10-Q 1 a13-26389_410q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended December 31, 2013

 

OR

 

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from         to         

 

Commission file number: 001-34733

 

Niska Gas Storage Partners LLC

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

27-1855740
(I.R.S. Employer
Identification number)

 

 

 

1001 Fannin Street, Suite 2500
Houston, TX

(Address of principal executive offices)

 


77002

(Zip Code)

 

(281) 404-1890

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of January 30, 2014, there were 35,301,200 Common Units outstanding.

 

 

 



Table of Contents

 

Cautionary Statement Regarding Forward-Looking Information

 

This report contains information that may constitute “forward-looking statements.” Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which typically are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future—including statements relating to general views about future operating results—are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include changes in general economic conditions, competitive conditions in our industry, actions taken by third-party operators, processors and transporters, changes in the availability and cost of capital, operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control, the effects of existing and future laws and governmental regulations, the effects of future litigation, and certain factors described in Part II, “Item 1A. Risk Factors” and elsewhere in this report and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, and those described  from time to time in our future reports filed with the Securities and Exchange Commission.

 

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Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (unaudited)

1

 

 

 

 

Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for the Three and Nine Months Ended December 31, 2013 and 2012

1

 

Consolidated Balance Sheets as of December 31, 2013 and March 31, 2013

2

 

Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2013 and 2012

3

 

Consolidated Statements of Changes in Members’ Equity for the Nine Months Ended December 31, 2013 and 2012

4

 

Notes to Unaudited Consolidated Financial Statements

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

Item 1A.

Risk Factors

31

 

 

 

Item 6.

Exhibits

32

 

ii



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1.  Financial Statements (unaudited)

 

Niska Gas Storage Partners LLC

Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss)

(in thousands of U.S. dollars, except for per unit amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Fee-based revenue

 

$

30,484

 

$

41,255

 

$

95,151

 

$

119,314

 

Optimization, net

 

(4,637

)

32,576

 

24,746

 

(23,725

)

 

 

25,847

 

73,831

 

119,897

 

95,589

 

Expenses (income):

 

 

 

 

 

 

 

 

 

Operating

 

8,426

 

8,330

 

27,747

 

25,250

 

General and administrative

 

9,361

 

8,417

 

30,164

 

26,332

 

Depreciation and amortization

 

10,518

 

14,831

 

31,149

 

39,896

 

Interest

 

17,114

 

17,279

 

49,718

 

50,459

 

Loss on disposal of assets

 

 

15,072

 

 

15,072

 

Loss on extinguishment of debt

 

 

 

 

599

 

Foreign exchange losses (gains)

 

160

 

22

 

606

 

(314

)

Other (income) expense

 

(14

)

3

 

360

 

(182

)

 

 

 

 

 

 

 

 

 

 

EARNINGS (LOSS) BEFORE INCOME TAXES

 

(19,718

)

9,877

 

(19,847

)

(61,523

)

Income tax benefit

 

(6,309

)

(542

)

(6,561

)

(19,200

)

 

 

 

 

 

 

 

 

 

 

NET EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS)

 

$

(13,409

)

$

10,419

 

$

(13,286

)

$

(42,323

)

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managing Member

 

$

(260

)

$

206

 

$

(256

)

$

(838

)

Common unitholders

 

$

(13,149

)

$

5,158

 

$

(13,030

)

$

(20,951

)

Subordinated unitholder (Notes 1 and 6)

 

$

 

$

5,055

 

$

 

$

(20,534

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per unit allocated to common unitholders

 

 

 

 

 

 

 

 

 

- basic and diluted

 

$

(0.37

)

$

0.15

 

$

(0.37

)

$

(0.61

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per unit allocated to subordinated unitholders

 

 

 

 

 

 

 

 

 

- basic and diluted (Notes 1 and 6)

 

$

 

$

0.15

 

$

 

$

(0.61

)

 

(See Notes to Unaudited Consolidated Financial Statements)

 

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Niska Gas Storage Partners LLC

Consolidated Balance Sheets

(in thousands of U.S. dollars)

(Unaudited)

 

 

 

December 31,

 

March 31,

 

 

 

2013

 

2013

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

9,172

 

