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| RRMS > SEC Filings for RRMS > Form 10-K on 1-Mar-2013 | All Recent SEC Filings |
1-Mar-2013
Annual Report
Overview
Horizontal drilling and hydraulic fracturing continue to increase the production
of crude oil in the U.S. As a result, there is increasing demand for the
services of midstream companies such as Rose Rock, which can gather, transport
and store crude oil as it is moved from the wellhead to refiners and other
market participants. We have responded to this demand with additional storage
tanks and we are building new crude oil gathering and transportation pipelines.
We, and our significant equity method investee, own gathering systems,
transportation pipelines, storage facilities and terminals in the Midwest and
Rocky Mountain regions of the U.S.
For the years ended December 31, 2012 and 2011, approximately 79% and 70%,
respectively, of our Adjusted gross margin was generated from fee-based services
or fixed-margin transactions. For a definition of Adjusted gross margin and a
reconciliation of Adjusted gross margin to operating income (loss), its most
directly comparable financial measure calculated and presented in accordance
with GAAP, please see "Selected Consolidated Financial and Operating
Data-Non-GAAP Financial Measures".
How We Evaluate Our Operations
Our management uses a variety of financial and operational metrics to analyze
our performance. We view these metrics as important factors in evaluating our
profitability and review these measurements on at least a monthly basis for
consistency and trend analysis. These metrics include financial measures,
including Adjusted gross margin, operating expenses and Adjusted EBITDA, and
operating data, including contracted storage capacity and transportation,
marketing and unloading volumes.
Adjusted Gross Margin
We view Adjusted gross margin as an important performance measure of the core
profitability of our operations, as well as our operating performance as
compared to that of other companies in our industry, without regard to financing
methods, historical cost basis, capital structure or the impact of fluctuating
commodity prices. We define Adjusted gross margin as total revenues minus cost
of products sold and unrealized gain (loss) on derivatives. Adjusted gross
margin allows us to make a meaningful comparison of the operating results
between our fee-based activities, which do not involve the purchase or sale of
crude oil, and our fixed-margin and marketing operations, which do. In
particular, Adjusted gross margin provides a way to compare the actual
transportation fee received under fixed-fee contracts with the effective
transportation fee realized through a fixed-margin transaction. In addition,
Adjusted gross margin allows us to make a meaningful comparison of the results
of our fixed-margin and marketing operations across different commodity price
environments because it measures the spread between the product sales price and
cost of products sold. See "Selected Consolidated Financial and Operating
Data-Non-GAAP Financial Measures".
Operating Expenses
Our management seeks to maximize the profitability of our operations, in part,
by minimizing operating expenses. These expenses are comprised of salary and
wage expense, utility costs, insurance premiums, taxes and other operating
costs, some of which are independent on the volumes we handle.
The current high levels of crude oil exploration, development and production
activities are increasing competition for personnel and equipment. This
increased competition is placing upward pressure on the prices we pay for labor,
supplies and miscellaneous equipment.
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss) before interest expense, income
tax expense (benefit), depreciation and amortization, earnings from equity
method investments and any other non-cash adjustments to reconcile net income
(loss) to net cash provided by (used in) operating activities plus cash
distributions from equity method investments. We use Adjusted EBITDA as a
supplemental performance and liquidity measure to assess:
• our operating performance as compared to that of other companies in our
industry, without regard to financing methods, historical cost basis,
capital structure or the impact of fluctuating commodity prices;
• the ability of our assets to generate sufficient cash flow to make distributions to our partners;
• our ability to incur and service debt and fund capital expenditures; and
• the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
Contracted Storage Capacity and Transportation, Marketing and Unloading Volumes In our Cushing storage operations, we charge our customers a fee for storage capacity provided, regardless of actual usage. On our Kansas and Oklahoma system, we provide transportation services on a fee basis or pursuant to fixed-margin transactions, but in either case, the Adjusted gross margin we generate is dependent on the volume of crude oil transported (if
on a fee basis) or purchased and sold (if pursuant to a fixed-margin transaction). We refer to these volumes, in the aggregate, as transportation volumes. Similarly, on our Kansas and Oklahoma system, and through our Bakken Shale operations, we conduct marketing activities involving the purchase and sale of crude oil or related derivative contracts. We refer to the crude oil volumes purchased and sold in our marketing operations as marketing volumes. Finally, at our Platteville truck unloading facility, we charge our customers a fee based on the volumes unloaded. We refer to these as unloading volumes.
