ROSE ROCK MIDSTREAM, L.P., 10-K filed on 2/27/2015
Annual Report
Document and Entity Information†(USD $)
12 Months Ended
Dec. 31, 2014
Feb. 17, 2015
Jun. 30, 2014
Document Type
10-K†
Amendment Flag
false†
Document Period End Date
Dec. 31, 2014†
Document Fiscal Period Focus
FY†
Document Fiscal Year Focus
2014†
Entity Registrant Name
Rose Rock Midstream, L.P.†
Entity Central Index Key
0001527622†
Current Fiscal Year End Date
--12-31†
Entity Filer Category
Large Accelerated Filer†
Entity Common Stock, Shares Outstanding
36,788,412†
Entity Well-known Seasoned Issuer
No†
Entity Public Float
$†746,608,937†
Entity Current Reporting Status
Yes†
Entity Voluntary Filers
No†
Consolidated Balance Sheets†(USD $)
In Thousands, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Current assets:
Cash and cash equivalents
$†3,666†
$†15,459†
Accounts receivable
224,005†
217,213†
Receivable from affiliates
15,481†
56,220†
Inventories
26,722†
30,779†
Other current assets
4,016†
1,916†
Total current assets
273,890†
321,587†
Property, plant and equipment, net
335,910†
311,616†
Equity method investment
269,635†
224,095†
Goodwill
36,116†
28,322†
Other intangible assets (net of accumulated amortization of $370 and $1,155 at December 31, 2014 and 2013, respectively)
16,640†
5,775†
Other noncurrent assets, net
13,037†
5,852†
Total assets
945,228†
897,247†
Current liabilities:
Accounts payable
210,920†
211,298†
Payable to affiliates
27,864†
69,274†
Accrued liabilities
21,705†
8,645†
Other current liabilities
3,191†
3,814†
Total current liabilities
263,680†
293,031†
Long-term debt
432,092†
245,088†
Commitments and contingencies (Note 9)
  †
  †
Partnersí capital:
General partner
8,599†
5,995†
Total Rose Rock Midstream, L.P. partnersí capital
249,456†
280,571†
Noncontrolling interests in consolidated subsidiaries
0†
78,557†
Total equity
249,456†
359,128†
Total liabilities and partnersí capital
945,228†
897,247†
Capital Unit, Class A [Member] |
SemGroup [Member]
Partnersí capital:
Common units
76,321†
40,772†
Common Units [Member] |
Public [Member]
Partnersí capital:
Common units
69,929†
159,961†
Common Units [Member] |
SemGroup [Member]
Partnersí capital:
Common units
155,367†
79,218†
Subordinated Units [Member] |
SemGroup [Member]
Partnersí capital:
Common units
$†(60,760)
$†(5,375)
Consolidated Balance Sheets (Parenthetical)†(USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2014
Dec. 31, 2013
Finite-Lived Intangible Assets, Accumulated Amortization
$†370†
$†1,155†
Subordinated Units [Member] |
SemGroup [Member]
Common units, issued
8,389,709†
8,389,709†
Common units, outstanding
8,389,709†
8,389,709†
Common Class A [Member] |
SemGroup [Member]
Common units, issued
3,750,000†
2,500,000†
Common units, outstanding
3,750,000†
2,500,000†
Common Units [Member] |
Public [Member]
Common units, issued
13,765,451†
13,759,739†
Common units, outstanding
13,765,451†
13,759,739†
Common Units [Member] |
SemGroup [Member]
Common units, issued
6,814,709†
4,389,709†
Common units, outstanding
6,814,709†
4,389,709†
Consolidated Statements of Income†(USD $)
Share data in Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Revenues, including revenues from affiliates (Note 14):
Product
$†1,185,456,000†
$†702,028,000†
$†576,158,000†
Service
105,188,000†
64,498,000†
44,318,000†
Other
0†
0†
(59,000)
Total revenues
1,290,644,000†
766,526,000†
620,417,000†
Expenses, including expenses from affiliates (Note 14):
Costs of products sold, exclusive of depreciation and amortization
1,131,362,000†
663,759,000†
546,966,000†
Operating
78,792,000†
35,795,000†
23,302,000†
General and administrative
18,783,000†
15,287,000†
12,083,000†
Depreciation and amortization
36,072,000†
23,165,000†
12,131,000†
Total expenses
1,265,009,000†
738,006,000†
594,482,000†
Earnings from equity method investment
57,378,000†
17,571,000†
0†
Operating income
83,013,000†
46,091,000†
25,935,000†
Other expenses (income):
Interest expense
20,456,000†
8,100,000†
1,912,000†
Other expense (income), net
(20,000)
(14,000)
69,000†
Total other expenses (income), net
20,436,000†
8,086,000†
1,981,000†
Net income
62,577,000†
38,005,000†
23,954,000†
Less: net income attributable to noncontrolling interests
7,758,000†
1,256,000†
0†
Net income attributable to Rose Rock Midstream, L.P.
54,819,000†
36,749,000†
23,954,000†
Earnings per limited partner unit
Net income allocated to general partner
7,794,000†
1,218,000†
479,000†
Net income (loss) allocated to limited partners
47,025,000†1
35,531,000†1
23,475,000†1
Common Units [Member]
Earnings per limited partner unit
Net income (loss) allocated to limited partners
32,914,000†
22,701,000†
11,737,500†
Earnings per limited partner unit, basic
$†1.69†
$†1.66†
$†1.40†
Earnings per limited partner unit, diluted
$†1.69†
$†1.66†
$†1.40†
Basic weighted average number of limited partner units outstanding:
Basic weighted average number of limited partner units outstanding:
19,419†
13,672†
8,390†
Diluted weighted average number of limited partner units outstanding:
Diluted weighted average number of limited partner units outstanding:
19,484†
13,708†
8,406†
Subordinated Units [Member]
Earnings per limited partner unit
Net income (loss) allocated to limited partners
13,912,000†
13,321,000†
11,737,500†
Subordinated Units [Member]
Earnings per limited partner unit
Net income (loss) allocated to limited partners
13,912,000†
13,321,000†
11,737,500†
Earnings per limited partner unit, basic and diluted
$†1.66†
$†1.59†
$†1.40†
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†
Common Class A [Member]
Earnings per limited partner unit
Net income (loss) allocated to limited partners
$†199,000†
$†(491,000)
$†0†
Earnings per limited partner unit, basic and diluted
$†0.06†
$†(0.39)
$†0.00†
Basic weighted average number of limited partner units outstanding:
Basic weighted average number of limited partner units outstanding:
3,154†
1,264†
0†
Diluted weighted average number of limited partner units outstanding:
Diluted weighted average number of limited partner units outstanding:
3,154†
1,264†
0†
[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. Prior to the conversion of the Class A units in January 2015, the Class A units did not participate in cash distributions, but were allocated a proportional share of undistributed earnings. Class A units will receive the declared distribution for the fourth quarter of 2014, as such the fourth quarter distribution is reflected in the earnings attributable to Class A units for the year ended December 31, 2014. As distributions related to the available cash exceeded net income, the Class A units reflect a loss for the year ended December 31, 2013.
Consolidated Statements of Changes in Equity†(USD $)
In Thousands, unless otherwise specified
Total
Common Units Public [Member]
Common Units SemGroup [Member]
Subordinated Units [Member]
Class A unitholder [Member]
General Partner [Member]
Noncontrolling Interest [Member]
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest at Dec. 31, 2011
$†304,854†
$†127,531†
$†37,739†
$†133,487†
$†0†
$†6,097†
$†0†
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest
23,954†
9,797†
1,940†
11,738†
0†
479†
0†
Cash distributions to Partners
(20,795)
(8,502)
(1,687)
(10,189)
0†
(417)
0†
Non-cash equity compensation
308†
308†
0†
0†
0†
0†
0†
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest at Dec. 31, 2012
308,321†
129,134†
37,992†
135,036†
0†
6,159†
0†
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†
Consolidation of SemCrude Pipeline
77,301†
0†
0†
0†
0†
0†
77,301†
Cash distributions to Partners
(38,076)
(17,647)
(4,977)
(14,451)
0†
(1,001)
0†
Non-cash equity compensation
806†
806†
0†
0†
0†
0†
0†
Equity issuance
387,131†
210,226†
98,895†
0†
70,105†
7,905†
0†
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)
0†
Unvested distribution equivalent rights
(52)
(52)
0†
0†
0†
0†
0†
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†
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest
62,577†
22,817†
10,097†
13,912†
199†
7,794†
7,758†
Cash distributions to Partners
(62,339)
(28,494)
(11,778)
(17,366)
0†
(4,701)
0†
Non-cash equity compensation
943†
943†
0†
0†
0†
0†
0†
Equity issuance
182,220†
0†
120,013†
0†
58,563†
3,644†
0†