$

10,610

 

Margin deposits

 

53,658

 

18,474

 

Trade receivables

 

3,837

 

2,702

 

Accrued receivables

 

63,930

 

106,726

 

Natural gas inventory

 

182,459

 

83,416

 

Prepaid expenses and other current assets

 

3,489

 

4,688

 

Short-term risk management assets

 

16,947

 

21,159

 

 

 

333,492

 

247,775

 

Long-term assets

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation

 

898,271

 

918,061

 

Goodwill

 

245,604

 

245,604

 

Long-term natural gas inventory

 

15,264

 

15,264

 

Intangible assets, net of accumulated amortization

 

68,381

 

73,998

 

Deferred charges, net of accumulated amortization

 

11,914

 

14,420

 

Other assets

 

2,643

 

2,677

 

Long-term risk management assets

 

6,654

 

6,593

 

 

 

1,248,731

 

1,276,617

 

TOTAL

 

$

1,582,223

 

$

1,524,392

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Revolving credit facility

 

$

127,000

 

$

65,000

 

Current portion of obligations under capital lease

 

1,289

 

1,259

 

Trade payables

 

785

 

1,048

 

Current portion of deferred taxes

 

7,743

 

14,303

 

Deferred revenue

 

887

 

568

 

Accrued liabilities

 

65,974

 

39,840

 

Short-term risk management liabilities

 

37,492

 

20,005

 

 

 

241,170

 

142,023

 

Long-term liabilities

 

 

 

 

 

Long-term risk management liabilities

 

5,384

 

4,574

 

Asset retirement obligations

 

1,998

 

2,007

 

Other long-term liabilities

 

1,394

 

1,461

 

Deferred income taxes

 

121,003

 

120,935

 

Obligations under capital lease

 

11,255

 

12,225

 

Long-term debt

 

643,790

 

643,790

 

 

 

1,025,994

 

927,015

 

Members’ equity

 

 

 

 

 

Common units

 

281,534

 

321,642

 

Subordinated units (Notes 1 and 6)

 

 

265,877

 

Managing Member’s interest

 

274,695

 

9,858

 

 

 

556,229

 

597,377

 

Commitments and contingencies (Note 2)

 

 

 

 

 

TOTAL

 

$

1,582,223

 

$

1,524,392

 

 

(See Notes to Unaudited Consolidated Financial Statements)

 

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Table of Contents

 

Niska Gas Storage Partners LLC

Consolidated Statements of Cash Flows

(in thousands of U.S. dollars)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net loss

 

$

(13,286

)

$

(42,323

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

Unrealized foreign exchange losses

 

830

 

30

 

Deferred income tax benefit

 

(6,561

)

(19,222

)

Unrealized risk management losses

 

22,447

 

37,739

 

Depreciation and amortization

 

31,149

 

39,896

 

Deferred charges amortization

 

2,506

 

2,577

 

Loss on disposal of assets

 

 

15,072

 

Loss on extinguishment of debt

 

 

599

 

Write-down of inventory

 

 

22,281

 

Changes in non-cash working capital

 

(67,961

)

32,416

 

Net cash (used in) provided by operating activities

 

(30,876

)

89,065

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Property, plant and equipment expenditures

 

(1,662

)

(29,244

)

Purchase of customer contracts

 

(2,007

)

 

Proceeds on sale of assets

 

 

2,200

 

Net cash used in investing activities

 

(3,669

)

(27,044

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from revolver drawings

 

452,000

 

281,948

 

Revolver payments

 

(390,000

)

(307,948

)

Payment of deferred financing costs

 

 

(3,248

)

Proceeds from obligations under capital lease

 

 

947

 

Repayments of obligations under capital lease

 

(941

)

(408

)

Unit issuance costs

 

(100

)

 

Distributions to unitholders

 

(27,631

)

(35,043

)

Net cash provided by (used in) financing activities

 

33,328

 

(63,752

)

 

 

 

 

 

 

Effect of translation on foreign currency cash and cash equivalents

 

(221

)

49

 

Net decrease in cash and cash equivalents

 

(1,438

)

(1,682

)

Cash and cash equivalents, beginning of period

 

10,610

 