How We Generate Adjusted Gross Margin
We generate Adjusted gross margin by providing fee-based services, by entering
into fixed-margin transactions and through marketing activities. Revenues from
our fee-based services are included in service revenue, and revenues from our
fixed-margin and marketing activities are included in product revenue.
The following table shows the Adjusted gross margin generated by our fee-based
services, our fixed-margin transactions and our marketing activities for the
year ended December 31, 2012 (in thousands):
Year Ended December 31, 2012
Marketing
Storage Transportation Activities Other (1) Total
Revenues $ 32,572 $ 18,367 $ 561,689 $ 7,789 $ 620,417
Less: Costs of products sold,
exclusive of depreciation and
amortization - - 546,966 - 546,966
Less: Unrealized gain (loss) on
derivatives - - (1,196 ) - (1,196 )
Adjusted gross margin $ 32,572 $ 18,367 $ 15,919 $ 7,789 $ 74,647
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(1) This category includes fee-based services such as unloading and ancillary storage terminal services.
The following table shows the Adjusted gross margin generated by our fee-based services, our fixed-margin transactions and our marketing activities for the year ended December 31, 2011 (in thousands):
Year Ended December 31, 2011
Marketing
Storage Transportation Activities Other (1) Total
Revenues $ 24,381 $ 14,833 $ 386,252 $ 5,855 $ 431,321
Less: Costs of products sold,
exclusive of depreciation and
amortization - - 366,265 - 366,265
Less: Unrealized gain (loss) on
derivatives - - 787 - 787
Adjusted gross margin $ 24,381 $ 14,833 $ 19,200 $ 5,855 $ 64,269
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(1) This category includes fee-based services such as unloading and ancillary storage terminal services.
Fee-Based Services
We charge a capacity or volume-based fee for the unloading, transportation and
storage of crude oil and related ancillary services. Our fee-based services
include substantially all of our operations in Cushing and Platteville and a
portion of the transportation services we provide on our Kansas and Oklahoma
pipeline system. Some of our fee-based contracts are take-or-pay contracts,
whereby the customer is required to pay us a fixed minimum monthly fee
regardless of usage. For the years ended December 31, 2012 and 2011,
approximately 59% and 56%, respectively, of our Adjusted gross margin was
generated by providing fee-based services to customers.
Fixed-Margin Transactions
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. We refer to these arrangements
as "fixed-margin" or "buy/sell" transactions. These fixed-margin transactions
account for a portion of the Adjusted gross margin we generate on our Kansas and
Oklahoma pipeline system and through our Bakken Shale operations.
For the years ended December 31, 2012 and 2011, approximately 20% and 14%,
respectively, of our Adjusted gross margin was generated through fixed-margin
transactions.
Marketing Activities
We conduct marketing activities by purchasing crude oil for our own account from
producers, aggregators and traders and selling crude oil to traders and
refiners. Our marketing activities account for a portion of the Adjusted gross
margin we generate on our Kansas and Oklahoma pipeline system and through our
Bakken Shale operations. For the years ended December 31, 2012 and 2011,
approximately 21% and 30%, respectively, of our Adjusted gross margin was
generated through marketing activities.
We mitigate the commodity price exposure of our crude oil 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 intended
to lock in positive margins based on the timing, location or quality of the
crude oil purchased and delivered or (ii) derivative contracts. All of our
marketing activities are subject to our Comprehensive Risk Management Policy,
which establishes limits to manage risk and mitigate financial exposure.