Purchase price in excess of historical cost in common control transaction, including non-cash consideration
(206,633)
(85,173)
(42,183)
(51,931)
(23,213)
(4,133)
0†
Unvested distribution equivalent rights
(125)
(125)
0†
0†
0†
0†
0†
Cash distributions to noncontrolling interest in SemCrude Pipeline, L.L.C.
(10,683)
0†
0†
0†
0†
0†
(10,683)
Contributions from noncontrolling interest in SemCrude Pipeline, L.L.C.
14,367†
0†
0†
0†
0†
0†
14,367†
Purchase of remaining one-third interest in SemCrude Pipeline, L.L.C.
(89,999)
0†
0†
0†
0†
0†
(89,999)
Stockholders' Equity, Including Portion Attributable to Noncontrolling Interest at Dec. 31, 2014
$†249,456†
$†69,929†
$†155,367†
$†(60,760)
$†76,321†
$†8,599†
$†0†
Consolidated Statements of Cash Flows†(USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Net Income (Loss), Including Portion Attributable to Noncontrolling Interest
$†62,577†
$†38,005†
$†23,954†
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
36,072†
23,165†
12,131†
Loss (gain) on disposal of long-lived assets, net
319†
(31)
(1)
Earnings from equity method investment
(57,378)
(17,571)
0†
Distributions from equity method investment
57,378†
16,999†
0†
Amortization of debt issuance costs
1,529†
811†
359†
Non-cash equity compensation
943†
806†
308†
Net unrealized (gain) loss related to derivative instruments
(1,621)
(974)
1,196†
Inventory Write-down
5,667†
0†
0†
Changes in assets and liabilities:
Decrease (increase) in accounts receivable
(6,792)
13,549†
(91,207)
Decrease (increase) in receivable from affiliates
40,739†
(56,163)
2,153†
Decrease (increase) in inventories
(1,610)
(7,465)
(3,251)
Decrease (increase) in other current assets
(425)
833†
(1,707)
Decrease (increase) in other assets
(120)
(7)
(20)
Increase (decrease) in accounts payable and accrued liabilities
11,936†
(6,107)
96,524†
Increase (decrease) in payable to affiliates
(41,524)
66,625†
(5,342)
Net cash provided by operating activities
107,690†
72,475†
35,097†
Cash flows from investing activities:
Capital expenditures
(36,313)
(25,223)
(28,370)
Proceeds from sale of long-lived assets
1,063†
38†
244†
Contributions to equity method investment
(54,930)
(31,832)
0†
Acquisitions
(133,993)
(171,258)
0†
Proceeds from Equity Method Investment, Dividends or Distributions, Return of Capital
9,390†
0†
0†
Net cash used in investing activities
(214,783)
(228,275)
(28,126)
Cash flows from financing activities:
Debt issuance costs
(8,593)
(4,069)
(252)
Borrowings on revolving credit facility and issuance of senior unsecured notes
844,415†
558,000†
91,000†
Principal payments on revolving credit facility
(657,415)
(317,500)
(86,525)
Principal payments on capital lease obligations
(39)
(27)
0†
Proceeds from common L.P. unit issuance, net of offering costs
0†
210,226†
0†
Contributions from general partner
0†
3,242†
0†
Cash consideration in excess of historical cost of interest in SemCrude Pipeline, L.L.C.
(24,413)
(240,645)
0†
Net distributions to partners
(62,339)
(38,076)
(20,795)
Payments of Ordinary Dividends, Noncontrolling Interest
(10,683)
0†
0†
Proceeds from Noncontrolling Interests
14,367†
0†
0†
Net cash used in financing activities
95,300†
171,151†
(16,572)
Net increase (decrease) in cash and cash equivalents
(11,793)
15,351†
(9,601)
Cash and cash equivalents at beginning of period
15,459†
108†
9,709†
Cash and cash equivalents at end of period
$†3,666†
$†15,459†
$†108†
Overview
Overview
OVERVIEW
Rose Rock Midstream, L.P. is a Delaware limited partnership. 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.
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 and its subsidiaries. The term “SemGroup” refers to SemGroup Corporation and its controlled subsidiaries, including Rose Rock Midstream GP, LLC.
Rose Rock's assets include the following:
approximately 7.6 million barrels of crude oil storage capacity in Cushing, Oklahoma;
a 570-mile crude oil gathering and transportation pipeline system with over 630,000 barrels of associated storage capacity in Kansas and northern Oklahoma that is connected to several third-party pipelines and refineries and our storage terminal in Cushing;
a crude oil gathering, storage, transportation and marketing business in the Bakken Shale in North Dakota and Montana;
a 17-mile crude oil pipeline that connects our Platteville, Colorado crude oil terminal to the Tampa, Colorado crude oil market;
a crude oil trucking fleet of over 255 transport trucks and 275 trailers;
a 51% interest in White Cliffs, L.L.C. ("White Cliffs"), who owns a pipeline system that runs 527 miles and consists of two 12-inch common carrier, crude oil pipelines that transport crude oil from Platteville, Colorado in the DJ Basin to Cushing, Oklahoma (the "White Cliffs Pipeline"); and
a modern, 16-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 include the accounts of Rose Rock and its controlled subsidiaries.
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. All significant transactions between Rose Rock and its consolidated subsidiaries have been eliminated. 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, 2014:
20,580,160 common units representing limited partner interests (of which 6,814,709 units are held by SemGroup);
8,389,709 subordinated units representing limited partner interests (all of which are held by SemGroup);
3,750,000 Class A units representing limited partner interests (all of which are held by SemGroup), which did not participate in cash distributions until conversion to common units in January 2015; and
a 2% general partner interest (which is held by SemGroup).
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; (5) valuation of goodwill and other intangible assets; and (6) 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, 2014 and 2013.
INVENTORIES – Inventories primarily consist of crude oil. Inventories are valued at the lower of cost or market, with cost generally determined using the weighted-average method. The cost of inventory includes applicable transportation costs. During the year ended December 31, 2014, we recorded non-cash charges of $5.7 million to write-down inventory to the lower of cost or market.
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
Trucking equipment and other
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 1st 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, 2014 and 2013 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, 2014 and 2013.
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.
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 – 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 in 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.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers", which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.
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.
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 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, L.L.C. ("SCPL"), which was retained by SemGroup prior to our acquisition of the remaining noncontrolling interest in 2014. Income was 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
During the year ended December 31, 2014, we completed the following acquisitions:
SemCrude Pipeline, L.L.C.
On June 23, 2014, we acquired the remaining 33% interest in SCPL from SemGroup in exchange for (i) cash of approximately $114.4 million, (ii) the issuance of 2.425 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. As the transaction was between entities under common control, we recorded our investment in SCPL 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.
Class A units were 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. The Class A units converted to common units in January 2015.
The cash consideration was funded through a borrowing under our credit facility. The 2.425 million common units were valued at $49.49 per unit, or $120.0 million, based on the closing price on June 19, 2014, which was the date on which the transaction price was determined. The Class A units were valued at $49.49 per unit discounted for the expected forbearance of distributions, or $58.6 million. The non-cash contribution to the general partner's capital account was made in the amount of $3.6 million.