13,342

 

Cash and cash equivalents, end of period

 

$

9,172

 

$

11,660

 

 

(See Notes to Unaudited Consolidated Financial Statements)

 

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Table of Contents

 

Niska Gas Storage Partners LLC

Consolidated Statements of Changes in Members’ Equity

(in thousands of U.S. dollars)

(Unaudited)

 

 

 

 

 

 

 

Managing

 

 

 

 

 

Common

 

Subordinated

 

Member

 

 

 

 

 

Units

 

Units

 

Interest

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2012

 

$

391,585

 

$

287,105

 

$

11,700

 

$

690,390

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(20,951

)

(20,534

)

(838

)

(42,323

)

 

 

 

 

 

 

 

 

 

 

Distributions to unitholders

 

(35,835

)

370

 

(717

)

(36,182

)

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

$

334,799

 

$

266,941

 

$

10,145

 

$

611,885

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2013

 

$

321,642

 

$

265,877

 

$

9,858

 

$

597,377

 

 

 

 

 

 

 

 

 

 

 

Cancellation of subordinated units

 

 

(265,877

)

265,877

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

(13,030

)

 

(256

)

(13,286

)

 

 

 

 

 

 

 

 

 

 

Distributions to unitholders

 

(38,938

)

 

(784

)

(39,722

)

 

 

 

 

 

 

 

 

 

 

Issuance of common units

 

11,860

 

 

 

11,860

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

$

281,534

 

$

 

$

274,695

 

$

556,229

 

 

(See Notes to Unaudited Consolidated Financial Statements)

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

1. Organization and Basis of Presentation

 

Organization

 

Niska Gas Storage Partners LLC (“Niska Partners” or the “Company”) is a publicly-traded Delaware limited liability company (NYSE:NKA) which independently owns and/or operates natural gas storage assets in North America. The Company operates the AECO Hub™, which consists of the Countess and Suffield gas storage facilities in Alberta, Canada and the Wild Goose and Salt Plains gas storage facilities in California and Oklahoma, respectively. Each of these facilities markets natural gas storage services in addition to optimizing storage capacity with its own proprietary gas purchases.

 

On April 2, 2013, Niska Partners completed an equity restructuring with affiliates of Carlyle/Riverstone Global Energy and Power Fund II, L.P. and Carlyle/Riverstone Global Energy and Power Fund III, L.P. (collectively the “Carlyle/Riverstone Funds”).  In the restructuring, all of the Company’s 33.8 million subordinated units and previous incentive distribution rights (all of which were owned by the Carlyle/Riverstone Funds) were combined into and restructured as a new class of incentive distribution rights (“new IDRs”).  The equity restructuring, which did not require any further consents or approvals, was effective as of the same day.  The transaction was unanimously approved by the Company’s Board of Directors on the unanimous approval and recommendation of its Conflicts Committee, which is composed solely of independent directors.

 

The restructuring permanently eliminated all of the Company’s subordinated units and previous incentive distribution rights in return for the new IDRs.  Prior to completion of the restructuring, the Company would have been required to pay the full minimum quarterly distribution of $0.35 per unit on the subordinated units (requiring additional distributions of approximately $12 million per quarter) prior to increasing the quarterly distribution on common units. Quarterly distributions on the subordinated units had not been paid since the quarter ended September 30, 2011.

 

The new IDRs entitle the Carlyle/Riverstone Funds to receive 48% of any quarterly cash distributions after Niska Partners’ common unit holders have received the full minimum quarterly distribution ($0.35 per unit) for each quarter plus any arrearages from prior quarters (of which there are currently none).  The previous incentive distribution rights entitled the Carlyle/Riverstone Funds to receive increasing percentages (ranging from 13% to 48%) of incremental cash distributions after the unit holders (both common and subordinated) exceeded quarterly distributions ranging from $0.4025 per unit to $0.5250 per unit.  In addition, for a period of five years, and provided that the Carlyle/Riverstone Funds continue to own a majority of both the managing member and the new IDRs, the Carlyle/Riverstone Funds will be deemed to own 33.8 million “Notional Subordinated Units” in connection with votes to remove and replace the managing member.  These Notional Subordinated Units are not entitled to distributions, but preserve the Carlyle/Riverstone Fund’s voting rights with respect to removal of the managing member.

