorized as a Level 3 measurement. It is our belief that neither the market interest rates nor our credit profile have changed significantly enough to have had a material impact on the fair value of our debt outstanding at December 31, 2013.

Shelf Registration Statement
On May 15, 2013, we filed a universal shelf registration statement with the SEC on Form S-3, which became effective on May 29, 2013. Pursuant to this registration statement, we may issue debt securities in one or more series, as to any of which Rose Rock Finance Corporation ("Rose Rock Finance") may be a co-issuer on a joint and several basis with Rose Rock. Rose Rock Finance was incorporated under the laws of the State of Delaware on May 6, 2013, and is 100 percent-owned by Rose Rock. Rose Rock Finance was organized for the purpose of co-issuing our debt securities and has no material assets or any liabilities.
Any debt securities that we offer under this registration statement will be direct, unsecured general obligations. The debt securities will be either senior debt securities or subordinated debt securities. As of December 31, 2013, no debt securities have been issued under this registration statement.
In the event that one or more of certain 100 percent-owned subsidiaries of Rose Rock (Rose Rock Midstream Operating, LLC, Rose Rock Midstream Energy GP, LLC and/or Rose Rock Midstream Crude, L.P.) guarantees such debt securities, when issued, such guarantees will be full and unconditional and will constitute the joint and several obligations of such subsidiaries. Rose Rock Midstream Operating, LLC, Rose Rock Midstream Energy GP, LLC and Rose Rock Midstream Crude, L.P. are our sole subsidiaries, other than Rose Rock Finance. We have no assets or operations independent of our subsidiaries, and there are no significant restrictions upon the ability of us, or any of our subsidiaries, to obtain funds from its respective subsidiaries by dividend or loan. None of the assets of our subsidiaries represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act of 1933, as amended.
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, SemCrude, and Eaglwing emerged from bankruptcy protection on November 30, 2009 (the “Emergence Date”).
(a)
Confirmation order appeal
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 SemGroup's 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. On August 27, 2013, the United States Court of Appeals for the Third Circuit issued an opinion, and on September 18, 2013 issued a judgment, reversing the District Court’s dismissal of the confirmation order and remanding the case to the District Court for consideration on the merits of Luke Oil’s appeal of the confirmation order. On October 1, 2013, at the request of the parties, the District Court entered an order staying the case and referring it to a magistrate judge for mediation. On January 28, 2014, the parties reached agreement to settle all outstanding disputes. Once the written settlement agreement is finalized and executed, the Appeal will be dismissed and the parties will release each other from all claims and causes of action. 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 SemGroup 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.
Environmental
We may, from time to time, experience leaks of petroleum products from our facilities and, 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.
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 assisting Blueknight with movement of crude oil belonging to Blueknight’s customers and with 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 perform all services necessary for the movement of its crude oil and the operation of its Cushing terminal without SemCrude's assistance.
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 Blueknight was requested to substantiate its claim, Blueknight filed suit against SemGroup and other related companies in the District Court of Oklahoma County, Oklahoma. On May 1, 2012, the case was transferred to Tulsa County, Oklahoma. On July 2, 2012, the Tulsa County District Court appointed a Special Master to review terminal operations accounting records and determine whether 141,000 barrels of crude oil owned by Blueknight is missing after three months of operations in April through June, 2010. On June 11, 2013, the Special Master’s Report was filed with the District Court finding a shortage in Blueknight’s Cushing terminal and Oklahoma pipeline system of 148,000 barrels. However, after a review of all records created during that three month time period, the Special Master was unable to determine how the shortage might have occurred and was unable to determine the ownership of the potential shortage.
We are currently seeking discovery in the District Court of documentation and testimony on the potential cause and the impact, if any, of the shortage found by the Special Master. Blueknight is resisting discovery and has asked for summary judgment against SemCrude and the other defendants for the entire terminal and pipeline system shortage. On February 20, 2014, the Court overruled all requests for summary judgment and ordered Blueknight to allow SemGroup to take further discovery. SemGroup will continue to defend its position; however, we 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 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.
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.
Operating 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, 2013 are as follows (in thousands):
 
For twelve months ending:
 