Crude oil trucking assets
On June 24, 2014, we acquired crude oil trucking assets from a subsidiary of Chesapeake Energy Corporation ("Chesapeake") for $44.0 million in cash. Highlights of the transaction include:
124 trucks, 122 trailers and miscellaneous equipment; and
a long-term transportation agreement with Chesapeake Energy Marketing, Inc.
The results of operations of these assets from June 24, 2014 to December 31, 2014 have been included in our consolidated statement of income and in our consolidated balance sheet as of December 31, 2014. During the year ended December 31, 2014, our consolidated statements of income did not include material amounts of revenue or operating income related to these assets. The proforma impact to comparative prior year periods, had the acquisition occurred at the beginning of the comparative prior year period, is not significant.
Fair values of the acquired assets were determined based on the cost, income and market approach methodologies. The trucks and equipment acquired were valued based on the cost approach, which considers the replacement cost of the assets adjusted for depreciation and physical deterioration, and the market approach, which considers the value of transactions for comparable assets. The value of the customer contract was determined based on the income approach using the excess earnings method over the remaining life of the contract and assuming a 95% probability of renewal.
We have recorded the fair value of the assets acquired as follows (in thousands):
Property, plant and equipment
$
19,092

Customer contract intangible
17,010

Goodwill
7,892

Total assets acquired
$
43,994


The above finalized purchase price allocation resulted in adjustments to previously reported estimates. Our preliminary estimate of the value of the acquired property, plant and equipment was reduced by $2.6 million and our estimate of the value of the intangible asset was increased by $12.6 million which resulted in a decrease in the value of the associated goodwill of $10.0 million.
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 the acquired business as a platform for growth and the acquired assembled workforce.
During the year ended December 31, 2013, we completed the following acquisitions:
SemCrude Pipeline, L.L.C.
On January 11, 2013, we acquired a 33% interest in 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.
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 (Note 11). 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 closing price on December 11, 2013, which was the date on which the transaction price was determined. The Class A units were valued at $36.30 per unit discounted for the expected forbearance of distributions, or $39.6 million. The non-cash 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.
As the SCPL transactions were 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.

Barcas Field Services, LLC
On September 1, 2013, we completed the acquisition of the assets of Barcas Field Services, LLC ("Barcas") for $49.0 million in cash. Highlights of the acquisition include the following:
114 trucks, 120 trailers and miscellaneous equipment; and
a long-term take-or-pay customer transportation agreement.
Fair values of the acquired assets were determined based on the cost, income and market approach methodologies. The trucks and equipment acquired were valued based on the cost approach which considers the replacement cost of the assets adjusted for depreciation and physical deterioration. The value of the customer contract was determined based on the income approach using the excess earnings method over the remaining life of the contract and assuming a 50% probability of renewal. The market approach which considers the value of comparable transactions was used to value the acquired land.

We have recorded fair values of the assets acquired as follows (in thousands
Property, plant and equipment
$
13,865

Customer contract intangible
6,880

Goodwill
28,224

Total assets acquired
$
48,969


Based on the final purchase price allocation, the amounts above differ from those reported at December 31, 2013 by a non-cash adjustment which decreased goodwill and other intangible assets and increased property, plant and equipment by $0.1 million.

Goodwill represents the excess of the consideration paid for the acquired business over the fair value of the individual assets acquired. Goodwill primarily represents cost savings due to the ability to transport using the acquired trucks rather than third-party trucks, the ability to bring more volume from the field into our pipelines, 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 had been recently constructed by Noble Energy, Inc. and was placed into service with the acquisition. The pipeline connects our Platteville, Colorado crude oil terminal to the Tampa, Colorado crude oil market.

Subsequent Event
On February 13, 2015, we acquired the Wattenberg Oil Trunkline and Glass Mountain Holding, LLC, which owns a 50% interest in Glass Mountain Pipeline LLC ("Glass Mountain"), from SemGroup in exchange for (i) cash of approximately $251.2 million, (ii) the issuance of 1.75 million common units and (iii) 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 and the issuance and sale of 2.3 million common units in an underwritten public offering for net proceeds of $89.1 million. As the transaction was between entities under common control, we will record the acquired assets and liabilities based on SemGroup's historical cost. The purchase price in excess of historical cost will be treated as an equity transaction with SemGroup, which will reduced the capital accounts of our general and limited partners on a pro-rata basis.
Equity Method Investment
Equity Method Investments [Text Block]
EQUITY METHOD INVESTMENT
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. Subsequent to our acquisition of additional ownership interests on December 16, 2013, we consolidated SCPL and reported a noncontrolling interest, the ownership interest in SCPL which was retained by SemGroup, until our purchase of the noncontrolling interest on June 23, 2014. 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.
For the years ended December 31, 2014 and 2013, we recorded equity in earnings of White Cliffs of $57.4 million and $3.8 million, respectively. The equity earnings for the year ended December 31, 2013 represent one month of earnings subsequent to our consolidation of SCPL. We received cash distributions from White Cliffs of $66.8 million for the year ended December 31, 2014. 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, 2014 and 2013 is shown below (in thousands):
 