 

At December 31, 2013, Niska Partners had 35,301,200 common units outstanding. Of this amount, 17,801,200 common units are owned by the Carlyle/Riverstone Funds, along with a 1.94% Managing Member’s interest in the Company and all of the Company’s new IDRs. Including all of the common units owned by the Carlyle/Riverstone Funds, along with the 1.94% Managing Member’s interest, the Carlyle/Riverstone Funds have a 51.39% ownership interest in the Company excluding the new IDRs, which are a variable interest. The remaining 17,500,000 common units, representing a 48.61% ownership interest in the Company excluding the new IDRs, are owned by the public.

 

Basis of Presentation

 

The accounting policies applied in these unaudited interim financial statements are consistent with the policies applied in the consolidated financial statements of Niska Partners and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

1. Organization and Basis of Presentation (continued)

 

In the opinion of management, the accompanying consolidated financial statements of Niska Partners, which are unaudited except for the balance sheet at March 31, 2013 which is derived from audited financial statements, include all adjustments necessary to present fairly Niska Partners’ financial position as of December 31, 2013, the results of Niska Partners’ operations for the three and nine months ended December 31, 2013 and 2012, along with its cash flows for the nine months ended December 31, 2013 and 2012. The results of operations for the three and nine months ended December 31, 2013 are not necessarily representative of the results to be expected for the full fiscal year ending March 31, 2014.  The optimization of proprietary gas purchases is seasonal with the majority of the revenues and costs associated with the physical sale of proprietary gas generally occurring during the third and fourth fiscal quarters, when demand for natural gas is typically the strongest.

 

Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), the unaudited consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements should be read in conjunction with the consolidated financial statements of Niska Partners and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

 

2. Commitments and Contingencies

 

Commitments

 

Niska Partners has entered into non-cancelable operating leases for office space, land use rights at its operating facilities, storage capacity at other facilities, equipment, and vehicles used in its operations. The remaining lease terms expire between October 2014 and August 2056 and require the payment of taxes, insurance and maintenance by the lessee.

 

Contingencies

 

Niska Partners and its subsidiaries are subject to various legal proceedings and actions arising in the normal course of business. While the outcome of such legal proceedings and actions cannot be predicted with certainty, it is the view of management that the resolution of such proceedings and actions will not have a material impact on Niska Partners’ unaudited consolidated financial position or results of operations.

 

3. Debt

 

Niska Partners’ debt obligations consist of the following:

 

 

 

December 31,

 

March 31,

 

 

 

2013

 

2013

 

 

 

 

 

 

 

Senior Notes due 2018

 

$

643,790

 

$

643,790

 

Revolving credit facility

 

127,000

 

65,000

 

Total

 

770,790

 

708,790

 

Less portion classified as current

 

(127,000

)

(65,000

)

 

 

$

643,790

 

$

643,790

 

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

3. Debt (continued)

 

Senior Notes

 

Interest on the Senior Notes is payable semi-annually on March 15 and September 15 at a rate of 8.875% per annum. The Senior Notes will mature on March 15, 2018. No principal payments on the Senior Notes are required prior to maturity except in certain instances of default. As at December 31, 2013, the estimated fair value of the Senior Notes was $665.3 million (March 31, 2013 - $669.5 million).

 

The indenture governing the Senior Notes limits Niska Partners’ ability to incur new debt or to pay distributions in respect of, repurchase or pay dividends on its membership interests (or other capital stock) or make other restricted payments. The limitations will apply differently depending on a fixed charge coverage ratio, which is defined as the ratio of cash flows (which is defined in the indenture in a manner substantially consistent with consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”)) to fixed charges, each as defined in the indenture governing the Senior Notes, and measured for the preceding four fiscal quarters.

 

Under this limitation, the indenture would have permitted the Company to distribute approximately $250.8 million as at December 31, 2013.

 

If the fixed charge coverage ratio is not less than 2.0 to 1.0 (after giving pro forma effect to the incurrence of the additional debt obligations and any debt repurchases), Niska Partners is generally permitted to incur additional debt obligations beyond the Senior Notes and its $400 million Credit Agreement (discussed below).