December 31, 2014
$
745

December 31, 2015
644

December 31, 2016
439

December 31, 2017
401

December 31, 2018
316

Thereafter
139

Total future minimum lease payments
$
2,684

We recorded lease and rental expenses of $1.2 million, $1.0 million and $1.0 million for the years ended December 31, 2013, 2012 and 2011, 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, 2013, such commitments included the following (in thousands):
 
Volume
(barrels)
 
Value
Fixed price purchases
337

 
$
30,767

Fixed price sales
397

 
$
38,311

Floating price purchases
14,610

 
$
1,432,982

Floating price sales
14,397

 
$
1,426,396


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 4 for information related to capital funding requirements related to White Cliffs.
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, 2013, SemGroup had approximately 230 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, 2013, there are 82,948 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 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

Awards granted
49,104
 
$
34.41

Awards vested
(9,333)
 
$
27.25

Awards forfeited
(783)
 
$
34.40

Outstanding at December 31, 2013
82,948
 
$
28.59



The following table summarizes the scheduled vesting of awards outstanding as of December 31, 2013:
Year ended December 31, 2014
5,712

units
Year ended December 31, 2015
34,627

units
Year ended December 31, 2016
42,609

units

Compensation cost expensed for the years ended December 31, 2013 and 2012 was $0.8 million and $0.3 million, respectively. As of December 31, 2013, there was $1.5 million of total unrecognized compensation cost related to our nonvested awards, which is expected to be recognized over a weighted-average period of 19 months.
The holders of restricted units granted in 2012 are entitled to equivalent distributions (“UUDs”) 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 UUDs are subject to the same forfeiture and acceleration conditions as the associated restricted units. For the year ended December 31, 2013, 406 UUDs were issued upon the vesting of restricted units. At December 31, 2013, the value of outstanding UUD’s was approximately $101 thousand. This is equivalent to approximately 2,617 common units based on the market price of our common units at the close of business on December 31, 2013 of $38.70 per unit. Holders of restricted units granted in 2013 are entitled to received distributions made during the vesting period in cash upon vesting.
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 $0.7 million, $0.6 million and $0.5 million during the years ended December 31, 2013, 2012 and 2011, respectively, related to such equity-based compensation.
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 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 $0.4 million, $0.3 million and $0.3 million during the years ended December 31, 2013, 2012 and 2011, respectively, for contributions made by SemGroup to this plan.
Allocated employee compensation expenses
As described in Note 14, 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.
Limited partner interests – Class A units
As described in Note 3, Class A units are not eligible to receive cash distributions until certain operational targets are achieved by White Cliffs, at which time they will convert to common units. Prior to the conversion, the Class A units will be entitled to vote with the common units as a single class on any matter that the unitholders are entitled to vote, except that the Class A units will be entitled to vote as a separate class on any matter that adversely affects the rights or preferences of the Class A units in relation to other classes of equity interests of the Partnership or as required by law.
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 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 2014, 2013 and 2012
The following table shows distributions paid in 2014, 2013 and 2012:
Quarter Ended
 
Record Date
 
Payment Date
 
Distribution Per Unit
 
December 31, 2011
 
February 3, 2012
 
February 13, 2012
 
$0.0670
*
March 31, 2012
 
May 7, 2012
 
May 15, 2012
 
$0.3725
 
June 30, 2012
 
August 6, 2012
 
August 14, 2012
 
$0.3825
 
September 30, 2012
 
November 5, 2012
 
November 14, 2012
 
$0.3925
 
December 31, 2012
 
February 4, 2013
 
February 14, 2013
 
$0.4025
 
March 31, 2013
 
May 6, 2013
 
May 15, 2013
 
$0.4300
 
June 30, 2013
 
August 5, 2013
 
August 14, 2013
 
$0.4400
 
September 30, 2013
 
November 5, 2013
 
November 14, 2013
 
$0.4500
 
December 31, 2013
 
February 4, 2014
 
February 14, 2014
 
$0.4650
 
* Calculated as the $0.3625 minimum quarterly distribution, prorated based on the length of time during the three months ended December 31, 2011, that was subsequent to our initial public offering.
Limited Partner Units
Changes in our limited partner units are as follows:
 
Common
Units -
Public
 
Common
Units -
SemGroup
 
Subordinated
Units
 
Class A units
December 14, 2011 initial public offering
7,000,000

 
1,389,709

 
8,389,709

 

Balance at December 31, 2012
7,000,000

 
1,389,709

 
8,389,709

 