December 31, 2014
 
December 31, 2013
Current assets
$
35,623

 
$
98,457

Property, plant and equipment, net
471,179

 
312,831

Goodwill
17,000

 
17,000

Other intangible assets, net
16,043

 
20,802

Total assets
$
539,845

 
$
449,090

Current liabilities
$
11,108

 
$
9,648

Members’ equity
528,737

 
439,442

Total liabilities and members’ equity
$
539,845

 
$
449,090

Certain summarized income statement information of White Cliffs for the years ended December 31, 2014 and 2013 is shown below (in thousands):
 
Year ended December 31, 2014
 
Year Ended December 31, 2013
Revenue
$
160,369

 
$
133,310

Operating, general and administrative expenses
$
23,067

 
$
23,825

Depreciation and amortization expense
$
23,257

 
$
18,668

Net income
$
114,045

 
$
90,817


The equity in earnings of White Cliffs for the years ended December 31, 2014 and 2013, recorded by SCPL, is less than 51% of the net income of White Cliffs for the same periods. 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 $1.6 million and $1.8 million of such general and administrative expense for the years ended December 31, 2014 and 2013, respectively.
The members of White Cliffs are required to contribute capital to White Cliffs to fund an expansion project adding approximately 65,000 barrels per day of capacity. We expect to contribute $40.0 million for this project. The project is expected to be complete in late 2015.
For the years ended December 31, 2014 and 2013, we contributed $53.3 million and $31.8 million, respectively, related to a project which added a 12-inch line from Platteville, Colorado to Cushing, Oklahoma and increased capacity to 150,000 barrels per day. This project was completed in August 2014. Contributions to White Cliffs in 2014 were partially funded by $14.4 million of contributions from 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, 2014 and 2013 and for each of the three years in the period ended December 31, 2014 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,
2014
 
December 31,
2013
Land
$
17,070

 
$
17,058

Pipelines and related facilities
189,775

 
181,697

Storage and terminal facilities
129,938

 
118,864

Linefill
25,507

 
13,866

Trucking equipment and other
40,190

 
19,089

Construction-in-progress
11,570

 
17,575

Property, plant and equipment, gross
414,050

 
368,149

Accumulated depreciation
(78,140
)
 
(56,533
)
Property, plant and equipment, net
$
335,910

 
$
311,616


 
We recorded depreciation expense of $30.0 million, $22.0 million and $12.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.

We include within the cost of property, plant and equipment interest costs incurred while an asset is being constructed. We capitalized $0.3 million and $0.7 million of interest costs during the years ended December 31, 2014 and 2013, respectively. No interest costs were capitalized 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, 2014 and 2013 (in thousands):
 
 
December 31, 2014
 
December 31, 2013
 
Level 1
 
Netting*
 
Total
 
Level 1
 
Netting*
 
Total
Assets
$
3,198

 
$
(1,637
)
 
$
1,561

 
$
36

 
$
(36
)
 
$

Liabilities
1,637

 
(1,637
)
 

 
96

 
(36
)
 
60


*
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 hierarchy. At December 31, 2014, all of our physical fixed price forward purchases and sales contracts were being accounted for as normal purchases and normal sales.
There were no financial assets or liabilities classified as Level 2 or Level 3 during the years ended December 31, 2014, 2013 and 2012, as such no rollforward of activity has been presented.
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, 2014
 
Year Ended December 31, 2013
 
Year Ended December 31, 2012
Sales
6,641

 
2,595

 
1,743

Purchases
6,477

 
2,575

 
1,636


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, 2014
 
December 31, 2013
Assets
 
Liabilities
 
Assets
 
Liabilities
$
1,561

 
$

 
$

 
$
60


We have posted margin deposits as collateral with brokers who have the right of set off associated with these funds. Our margin deposit balances were $0.8 million and $0.8 million at December 31, 2014 and 2013, 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, 2014 and 2013, we would have had net asset positions of $2.4 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, 2014
 
December 31, 2013
 
December 31, 2012
$
17,351

 
$
(1,593
)
 
$
149


Concentrations of risk
During the year ended December 31, 2014, we generated approximately $964 million of revenue from two third-party customers, which represented approximately 75% of our consolidated revenue. We purchased approximately $622 million of product from two third-party suppliers, which represented approximately 55% of our costs of products sold. At December 31, 2014, two third-party customers accounted for 53% of our consolidated accounts receivable.
As described in Note 14, we also generated revenues and expenses from other subsidiaries of SemGroup.
Goodwill and other intangibles
Goodwill and Intangible Assets Disclosure [Text Block]
7.
GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill
Changes in goodwill are shown below (in thousands):
Balance at December 31, 2012
$

Barcas acquisition (Note 3)
28,322

Balance at December 31, 2013
28,322

Oilfield trucking acquisition (Note 3)
7,892

Barcas purchase price adjustment
(98
)
Balance at December 31, 2014
$
36,116



Other Intangible Assets
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

Oilfield trucking acquisition
17,010

Barcas purchase price adjustment
(50
)
Amortization
(6,095
)
Balance at December 31, 2014
$
16,640


For the year ended December 31, 2014, we recorded a $17.0 million customer contract intangible asset related to the Chesapeake trucking acquisition. The intangible is being amortized in proportion with the expected revenues associated with the contract over 20 years.
The Barcas customer contract intangible was fully amortized during the year ended December 31, 2014 due to certain contractual terms being satisfied.
We estimate that future amortization of other intangible assets will be as follows (in thousands):
For the twelve months ending:
 
December 31, 2015
$
1,073

December 31, 2016
1,881

December 31, 2017
2,132

December 31, 2018
2,172

December 31, 2019
1,680

Thereafter
7,702

Total estimated amortization expense
$
16,640

Long-Term Debt
LONG TERM DEBT
LONG-TERM DEBT
Our long-term debt consisted of the following (in thousands):
 