 

If the fixed charge coverage ratio is not less than 1.75 to 1.0, Niska Partners is permitted to make restricted payments if the aggregate restricted payments since the date of the closing of its IPO, excluding certain types or amounts of permitted payments, are less than the sum (which the Company refers to as the restricted payment basket) of a number of items including, most importantly:

 

·                  operating surplus (defined similarly to the definition in the Company’s operating agreement) calculated as of the end of its preceding fiscal quarter; and

 

·                  the aggregate net cash proceeds received as a capital contribution or from the issuance of equity interests.

 

If the fixed charge coverage ratio is less than 1.75 to 1.0, Niska Partners is permitted to make restricted payments if the aggregate restricted payments constituting distributions in respect of Niska Partners’ equity interests since the date of the closing of its IPO, excluding certain types or amounts of permitted payments, are less than the sum (which the Company refers to as the restricted payment basket) of a number of items including, most importantly:

 

·                  $75.0 million; and

 

·                  the aggregate net cash proceeds received as a capital contribution or from the issuance of equity interests, again including the net cash proceeds from the IPO, reduced by the amount distributed before the IPO.

 

The indenture does not prohibit certain types or amounts of restricted payments, including a general basket of $75.0 million of restricted payments.

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

3. Debt (continued)

 

At December 31, 2013, the fixed charge coverage ratio was 2.44 to 1.0.

 

$400 Million Credit Agreement

 

Niska Partners, through its subsidiaries, Niska Gas Storage US, LLC and AECO Gas Storage Partnership, has senior secured asset-based revolving credit facilities, consisting of a U.S. revolving credit facility and a Canadian revolving credit facility, both of which are governed by a credit agreement (the “Credit Agreement” or the “$400 million Credit Agreement”). Each revolving credit facility matures on June 29, 2016.

 

At December 31, 2013, $127.0 million in borrowings, with a weighted average interest rate of 3.93% (March 31, 2013 - $65.0 million of borrowings had a weighted average interest rate of 3.69%), were outstanding under the credit facilities. Amounts committed in support of letters of credit totaled $34.1 million at December 31, 2013 (March 31, 2013 - $3.3 million). Any borrowings under the $400 million Credit Agreement are classified as current.

 

The Credit Agreement provides that Niska Partners may borrow only up to the lesser of the level of the then current borrowing base or the committed maximum borrowing capacity, which is currently $400.0 million. As of December 31, 2013, the borrowing base collateral totaled $486.4 million.

 

The $400 million Credit Agreement contains limitations on Niska Partners’ ability to incur additional debt or to pay distributions in respect of, repurchase or pay dividends on its membership interests (or other capital stock) or make other restricted payments. These limitations are similar to those contained in the indenture governing the Senior Notes, but contain certain substantive differences.  As a result of these differences, the limitations on restricted payments contained in the Credit Agreement should be less restrictive than the limitations contained in the indenture.  As of December 31, 2013, Niska Partners was in compliance with all covenant requirements under the indenture governing the Senior Notes and the $400 million Credit Agreement.

 

Niska Partners has no independent assets or operations other than its investments in its subsidiaries. Both the Senior Notes and the $400 million Credit Agreement have been jointly and severally guaranteed by Niska Partners and substantially all of its subsidiaries. Niska Partners’ subsidiaries have no significant restrictions on their ability to pay distributions or make loans to Niska Partners, which are prepared and measured on a consolidated basis, and have no restricted assets as of December 31, 2013.

 

4. Risk Management Activities and Financial Instruments

 

Risk Management Overview

 

Niska Partners has exposure to commodity price, foreign currency, counterparty credit, interest rate and liquidity risks. Risk management activities are tailored to the risks they are designed to mitigate.

 

Commodity Price Risk

 

As a result of its natural gas inventory, Niska Partners is exposed to risks associated with changes in price when buying and selling natural gas across future time periods. To manage these risks and reduce variability of cash flows, the Company utilizes a combination of financial and physical derivative contracts, including forwards, futures, swaps and option contracts. The use of these contracts is subject to the Company’s risk management policies. These contracts have not been treated as hedges for financial reporting purposes and therefore changes in fair value are recorded directly in earnings.