More specifically, we utilize futures and swap contracts to manage our exposure
to market changes in commodity prices to protect our Adjusted gross margin on
our purchased crude oil. As we purchase crude oil from suppliers, we may
establish either a fixed or a variable margin with future sales by:
• selling a like quantity of crude oil for future physical delivery to create
an effective back-to-back transaction; or
• entering into futures and swaps contracts on the NYMEX or over-the-counter markets.
General Trends and Outlook
We expect our business to continue to be affected by the key trends discussed
below. Our expectations are based on assumptions made by us and information
currently available to us. To the extent our underlying assumptions about, or
interpretations of, available information prove to be incorrect, our actual
results may vary materially from our expected results.
Commodity Prices
Our fee-based operations have minimal direct exposure to commodity prices. With
respect to our fixed-margin and marketing operations, increases or decreases in
commodity prices will directly affect revenues generated and the costs of
products sold, but generally have significantly lesser impact on Adjusted gross
margin. As a result, our fixed-margin and marketing operations are generally not
directly affected by the absolute level of crude oil prices, but are affected by
overall levels of the supply of, and demand for, crude oil and relative
fluctuations in market-related indices at various locations. However, to the
extent that we do not enter into "back-to-back" purchase and sale transactions,
or we do not cover with a financial hedge, our marketing operations have direct
exposure to commodity price volatility.
All of our operations are indirectly affected by commodity prices. Crude oil
prices have been highly volatile in the past, and we expect that volatility to
continue. The demand for storage capacity results, in part, from our customers'
desire to have the ability to take advantage of profit opportunities created by
volatility in the price of crude oil. The lack of a contango market for crude
oil (when the prices for future deliveries are higher than the current prices)
negatively affects the demand for our storage assets because the margin between
crude oil futures prices relative to spot prices may not cover the cost of
purchasing crude oil and holding it in storage. On the other hand, increased
volatility in crude oil prices increases the value of these assets by increasing
the option value of crude oil stored. Further, the higher the level of absolute
crude oil prices, the higher the costs of financing and insuring crude oil in
storage, which negatively affects storage economics. Changes in crude oil prices
may also indirectly impact the volumes of crude oil we gather, transport and
market.
In recent years, Cushing has experienced a shortfall in takeaway pipeline
capacity, which has been cited as a principal reason for the decline in the WTI
Index price used at Cushing compared to other crude oil price indices. We
believe that as takeaway pipeline expansion projects are completed, this price
differential will narrow and Cushing will remain an important benchmarking and
transportation hub for crude oil in the U.S.
Interest Rates
The credit markets recently have experienced near-record lows in interest rates.
If the overall economy strengthens, it is likely that monetary policy will
tighten, resulting in higher interest rates to counter possible inflation. If
this occurs, interest rates on floating rate credit facilities and future
offerings in the debt capital markets could be higher than current levels,
causing our financing costs to increase accordingly.
In addition, there is a financing cost for the storage capacity user to carry
the cost of the inventory while it is stored in the facility. That financing
cost is impacted by the cost of capital or interest rate incurred by the storage
user as well as the commodity cost of the crude oil in inventory. The higher the
financing cost, the lower the margin that will be left over from the price
spread that was intended to be captured. Accordingly, a significant increase in
interest rates could impact the demand for storage capacity independent of other
market fundamentals.
Our implied distribution yield is a product of our unit price and the level of
our cash distributions. It is determined by dividing our annual cash
distribution by our common unit price. The distribution yield is often used by
investors to compare and rank related yield-oriented securities for investment
decision-making purposes. Therefore, changes in interest rates, either positive
or negative, may affect the yield requirements of investors who invest in our
common units, and a rising interest rate environment could have an adverse
impact on our unit price and our ability to issue additional equity to make
acquisitions, reduce debt or for other purposes.
Recent Developments
On January 11, 2013, we acquired a one-third 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 Class A units are not entitled to
receive any distributions of available cash (other than upon liquidation) prior
to the first day of the month immediately following the first month for which
the average daily throughput volumes on the White Cliffs Pipeline for such month
are 125,000 barrels per day or greater. Upon such date, the Class A units will
automatically convert into common units. SCPL owns a 51% membership interest in
White Cliffs, giving us an indirect 17% interest in White Cliffs.