December 31,
2014
 
December 31,
2013
5.625% senior unsecured notes
$
400,000

 
$

Revolving credit facility
32,000

 
245,000

Capital leases
132

 
125

Total long-term debt
432,132

 
245,125

less: current portion of long-term debt
40

 
37

Noncurrent portion of long-term debt
$
432,092

 
$
245,088


Senior unsecured notes
On July 2, 2014, Rose Rock and its wholly-owned subsidiary, Rose Rock Finance Corporation ("Finance Corp."), as co-issuer, sold $400 million of 5.625% senior unsecured notes due 2022 (the “Notes”) to certain initial purchasers for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to non-U.S. persons outside the United States pursuant to Regulation S of the Securities Act. The Notes are guaranteed by all of our existing subsidiaries other than Finance Corp. Such guarantees of the Notes are full and unconditional and constitute the joint and several obligations of the subsidiary guarantors.
The net proceeds from the offering of $391.9 million, after underwriters' fees and offering expenses, were used to repay amounts borrowed under our revolving credit facility and for general partnership purposes.
The Notes are governed by an indenture between the Partnership, its subsidiary guarantors, Finance Corp. and Wilmington Trust, National Association, as trustee (the “Indenture”). The Indenture includes customary covenants, including limitations on our ability to incur additional indebtedness or issue certain preferred shares; pay dividends and make certain distributions, investments and other restricted payments; create certain liens; sell assets; enter into transactions with affiliates; merge, consolidate, sell or otherwise dispose of all or substantially all of our assets; and designate our subsidiaries as unrestricted under the Indenture.
The Indenture includes customary events of default. A default would permit the trustee or holders of at least 25% in aggregate principal amounts of the Notes then outstanding to declare all amounts owing under the Notes to be due and payable.
The Notes are effectively subordinated in right of payment to any of our, and the subsidiary guarantors', existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness.
The Partnership may issue additional Notes under the Indenture from time to time, subject to the terms of the Indenture.
Except as described below, the Notes are not redeemable at the Partnership's option prior to July 15, 2017. From and after July 15, 2017, the Partnership may redeem the Notes, in whole or in part, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest, if redeemed during the twelve-month period beginning on July 15 of each of the years indicated below:
Year
 
Percentage
2017
 
104.219%
2018
 
102.813%
2019
 
101.406%
2020 and thereafter
 
100.000%

Prior to July 15, 2017, the Partnership may, at its option, on one or more occasions, redeem up to 35% of the sum of the original aggregate principal amount of the Notes at a redemption price equal to 105.625% of the aggregate principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings of the Partnership, or the parent of the Partnership to the extent such net proceeds are contributed to the Partnership, subject to certain conditions.
Prior to July 15, 2017, the Partnership may also redeem all or part of the Notes at a price equal to the principal plus a premium equal to the greater of 1% of the principal or the excess of the present value of the July 15, 2017 redemption price from the table above plus all required interest payments due through July 15, 2017, computed using a discount rate based on a published United States Treasury Rate plus 50 basis points, over the principal value of such Note.
In the event of a change of control, the Partnership is required to offer to repurchase the Notes at an amount equal to 101% of the principal plus accrued and unpaid interest.
In accordance with a Registration Rights Agreement, in September 2014 the Partnership filed a registration statement with the SEC, which was declared effective by the SEC on September 23, 2014, enabling holders of the Notes to exchange the Notes and related guarantees for registered notes (the "Exchange Notes") and guarantees that have substantially identical terms as the Notes and related guarantees. The exchange offer expired on October 22, 2014. All of the Notes were exchanged. The guarantees of the Exchange Notes are full and unconditional and constitute the joint and several obligations of the Partnership and its subsidiary guarantors.
Each of the subsidiary guarantors is 100% owned by the Partnership. The Partnership has no assets or operations independent of its subsidiaries and there are no significant restrictions upon the ability of the Partnership, or any of its subsidiaries, to obtain funds from its respective subsidiaries by dividend or loan. None of the assets of the Partnership's subsidiaries represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act.
Interest on the Notes is payable in arrears on January 15th and July 15th to holders of record on January 1st and July 1st each year until maturity. For the year ended December 31, 2014, we recorded interest expense of $11.7 million, including amortization of debt issuance costs. At December 31, 2014, we had $8.0 million of debt issuance costs, net of accumulated amortization, related to the Notes included in other noncurrent assets on our consolidated balance sheet.
At December 31, 2014, we were in compliance with the terms of the Notes.
Revolving credit facility
At December 31, 2014, our credit agreement, as amended, provides for a revolving credit facility of $585 million and includes a $150 million sub-limit for letters of credit. The credit agreement expires September 20, 2018, when all amounts owed will be due, and permits the increase of the facility by not more than $200 million, subject to certain conditions.
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, 2014, we had outstanding borrowings of $32.0 million. Borrowings of $20 million incurred interest at the Eurodollar rate plus an applicable margin and borrowings of $12 million incurred interest at the ABR rate plus an applicable margin. The interest rates at December 31, 2014 were 2.74% for Eurodollar borrowings and 4.75% for ABR borrowings.
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, 2014, there were $17.5 million in outstanding letters of credit, and the rate in effect was 2.50%. In addition, a fronting fee of 0.25% is charged on outstanding letters of credit.
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, 2014, we had $67.6 million of secured bilateral letters of credit outstanding and the interest rate in effect was 1.75%.
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.
During the years ended December 31, 2014, 2013 and 2012, we recorded $9.0 million, $8.7 million and $1.9 million, respectively, of interest expense related to the credit facility, including amortization of capitalized loan fees. At December 31, 2014, we had $3.8 million in capitalized loan fees, net of accumulated amortization, related to the credit facility included in other noncurrent assets.
The credit agreement contains representations and warranties and affirmative and negative covenants. The covenants in the agreement include limitations on creation of new indebtedness and liens, entry into sale and lease-back transactions, investments, and fundamental changes including mergers and consolidations, certain cash distributions and other distributions, material changes in our business and modifying certain documents.
Subsequent to the issuance of the Notes, we elected to adhere to alternative financial performance covenants under our credit facility. These covenants require us to not 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, not 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 5.50 to 1.00, or not permit the ratio of senior secured debt to our consolidated EBITDA to be greater than 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, 2014, we were in compliance with the terms of the credit agreement.
Capital lease obligations
At December 31, 2014, we had $92 thousand ($132 thousand including current portion) of capital lease obligations reported as long-term debt on the consolidated balance sheet.
Scheduled principal payments
The following table summarizes the scheduled principal payments as of December 31, 2014 (in thousands). As described above, our debt agreements require accelerated principal payments under certain circumstances. As a result, principal payments may occur earlier than shown in the table below.
 