 

8



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

4. Risk Management Activities and Financial Instruments (continued)

 

Forward contracts and futures contracts are agreements to purchase or sell a specific financial instrument or quantity of natural gas at a specified price and date in the future. Niska Partners enters into forward contracts and futures contracts to mitigate the impact of changes in natural gas prices. In addition to cash settlement, exchange traded futures may also be settled by the physical delivery of natural gas.

 

Swap contracts are agreements between two parties to exchange streams of payments over time according to specified terms. Swap contracts require receipt of payment for the notional quantity of the commodity based on the difference between a fixed price and the market price on the settlement date. Niska Partners enters into commodity swaps to mitigate the impact of changes in natural gas prices.

 

Option contracts are contractual agreements to convey the right, but not the obligation, for the purchaser of the option to buy or sell a specific physical or notional amount of a commodity at a fixed price, either at a fixed date or at any time within a specified period. Niska Partners enters into option agreements to mitigate the impact of changes in natural gas prices.

 

To limit its exposure to changes in commodity prices, Niska Partners enters into purchases and sales of natural gas inventory and concurrently matches the volumes in these transactions with offsetting derivative contracts. To comply with its internal risk management policies, Niska Partners is required to limit its exposure of unmatched volumes of proprietary current natural gas inventory to an aggregate overall limit of 8.0 billion cubic feet (“Bcf”). At December 31, 2013, 56.4 Bcf of natural gas inventory was offset with financial contracts, representing 100% of total current inventory. Non-cycling working gas, which is included in long-term inventory, and fuel gas used for operating the facilities are excluded from the coverage requirement. Total volumes of long-term inventory and fuel gas at December 31, 2013 are 3.4 Bcf and 0.0 Bcf, respectively. As of December 31, 2013 and March 31, 2013, the volumes of inventories which were economically hedged using each type of contract were:

 

 

 

December 31,

 

March 31,

 

 

 

2013

 

2013

 

 

 

 

 

 

 

Forwards

 

0.9

Bcf

1.6

Bcf

Futures

 

55.1

Bcf

14.1

Bcf

Swaps

 

0.0

Bcf

10.0

Bcf

Options

 

 

 

 

 

56.0

Bcf

25.7

Bcf

 

Counterparty Credit Risk

 

Niska Partners is exposed to counterparty credit risk on its trade and accrued accounts receivable and risk management assets. Counterparty credit risk is the risk of financial loss to the Company if a customer fails to perform its contractual obligations. Niska Partners engages in transactions for the purchase and sale of products and services with major companies in the energy industry and with industrial, commercial, residential and municipal energy consumers.  Credit risk associated with trade accounts receivable is mitigated by the high percentage of investment grade customers, collateral support of receivables and Niska Partners’ ability to take ownership of customer owned natural gas stored in its facilities in the event of non-payment.  For the nine months ended December 31, 2013 and 2012, no trade receivables were deemed to be uncollectible. It is management’s opinion that no allowance for doubtful accounts is required at December 31, 2013 or March 31, 2013 on accrued and trade accounts receivable.

 

9



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

4. Risk Management Activities and Financial Instruments (continued)

 

The Company analyzes the financial condition of counterparties prior to entering into an agreement. Credit limits are established and monitored on an ongoing basis. Management believes, based on its credit policies, that the Company’s financial position, results of operations and cash flows will not be materially affected as a result of non-performance by any single counterparty. Credit risk is assessed prior to transacting with any counterparty and each counterparty is required to maintain an investment grade rating, provide a parental guarantee from an investment grade parent, or provide an alternative method of financial assurance (letter of credit, cash, etc.) to support proposed transactions. In addition, the Company’s tariffs contain provisions that permit it to take title to a customer’s inventory should the customer’s account remain unpaid for an extended period of time. Although the Company relies on a few counterparties for a significant portion of its revenues, one counterparty making up 40.5% of gross revenues for the nine months ended December 31, 2013 is a physical natural gas clearing and settlement facility that requires counterparties to post margin deposits equal to 125% of their net position, which reduces the risk of default.