Private placement
2,000,000

 

 

 

Units issued to SemGroup in SemCrude Pipeline transactions

 
3,000,000

 

 
2,500,000

August common unit offering
4,750,000

 

 

 

Vesting of share-based compensation awards, including equivalent distributions
9,739

 

 

 

Balance at December 31, 2013
13,759,739

 
4,389,709

 
8,389,709

 
2,500,000


There were no shares issued between the December 14, 2011 initial public offering and December 31, 2012.
Equity Issuances
On August 13, 2013, we issued 4,750,000 common limited partner units to the public for proceeds of $152.5 million, net of underwriting discounts and commissions of $6.4 million. Our general partner contributed $3.2 million to the Partnership to maintain its 2% ownership. Proceeds were used to repay borrowings on our credit facility.
See Note 3 for information related to equity issued in conjunction with our acquisitions of interests in SCPL, including the private placement offering in January 2013. See Note 10 for information related to shares issued due to vesting of share-based compensation awards.
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, such as 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 years ended December 31, 2013 and 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,
 
December 15th through December 31, 2011
 
2013
 
2012
 
Net income attributable to Rose Rock Midstream, L.P.
$
36,749

 
$
23,954

 
$
970

Less: General partner’s incentive distribution earned (*)
483

 

 

Less: General partner’s 2.0% ownership
735

 
479

 
19

Net income allocated to limited partners
$
35,531

 
$
23,475

 
$
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
$
22,701

 
$
11,737.5

 
$
475.5

Net income allocable to subordinated units
13,321

 
11,737.5

 
475.5

Net income (loss) allocable to Class A units
(491
)
 

 

Net income allocated to limited partners
$
35,531

 
$
23,475

 
$
951

Denominator for basic and diluted earnings per limited partner unit:
 
 
 
 
 
Basic weighted average number of common units outstanding
13,672

 
8,390

 
8,390

Effect of non-vested restricted units
36

 
16

 

Diluted weighted average number of common units outstanding
13,708

 
8,406

 
8,390

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

 
8,390

 
8,390

Basic and diluted weighted average number of Class A units outstanding
1,264

 

 

Earnings (loss) per limited partner unit:
 
 
 
 
 
Common units (basic)
$
1.66

 
$
1.40

 
$
0.06

Common units (diluted)
$
1.66

 
$
1.40

 
$
0.06

Subordinated units (basic and diluted)
$
1.59

 
$
1.40

 
$
0.06

Class A units (basic and diluted)
$
(0.39
)
 