Senior Unsecured Notes
 
Revolving Credit
Facility
 
Capital
Leases
 
Total
For the year ended:
 
 
 
 
 
 
 
December 31, 2015
$

 
$

 
$
40

 
$
40

December 31, 2016

 

 
40

 
40

December 31, 2017

 

 
26

 
26

December 31, 2018

 
32,000

 
26

 
32,026

December 31, 2019

 

 

 

Thereafter
400,000

 

 

 
400,000

Total
$
400,000

 
$
32,000

 
$
132

 
$
432,132


Fair value
We estimate the fair value of our senior unsecured notes to be $368 million at December 31, 2014, based on unadjusted, transacted market prices, which is categorized as a Level 1 measurement. We estimate that the fair value of our revolving long-term debt was not materially different than the reported values at December 31, 2014, and is categorized as a Level 2 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 revolving debt outstanding at December 31, 2014.
Commitments and Contingencies
Commitments and Contingencies
COMMITMENTS AND CONTINGENCIES
Bankruptcy matters
On July 22, 2008 (the "Petition Date"), SemGroup, L.P., SemCrude, L.P. ("SemCrude"), the predecessor of Rose Rock, and Eaglwing, L.P. ("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").
Claims reconciliation process
A large number of parties made claims against SemGroup for obligations alleged to have been incurred prior to the Petition Date. We have resolved or settled all of these outstanding claims and have made all required distributions. The Plan of Reorganization has therefore been fully administered.
On November 7, 2014, SemGroup Corporation and the other reorganized debtors moved for a final decree from the bankruptcy court closing the debtors’ bankruptcy cases. The United States Bankruptcy Court for the District of Delaware granted the request and entered its Order Granting Motion of Remaining Debtors for Entry of Final Decree on December 18, 2014. Accordingly, the bankruptcy cases for SemCrude, L.P., Eaglwing, L.P., SemCanada II, L.P., SemCanada L.P., SemGas, L.P., SemGroup, L.P., SemMaterials, L.P., and SemStream, L.P. have been closed. As part of its decree, the Court retained jurisdiction over certain on-going adversary proceedings, but the debtors have estimated and paid the claims associated with these remaining adversaries, leaving the non-debtor parties to the adversaries to resolve their remaining claims amongst themselves.
On January 2, 2015, Bettina M. Whyte, the duly appointed Trustee of the SemGroup Litigation Trust (the “Litigation Trustee”), filed a notice of appeal of the Bankruptcy Court’s December 18, 2014 order closing the aforementioned bankruptcy cases. However, the Bankruptcy Court’s order of final decree was effective upon entry, and the appeal does not stay the effect of the order. The Litigation Trustee’s appeal to the United States District Court for the District of Delaware is currently pending and will be opposed by SemGroup Corporation and the other remaining reorganized debtors. We are indemnified by SemGroup against any loss in this matter pursuant to the terms of the omnibus agreement with SemGroup.
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 the KDHE believed, based on their historical use, may have soil or groundwater contamination in excess of state standards. The 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 the KDHE to conduct environmental assessments on the sites and to pay the 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 appeared to have ground water contamination requiring further delineation and/or on-going monitoring. Work plans have been submitted to, and approved by, the KDHE. One site was closed and we anticipate closure in 2015 for three of the remaining four sites. 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 with SemGroup.
Dimmit County, TX claims
An employee of Rose Rock Midstream Field Services, LLC was involved in a tractor trailer accident on January 15, 2015 in Dimmit County, Texas.  A second accident followed resulting in six fatalities and multiple injuries. At this time, the following lawsuits have been filed in either the District Court of Zavala County, Texas or the District Court of Dimmit County, Texas, Olga D. Rubio and Carlos Rubio, Individually and on Behalf of All Statutory Wrongful Death Beneficiaries of Carlos Rubio, Jr., Deceased vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; David Rodriguez and Maribel Rodriguez vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; David Rodriguez and Maribel Rodrigues, Plaintiffs and Alejandra Abigail Ortega, Individually and as next friend of K.A.P., a minor, and as Representative of the Estate of Eduardo Pena, and Julian Pena and Nelva G. Suifuentes Pena Intervenors vs. Rose Rock Midstream Field Services, LLC, Jesus Riojas, and Roberto Rivera; Derek Muhlenbruch vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas; and Agustin Lara, Sr., Individually, and Elsa Zamarripa, Individually and As Representative of the Estate of Justin Lara, Deceased vs. Rose Rock Midstream Field Services, LLC and Jesus T. Riojas.  It is anticipated that additional lawsuits will be brought on behalf of the other deceased and injured parties.  We are currently working with counsel for the interested parties to investigate the accident, and no determination of liability has been made.  We will continue to defend our position and believe that any liability that may arise from this incident will be covered by our insurance; however, we cannot predict the outcome.
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. SemGroup believes Blueknight’s causes of action to be without merit and 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 with SemGroup.
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 and trucks. Future minimum payments required under operating leases that have initial or remaining non-cancellable lease terms in excess of one year at December 31, 2014 are as follows (in thousands):
 
For twelve months ending:
 
December 31, 2015
$
986

December 31, 2016
823

December 31, 2017
617

December 31, 2018
417

December 31, 2019
250

Thereafter
11

Total future minimum lease payments
$
3,104


We recorded lease and rental expenses of $1.5 million, $1.2 million and $1.0 million for the years ended December 31, 2014, 2013 and 2012, 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, 2014, such commitments included the following (in thousands
 
Volume
(barrels)
 
Value
Fixed price purchases
13,648

 
$
1,141,694

Fixed price sales
13,612

 
$
1,152,966

Floating price purchases
7,187

 
$
373,539

Floating price sales
7,293

 
$
389,949


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, 2014, SemGroup had approximately 360 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. 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. We use authorized but unissued units to satisfy our equity-based payment obligations. Although these awards are to be settled in units, we may elect to give participants the option of settling a portion of the awards in cash, to meet statutory minimum tax withholding requirements. The activity related to these awards is summarized below:
 
Unvested Units
 
Average Grant Date Fair Value
 
Aggregate Fair Value of Units (in thousands)
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

 
$
254

Awards forfeited
(783)
 
$
34.40

 
 
Outstanding at December 31, 2013
82,948
 
$
28.59

 
 
Awards granted
46,536
 
$
41.35

 
 
Awards vested
(5,712)
 
$
35.87

 
$
205

Awards forfeited
(21,432)
 
$
29.82

 
 
Outstanding at December 31, 2014
102,340
 
$
33.79

 
 

During the month of January 2015, 25,745 of these awards vested. Of these vested awards, 10,537 units were withheld to satisfy minimum tax requirements.
Compensation cost expensed for the years ended December 31, 2014, 2013 and 2012 was $0.9 million, $0.8 million and $0.3 million, respectively. As of December 31, 2014, there was $1.8 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, 2014, no UUD units were issued upon the vesting of restricted units. For the year ended December 31, 2013, 406 UUD units were issued upon the vesting of restricted units. At December 31, 2014, the value of outstanding UUD’s was approximately $129 thousand. This is equivalent to approximately 2,835 common units based on the market price of our common units at the close of business on December 31, 2014 of $45.45 per unit. During the month of January 2015, 3,335 units were issued upon the vesting of restricted units noted above. Distributions related to the restricted unit awards granted subsequent to 2012 will be settled in cash upon vesting. At December 31, 2014, the value of these UUDs related to cash settled unvested restricted units was approximately $177 thousand.
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 $1.1 million, $0.7 million and $0.6 million during the years ended December 31, 2014, 2013 and 2012, respectively, related to such equity-based compensation.
 