 

Exchange traded futures and options comprise approximately 60.6% of Niska Partners’ commodity risk management assets at December 31, 2013. These exchange traded contracts have minimal credit exposure as the exchanges guarantee that every contract will be margined on a daily basis. In the event of any default, Niska Partners’ account on the exchange would be absorbed by other clearing members. Because every member posts an initial margin, the exchange can protect the exchange members if or when a clearing member defaults.

 

Niska Partners further manages credit exposure by entering into master netting agreements for the majority of non-retail contracts. These master netting agreements provide the Company, in the event of default, the right to offset the counterparty’s rights and obligations.

 

Interest Rate Risk

 

Niska Partners assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows. At December 31, 2013, Niska Partners was only exposed to interest rate risk resulting from the variable rates associated with its $400 million Credit Agreement of which $127.0 million was drawn.

 

Liquidity Risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. Niska Partners continues to manage its liquidity risk by ensuring sufficient cash and credit facilities are available to meet its operating and capital expenditure obligations when due, under both normal and stressed conditions.

 

10



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

4. Risk Management Activities and Financial Instruments (continued)

 

Foreign Currency Risk

 

Foreign currency risk is created by fluctuations in foreign exchange rates. As Niska Partners conducts a portion of its activities in Canadian dollars, earnings and cash flows are subject to currency fluctuations. The performance of the Canadian dollar relative to the U.S. dollar could positively or negatively affect earnings. Niska Partners is exposed to cash flow risk to the extent that Canadian currency outflows exceed Canadian currency inflows. The Company enters into currency swaps to mitigate the impact of changes in foreign exchange rates. The notional value of currency swaps at December 31, 2013 was $57.5 million (March 31, 2013 - $84.0 million). These contracts expire on various dates from January 1, 2014 through June 1, 2016. Niska Partners has not elected hedge accounting treatment, therefore, changes in fair value are recorded directly in earnings.

 

The following tables show the fair values of Niska Partners’ risk management assets and liabilities at December 31, 2013 and March 31, 2013:

 

 

 

Energy

 

Currency

 

 

 

December 31, 2013 

 

Contracts

 

Contracts

 

Total

 

 

 

 

 

 

 

 

 

Short-term risk management assets

 

$

16,217

 

$

730

 

$

16,947

 

Long-term risk management assets

 

6,376

 

278

 

6,654

 

Short-term risk management liabilities

 

(37,450

)

(42

)

(37,492

)

Long-term risk management liabilities

 

(5,383

)

(1

)

(5,384

)

 

 

$

(20,240

)

$

965

 

$

(19,275

)

 

 

 

Energy

 

Currency

 

 

 

March 31, 2013 

 

Contracts

 

Contracts

 

Total

 

 

 

 

 

 

 

 

 

Short-term risk management assets

 

$

20,383

 

$

776

 

$

21,159

 

Long-term risk management assets

 

6,593

 

 

6,593

 

Short-term risk management liabilities

 

(19,792

)

(213

)

(20,005

)

Long-term risk management liabilities

 

(4,477

)

(97

)

(4,574

)

 

 

$

2,707

 

$

466

 

$

3,173

 

 

11



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

4. Risk Management Activities and Financial Instruments (continued)

 

Information about the Company’s risk management assets and liabilities that had netting or rights of offset arrangements are as follows:

 

December 31, 2013 

 

Gross Amounts
Recognized

 

Gross Amounts
Offset in the 
Balance Sheet

 

Net Amounts 
Presented in 
the Balance 
Sheet

 

Margin 
Deposits not 
Offset in the 
Balance Sheet

 

Net Amounts

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

106,713

 

$

(84,120

)

$

22,593

 

$

(13,262

)

$

9,331

 

Currency derivatives

 

1,132

 

(124

)

1,008

 

(1,008

)

 

Total assets

 

107,845

 

(84,244

)

23,601

 

(14,270

)

9,331

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

126,954

 

(84,121

)

42,833

 

(28,904

)

13,929

 

Currency derivatives

 

166

 

(123

)

43

 

(43

)

 

Total liabilities

 

127,120

 

(84,244

)

42,876

 

(28,947

)