In connection with this transaction, we issued and sold 2.0 million common units
to third-party purchasers in a private placement. In addition, we exercised the
accordion feature of our revolving credit facility and increased the total
borrowing capacity under the credit facility from $150 million to $385 million
and made a borrowing of approximately $133.5 million under the credit facility.
The proceeds from the private placement and the borrowing were used to fund the
cash consideration in the transaction with SemGroup and to pay certain related
transaction costs and expenses.
White Cliffs has received sufficient binding shipper commitments during its
recent open season to move forward with an expansion project which will increase
the pipeline capacity from approximately 70,000 barrels per day to about 150,000
barrels per day. Subject to FERC and other regulatory approvals, the expansion
is anticipated to be in service in the first half of 2014. Rose Rock will
operate the expanded pipeline.
Results of Operations
Predecessor
Subsequent to Emergence Prior to Emergence
Year Ended
Year Ended Year Ended Year Ended Month Ended Eleven Months Ended December 31,
December 31, 2012 December 31, 2011 December 31, 2010 December 31, 2009 November 30, 2009 2008
Statement of income data: (in thousands, except per unit data)
Revenues, including revenues
from affiliates:
Product $ 576,158 $ 395,301 $ 158,308 $ 6,724 $ 197,203 $ 3,010,645
Service 44,318 35,801 49,408 3,891 40,281 19,129
Other (59 ) 219 365 - 3 10
Total Revenues 620,417 431,321 208,081 10,615 237,487 3,029,784
Expenses, including expenses
from affiliates:
Costs of products sold,
exclusive of depreciation
and amortization 546,966 366,265 146,614 5,969 180,154 3,685,594
Operating 23,302 18,973 20,398 1,536 15,614 298,874
General and administrative 12,083 9,843 7,660 1,270 5,813 33,841
Depreciation and
amortization 12,131 11,379 10,435 818 3,193 2,995
Total expenses 594,482 406,460 185,107 9,593 204,774 4,021,304
Operating income (loss) 25,935 24,861 22,974 1,022 32,713 (991,520 )
Other expenses (income):
Interest expense 1,912 1,823 482 43 1,699 2,907
Other expense (income), net 69 (197 ) (985 ) (306 ) (1,602 ) (806 )
Total other expenses
(income), net 1,981 1,626 (503 ) (263 ) 97 2,101
Income (loss) before
reorganization items 23,954 23,235 23,477 1,285 32,616 (993,621 )
Reorganization items gain
(loss), including expenses
allocated from affiliates - - - - 99,936 (94,424 )
Net income (loss) $ 23,954 $ 23,235 $ 23,477 $ 1,285 $ 132,552 $ (1,088,045 )
Net income per common unit
(basic and diluted) $ 1.40 $ 0.06 (1 ) $ 0.0 $ 0.0 $ 0.0 $ 0.0
Net income per subordinated
unit (basic and diluted) $ 1.40 $ 0.06 (1 ) $ 0.0 $ 0.0 $ 0.0 $ 0.0
Distribution paid per unit $ 1.2145 N/A N/A N/A N/A N/A
Adjusted gross margin (2) $ 74,647 $ 64,269 $ 62,230 $ 4,364 $ 57,079 $ (1,661,071 )
Adjusted EBITDA (2) $ 39,500 $ 34,798 $ 38,564 $ 1,864 $ (40,412 ) $ (2,020,618 )
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Calculated on net income subsequent to initial public offering on December
(1 ) 14, 2011.
(2 ) For a definition of Adjusted gross margin, Adjusted EBITDA and a
reconciliation to their most directly comparable financial measures
calculated and presented in accordance with GAAP, please read "-Selected
Financial and Operating Data-Non-GAAP Financial Measures".