Defined contribution plan
Most of the employees of SemGroup who support us participate in one of SemGroup’s defined contribution plans. SemGroup charged us $0.9 million, $0.4 million and $0.3 million during the years ended December 31, 2014, 2013 and 2012, 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 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. On February 17, 2015, all subordinated units converted to common units upon the achievement of certain targets specified in our partnership agreement. The conversion did not impact the total number of the Partnership’s outstanding units representing limited partner interests.
Limited partner interests – Class A units
As described in Note 3, Class A units were not eligible to receive cash distributions until certain operational targets were achieved by White Cliffs, at which time they would convert to common units. In December 2014, these operational targets were achieved by White Cliffs and on January 1, 2015 all 3,750,000 Class A units were converted to common units on a one-for-one basis. As the conversion took place before the date of record for our distribution of fourth quarter 2014 earnings, the Class A units participated in those distributions. The conversion did not impact the total number of the Partnership’s outstanding units representing limited partner interests.
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
The following table shows distributions paid in 2015, 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
 
March 31, 2014
 
May 5, 2014
 
May 15, 2014
 
$0.4950
 
June 30, 2014
 
August 4, 2014
 
August 14, 2014
 
$0.5350
 
September 30, 2014
 
November 4, 2014
 
November 14, 2014
 
$0.5750
 
December 31, 2014
 
February 3, 2015
 
February 13, 2015
 
$0.6200
 
* 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 equity-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

Units issued to SemGroup in SemCrude Pipeline transaction

 
2,425,000

 

 
1,250,000

Vesting of equity-based compensation awards, including equivalent distributions
5,712

 

 

 

Balance at December 31, 2014
13,765,451

 
6,814,709

 
8,389,709

 
3,750,000


There were no units 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.
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.
See Note 3 for information related to units issued to SemGroup as consideration in the SemCrude Pipeline transactions.
See Note 10 for information related to units issued due to vesting of equity-based compensation awards.
Subsequent Events
On January 1, 2015, based upon satisfying certain operational targets by White Cliffs, all 3,750,000 Class A units were converted to common units on a one-for-one basis. The conversion did not impact the total number of the Partnership's outstanding units representing limited partner interests.
On February 13, 2015, we issued and sold 2.3 million common limited partner units to the public for net proceeds of $89.1 million. Proceeds were used to acquire the Wattenberg Oil Trunkline and a 50% interest in Glass Mountain from SemGroup. See Note 3 for additional information related to the acquisition including units issued to SemGroup as consideration.
On February 17, 2015, certain targets specified in our partnership agreement were achieved and all 8,389,709 subordinated units were converted to common units. The conversion did not impact the total number of the partnership’s outstanding units representing limited partner interests.
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, 2014, 2013 and 2012 (in thousands, except per unit data): 
 
Year Ended December 31, 2014
 
Year Ended December 31, 2013
 
Year Ended December 31, 2012
Net income attributable to Rose Rock Midstream, L.P.
$
54,819

 
$
36,749

 
$
23,954

Less: General partner’s incentive distribution earned (*)
6,698

 
483

 

Less: General partner’s 2.0% ownership
1,096

 
735

 
479

Net income allocated to limited partners
$
47,025

 
$
35,531

 
$
23,475

Numerator for basic and diluted earnings per limited partner unit (**):
 
 
 
 
 
Allocation of net income among limited partner interests:
 
 
 
 
 
Net income allocable to common units
$
32,914

 
$
22,701

 
$
11,737.5

Net income allocable to subordinated units
13,912

 
13,321

 
11,737.5

Net income (loss) allocable to Class A units
199

 
(491
)
 

Net income allocated to limited partners
$
47,025

 
$
35,531

 
$
23,475

Denominator for basic and diluted earnings per limited partner unit:
 
 
 
 
 
Basic weighted average number of common units outstanding
19,419

 
13,672

 
8,390

Effect of non-vested restricted units
65

 
36

 
16

Diluted weighted average number of common units outstanding
19,484

 
13,708

 
8,406

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
3,154

 
1,264

 

Earnings (loss) per limited partner unit:
 
 
 
 
 
Common units (basic)
$
1.69

 
$
1.66

 
$
1.40

Common units (diluted)
$
1.69

 
$
1.66

 
$
1.40

Subordinated units (basic and diluted)
$
1.66

 
$
1.59

 
$
1.40

Class A units (basic and diluted)
$
0.06

 
$
(0.39
)
 
$

(*) Based on the amount of the distributions declared per common unit related to earnings for the year ended December 31, 2012, our general partner was not entitled to receive incentive distributions for that period.
(**) 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. Prior to the conversion of the Class A units in January 2015, the Class A units did not participate in cash distributions, but were allocated a proportional share of undistributed earnings. Class A units will receive the declared distribution for the fourth quarter of 2014, as such the fourth quarter distribution is reflected in the earnings attributable to Class A units for the year ended December 31, 2014. As distributions related to the available cash exceeded net income, the Class A units reflect a loss for the year ended December 31, 2013.
Supplemental Information - Statements Of Cash Flows
Supplemental Information - Statements of Cash Flows
SUPPLEMENTAL INFORMATION —STATEMENTS OF CASH FLOWS
Acquisitions
In connection with the acquisition of the remaining interest in SCPL in 2014 (Note 3), we issued 2.425 million common units and 1.25 million Class A units, valued at $120.0 million and $58.6 million, respectively, as non-cash consideration to SemGroup. In addition a non-cash contribution of $3.6 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 the 33% interest in SCPL was treated as an equity transaction with SemGroup, which reduced the partners' capital accounts pro-rata based on ownership percentages. Of the $206.6 million of purchase price in excess of historical cost, $24.4 million represented cash consideration in excess of historical cost and the remaining $182.2 million reduction represented the non-cash portion of the transaction related to equity consideration.
In connection with the acquisition of SCPL in 2013, 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
We paid cash for interest totaling $8.5 million, $7.2 million and $1.2 million during the years ended December 31, 2014, 2013 and 2012, respectively. We accrued $0.1 million and $0.1 million for purchases of property, plant and equipment at December 31, 2014 and 2012, respectively. We had no accrued purchases of property, plant and equipment at December 31, 2013.
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 $33.8 million, $13.5 million and $12.1 million during the years ended December 31, 2014, 2013 and 2012, respectively, for direct employee costs, including equity compensation and defined contribution plan benefits described in Note 10. These expenses were recorded to operating expenses and to 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 2014.
SemGroup charged us $10.1 million, $7.0 million and $6.4 million during the years ended December 31, 2014, 2013 and 2012, respectively, for such allocated costs. These expenses were recorded to general and administrative expenses in our consolidated statements of income.
Common control transactions
During 2014 and 2013, we purchased interests in SCPL from SemGroup. See Note 3 for additional information.
NGL Energy Partners LP and subsidiaries (Gavilon, LLC and High Sierra Crude Oil and Marketing, LLC)
For the years ending December 31, 2014, 2013 and 2012, we generated revenues from NGL Energy in the amounts of $400.3 million, $693.2 million and $362.7 million, respectively. For the years ending December 31, 2014, 2013 and 2012, we made purchases of condensate from NGL Energy in the amounts of $437.0 million, $669.4 million and $328.6 million, respectively. We received reimbursements from NGL Energy for certain services in the amount of $168.0 thousand and $182.0 thousand for the years ended December 31, 2014 and 2013, respectively. There were no reimbursements from NGL Energy during the year ended December 31, 2012.
Transactions with NGL Energy and its subsidiaries primarily relate to marketing, storage and transportation services of crude oil, including buy/sell transactions. In accordance with ASC 845-10-15, these transactions were reported as revenue on a net basis in our consolidated statements of income because the purchases of inventory and subsequent sales of the inventory were with the same counterparty. For comparability, prior year amounts above have been recast to include transactions with Gavilon, LLC, which was not affiliated with NGL Energy until December 2013.
SemGas
We purchase condensate from SemGas, L.P. (“SemGas”), which is also a wholly-owned subsidiary of SemGroup. Our purchases from SemGas were $37.9 million, $24.0 million and $10.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
White Cliffs
We provide storage and management services to White Cliffs. We generated revenues from White Cliffs of $2.9 million, $2.9 million and $2.5 million for the years ended December 31, 2014, 2013 and 2012, respectively. We incurred $3.9 million of cost for the year ended December 31, 2014 related to transportation fees for shipments on White Cliffs.
Glass Mountain Pipeline, LLC
SemGroup holds a 50% interest in Glass Mountain. We incurred $0.8 million of cost for the year ended December 31, 2014 related to transportation fees for shipments on Glass Mountain's pipeline. We received $0.5 million in fees from Glass Mountain for the year ended December 31, 2014 related to support services associated with Glass Mountain's pipeline operations.
 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 $0.1 million, $0.4 million and $0.6 million in legal fees and related expenses to this law firm during the years ended December 31, 2014, 2013 and 2012, respectively.
Our equity method investee, White Cliffs, paid legal fees and related expenses to this law firm of $0.1 million and $0.2 million during the years ended December 31, 2014 and 2013, 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, 2014, 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
$
290,923