$

 
$

(*) Based on the amount of the distributions declared per common unit related to earnings for the year ended December 31, 2012 and the period from December 15, 2011 through December 31, 2011, our general partner was not entitled to receive incentive distributions for those periods.
(**) We calculate net income allocated to limited partners based on the distributions pertaining to the current period’s available cash as defined by our partnership agreement. After adjusting for the appropriate period’s distributions, the remaining undistributed earnings or excess distributions over earnings, if any, are allocated to the general partner, limited partners and participating securities in accordance with the contractual terms of the partnership agreement and as further prescribed under the two-class method. Incentive distribution rights do not participate in undistributed earnings. Class A units do not participate in cash distributions, but are allocated a proportional share of undistributed earnings. As distributions related to current period available cash exceeded net income, the Class A shares reflect a loss.
Supplemental Information - Statements Of Cash Flows
Supplemental Information - Statements of Cash Flows
SUPPLEMENTAL INFORMATION —STATEMENTS OF CASH FLOWS
Acquisition
In connection with the acquisition of SCPL (Note 3), we issued 3.0 million common units and 2.5 million Class A units, valued at $98.9 million and $70.1 million, respectively, as non-cash consideration to SemGroup. In addition, a non-cash contribution of $4.6 million was recorded to the general partner's capital account.
As the transaction occurred between parties under common control, the purchase price in excess of SemGroup's historical cost of SCPL was treated as an equity transaction with SemGroup, which reduced the partners' capital accounts pro-rata based on ownership percentages. Of the $414.3 million of purchase price in excess of historical cost, $240.6 million represented cash consideration in excess of historical cost and the remaining $173.7 million reduction represented the non-cash portion of the transaction related to equity consideration.
Other supplemental disclosures
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 $7.2 million, $1.2 million and $1.8 million during the years ended December 31, 2013, 2012 and 2011, respectively. We had no accrued purchases of property, plant and equipment at December 31, 2013. We 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 $13.5 million, $12.1 million and $11.3 million during the years ended December 31, 2013, 2012 and 2011, 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 December 2013.
SemGroup charged us $7.0 million, $6.4 million and $4.5 million during the years ended December 31, 2013, 2012 and 2011, 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.
Common control transactions
During 2013, we purchased interests in SCPL from SemGroup. See Note 3 for additional information.
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 the assets of SemStream, L.P. ("SemStream"), a wholly-owned subsidiary of SemGroup. 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 years ending December 31, 2013 and 2012, we made purchases of condensate from NGL Energy in the amounts of $15.3 million and $42.7 million, respectively. We received reimbursements from NGL Energy for certain services in the amount of $182.0 thousand for the year ended December 31, 2013. There were no reimbursements from NGL Energy during the year ended December 31, 2012.
Gavilon, LLC
In December 2013, NGL Energy announced the acquisition of Gavilon, LLC ("Gavilon"). We generated sales to Gavilon of $560.4 million for the year ended December 31, 2013. Purchases from Gavilon were $552.1 million for the year ended December 31, 2013. Transactions with Gavilon primarily relate to leased storage and transportation services of crude oil, including buy/sell transactions. In accordance with ASC 845-10-15, buy/sell transactions were reported as revenue on a net basis in our consolidated statements of income as the purchases of inventory and subsequent sales of the inventory were with the same counterparty.
High Sierra Crude Oil and Marketing, LLC
We generated revenues from High Sierra Crude Oil and Marketing, LLC ("High Sierra"), which is a subsidiary of NGL Energy, of $132.8 million and $42.6 million for the years ended December 31, 2013 and 2012, respectively. Purchases from High Sierra were $102.2 million and $44.4 million for the years ended December 31, 2013 and 2012, respectively. Transactions with High Sierra primarily relate to transportation and marketing of crude oil and condensate. In accordance with ASC 845-10-15, these transactions were reported as revenue on a net basis in our consolidated statements of income as the purchases of inventory and subsequent sales of the inventory were with the same counterparty.
SemStream
Prior to NGL Energy's acquisition of SemStream assets on November 1, 2011, we purchased condensate from SemStream. 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 purchases of $46.7 million for the period from January 1, 2011 through November 1, 2011.
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, 2013
 
Year Ended December 31, 2012
 
Year Ended December 31, 2011
Purchases
$
23,985

 
$
10,606

 
$
6,547


White Cliffs
We provide leased storage and management services to White Cliffs. We generated revenues from White Cliffs of $2.9 million, $2.5 million and $2.2 million for the years ended December 31, 2013, 2012 and 2011, respectively.
 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 $0.4 million, $0.6 million and $0.3 million in legal fees and related expenses to this law firm during the years ended December 31, 2013, 2012 and 2011, 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, 2013, 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
$
171,232

 
$
161,422

 
$
181,831

 
$
252,041

 
$
766,526

Total expenses
160,937

 
153,257

 
174,074

 
249,738

 
738,006

Earnings from equity method investment
3,453

 
3,451

 
3,527

 
7,140

 
17,571

Operating income
13,748

 
11,616

 
11,284

 
9,443

 
46,091

Other expenses, net
1,754

 
2,482

 
1,873

 
1,977

 
8,086

Net income
11,994

 
9,134

 
9,411

 
7,466


38,005

Less: net income attributable to noncontrolling interests

 

 

 
1,256

 
1,256

Net income attributable to Rose Rock Midstream, L.P.
$
11,994

 
$
9,134

 
$
9,411

 
$
6,210

 
$
36,749

Earnings (loss) per limited partner unit
 
 
 
 
 
 
 
 
 
Common unit (basic)
$
0.59

 
$
0.44

 
$
0.45

 
$
0.26

 
$
1.66

Common unit (diluted)
$
0.59

 
$
0.44

 
$
0.45

 
$
0.26

 
$
1.66

Subordinated unit (basic and diluted)
$
0.57

 
$
0.44

 
$
0.37

 
$
0.24

 
$
1.59

Class A unit (basic and diluted)
$
0.16

 
$

 
$
(0.08
)
 
$
(0.38
)
 
$
(0.39
)

Summarized information on the 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