ASC 845-10-15, "Nonmonetary Transactions," requires certain transactions - those where inventory is purchased from a customer then resold to the same customer - to be presented in the income statement on a net basis, resulting in a reduction of revenue and costs of products sold by the same amount, but has no effect on operating income (loss). However, changes in the level of such purchase and sale activity between periods can have an effect on the comparison between those periods.
2012 versus 2011
Revenue
Revenue increased in 2012 to $620 million from $431 million in 2011.
Predecessor
Year Ended Year Ended
December 31, 2012 December 31, 2011
(in thousands)
Gross product revenue $ 2,133,054 $ 1,083,089
Nonmonetary transaction adjustment (1,555,700 ) (688,575 )
Net unrealized gain (loss) on derivatives (1,196 ) 787
Product revenue 576,158 395,301
Service revenue 44,318 35,801
Other (59 ) 219
Total revenue $ 620,417 $ 431,321
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Gross product revenue increased in 2012 to $2.1 billion from $1.1 billion in
2011. The increase was primarily due to an increase in the volume sold to
23.2 million barrels, at an average sales price of $92 per barrel, for 2012 from
the volume sold of 11.6 million barrels, at an average sales price of $94 per
barrel, for 2011.
The increase in sales volume was primarily the result of an increase in buy/sell
transactions (as defined above) to 15.4 million barrels in 2012, compared to
6.8 million barrels in 2011. The buy/sell transactions are used to achieve a
transportation margin.
Gross product revenue was reduced by $1.6 billion and $0.7 billion during 2012
and 2011, respectively, in accordance with ASC 845-10-15.
Service revenue increased in 2012 to $44 million from $36 million for 2011. The
increase in service revenue was primarily due to new storage tanks coming on
line during 2012.
Costs of Products Sold
Costs of products sold increased in 2012 to $547 million from $366 million in
2011. Costs of products sold reflected reductions of $1.6 billion and $0.7
billion in 2012 and 2011, respectively, in accordance with ASC 845-10-15. Costs
of products sold increased due to the increase in the barrels sold, as described
above, combined with a decrease in the average per barrel cost of crude oil to
$90 for 2012 from $91 for 2011.
Adjusted Gross Margin
We define Adjusted gross margin as total revenues minus costs of products sold
and unrealized gain (loss) on derivatives. (See "-How We Generate Adjusted Gross
Margin".) Adjusted gross margin increased in 2012 to $75 million from $64
million in 2011, due to:
• an increase of $8.2 million in Adjusted gross margin from our storage
operations due to the completion of an additional 1.95 million barrels of
storage capacity;
• an increase of $3.5 million in Adjusted gross margin attributable to our fee-based and fixed-margin transportation operations due to an increase in short haul volumes, leading to a decrease in average transportation rates;
• an increase of $1.9 million in Adjusted gross margin from our Platteville operations resulting from increased unloading volumes of approximately 4.1 million barrels; and
• a decrease of $3.3 million in Adjusted gross margin from our marketing operations resulting from lower North Dakota spreads due to a shift to rail, a net 2011 market price increase benefit not repeated, partially offset by an increase in Kansas/Oklahoma volumes which historically have lower spreads than North Dakota, as the excess of our average sales price per barrel over our average purchase cost per barrel decreased to approximately $2 from approximately $4.
Operating Expense
Operating expenses increased in 2012 to $23 million from $19 million during
2011, primarily due to increases in field expense of $2.2 million, maintenance
expense of $0.5 million and employment expense of $0.3 million. In addition, in
2011 we had a recovery of $0.9 million of previously reserved accounts
receivable.
General and Administrative Expense
General and administrative expense increased in 2012 to $12 million from $10
million in 2011, primarily due to an increase in overhead allocation from
SemGroup, as a result of a recently completed transfer pricing study and costs
associated with being a publicly traded partnership.
Depreciation
Depreciation increased in 2012 to $12 million from $11 million in 2011. The
increase was attributable to the completion of additional storage capacity at
Cushing and Platteville.
2011 versus 2010
Revenue
. . .
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