 
$
290,432

 
$
374,945

 
$
334,344

 
$
1,290,644

Total expenses
283,572

 
285,019

 
366,967

 
329,451

 
1,265,009

Earnings from equity method investment
11,080

 
12,291

 
16,289

 
17,718

 
57,378

Operating income
18,431

 
17,704


24,267


22,611


83,013

Other expenses, net
2,272

 
2,574

 
7,774

 
7,816

 
20,436

Net income
16,159

 
15,130


16,493


14,795


62,577

Less: net income attributable to noncontrolling interests
3,676

 
4,082

 

 

 
7,758

Net income attributable to Rose Rock Midstream, L.P.
$
12,483

 
$
11,048


$
16,493


$
14,795


$
54,819

Earnings (loss) per limited partner unit
 
 
 
 
 
 
 
 
 
Common unit (basic)
$
0.45

 
$
0.41

 
$
0.50

 
$
0.34

 
$
1.69

Common unit (diluted)
$
0.45

 
$
0.41

 
$
0.50

 
$
0.34

 
$
1.69

Subordinated unit (basic and diluted)
$
0.45

 
$
0.37

 
$
0.50

 
$
0.34

 
$
1.66

Class A unit (basic and diluted)*
$
(0.05
)
 
$
(0.25
)
 
$
(0.07
)
 
$
0.34

 
$
0.06

* Class A units converted to common units on January 1, 2015 and were eligible for distributions of fourth quarter 2014 earnings.
Summarized information on the 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 investments
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
)
Overview (Policies)
Consolidation, Policy [Policy Text Block]
Basis of presentation
These consolidated financial statements include the accounts of Rose Rock and its controlled subsidiaries.
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. All significant transactions between Rose Rock and its consolidated subsidiaries have been eliminated. 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 (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; (5) valuation of goodwill and other intangible assets; and (6) 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, 2014 and 2013.
INVENTORIES – Inventories primarily consist of crude oil. Inventories are valued at the lower of cost or market, with cost generally determined using the weighted-average method. The cost of inventory includes applicable transportation costs. During the year ended December 31, 2014, we recorded non-cash charges of $5.7 million to write-down inventory to the lower of cost or market.
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
Trucking equipment and other
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 1st 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, 2014 and 2013 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, 2014 and 2013.
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.
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 – 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 in 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.
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers", which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.
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.
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 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, L.L.C. ("SCPL"), which was retained by SemGroup prior to our acquisition of the remaining noncontrolling interest in 2014. Income was 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.
Summary of Significant Accounting Policies (Tables)
Property, plant and equipment, useful lives
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
Trucking equipment and other
3 – 7 years
Property, plant and equipment consists of the following (in thousands): 
 
December 31,
2014
 
December 31,
2013
Land
$
17,070

 
$
17,058

Pipelines and related facilities
189,775

 
181,697

Storage and terminal facilities
129,938

 
118,864

Linefill
25,507

 
13,866

Trucking equipment and other
40,190

 
19,089

Construction-in-progress
11,570

 
17,575

Property, plant and equipment, gross
414,050

 
368,149

Accumulated depreciation
(78,140
)
 
(56,533
)
Property, plant and equipment, net
$
335,910

 
$
311,616

Acquisitions (Tables)
We have recorded the fair value of the assets acquired as follows (in thousands):
Property, plant and equipment
$
19,092

Customer contract intangible
17,010

Goodwill
7,892

Total assets acquired
$
43,994

We have recorded fair values of the assets acquired as follows (in thousands
Property, plant and equipment
$
13,865

Customer contract intangible
6,880

Goodwill
28,224

Total assets acquired
$
48,969

Equity Method Investment (Tables)
Equity Method Investments, Summarized Financial Information[Table Text Block]
Certain summarized balance sheet information of White Cliffs as of December 31, 2014 and 2013 is shown below (in thousands):
 
December 31, 2014
 
December 31, 2013
Current assets
$
35,623

 
$
98,457

Property, plant and equipment, net
471,179

 
312,831

Goodwill
17,000

 
17,000

Other intangible assets, net
16,043

 
20,802

Total assets
$
539,845

 
$
449,090

Current liabilities
$
11,108

 
$
9,648

Members’ equity
528,737

 
439,442

Total liabilities and members’ equity
$
539,845

 
$
449,090

Certain summarized income statement information of White Cliffs for the years ended December 31, 2014 and 2013 is shown below (in thousands):
 
Year ended December 31, 2014
 
Year Ended December 31, 2013
Revenue
$
160,369

 
$
133,310

Operating, general and administrative expenses
$
23,067

 
$
23,825

Depreciation and amortization expense
$
23,257

 
$
18,668

Net income
$
114,045

 
$
90,817

Property, Plant and Equipment (Tables)
Property, plant and equipment
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
Trucking equipment and other
3 – 7 years
Property, plant and equipment consists of the following (in thousands): 
 
December 31,
2014