13,929

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

(19,275

)

$

 

$

(19,275

)

$

14,677

 

$

(4,598

)

 

March 31, 2013 

 

Gross Amounts 
Recognized

 

Gross Amounts 
Offset in the 
Balance Sheet

 

Net Amounts 
Presented in 
the Balance 
Sheet

 

Margin 
Deposits not 
Offset in the 
Balance Sheet

 

Net Amounts

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

88,682

 

$

(61,706

)

$

26,976

 

$

(15,030

)

$

11,946

 

Currency derivatives

 

881

 

(105

)

776

 

(776

)

 

Total assets

 

89,563

 

(61,811

)

27,752

 

(15,806

)

11,946

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

85,975

 

(61,706

)

24,269

 

(16,861

)

7,408

 

Currency derivatives

 

415

 

(105

)

310

 

(164

)

146

 

Total liabilities

 

86,390

 

(61,811

)

24,579

 

(17,025

)

7,554

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

3,173

 

$

 

$

3,173

 

$

1,219

 

$

4,392

 

 

12



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

4. Risk Management Activities and Financial Instruments (continued)

 

The Company expects to recognize risk management assets and liabilities outstanding at December 31, 2013 into net earnings and comprehensive income in the fiscal periods as follows:

 

 

 

Energy

 

Currency

 

 

 

 

 

Contracts

 

Contracts

 

Total

 

 

 

 

 

 

 

 

 

Fiscal year ending March 31, 2014

 

$

(22,774

)

$

317

 

$

(22,457

)

Fiscal year ending March 31, 2015

 

3,217

 

371

 

3,588

 

Fiscal year ending March 31, 2016

 

(771

)

179

 

(592

)

Thereafter

 

88

 

98

 

186

 

 

 

$

(20,240

)

$

965

 

$

(19,275

)

 

Net realized and unrealized optimization gains and losses from the settlement of risk management contracts are summarized as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Energy contracts

 

 

 

 

 

 

 

 

 

Realized

 

$

(559

)

$

(24,079

)

$

7,131

 

$

7,356

 

Unrealized

 

(29,803

)

41,515

 

(22,947

)

(37,616

)

Currency contracts

 

 

 

 

 

 

 

 

 

Realized

 

116

 

(146

)

1,712

 

(134

)

Unrealized

 

870

 

603

 

500

 

(145

)

 

 

$

(29,376

)

$

17,893

 

$

(13,604

)

$

(30,539

)

 

5. Fair Value Measurements

 

The carrying amount of cash and cash equivalents, margin deposits, trade receivables, accrued receivables, trade payables and accrued liabilities reported on the unaudited consolidated balance sheet approximate fair value. The fair value of debt is the estimated amount the Company would have to pay to transfer its debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are based on valuations of similar debt at the balance sheet date and supported by observable market transactions when available. See Note 3 for disclosures regarding the fair value of debt.

 

13



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

5. Fair Value Measurements (continued)

 

Fair values have been determined as follows for Niska Partners financial assets and liabilities that were accounted for at fair value on a recurring basis:

 

December 31, 2013 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

22,593

 

$

 

$

22,593

 

Currency derivatives

 

 

1,008

 

 

1,008

 

Total assets

 

 

23,601

 

 

23,601

 

Liabilities

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

 

42,833

 

 

42,833

 

Currency derivatives

 

 

43

 

 

43

 

Total liabilities

 

 

42,876

 

 

42,876

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

 

$

(19,275

)

$

 

$

(19,275

)

 

March 31, 2013 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

26,976

 

$

 

$

26,976

 

Currency derivatives

 

 

776

 

 

776

 

Total assets

 

 

27,752

 

 

27,752

 

Liabilities

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

 

24,269

 

 

24,269

 

Currency derivatives

 

 

310

 

 

310

 

Total liabilities

 

 

24,579

 

 

24,579

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

 

$

3,173

 

$

 

$

3,173

 

 

The Company’s financial assets and liabilities recorded at fair value on a recurring basis have been categorized as Level 2. The determination of the fair value of assets and liabilities for Level 2 valuations is generally based on a market approach. The key inputs used in Niska Partners’ valuation models include transaction-specific details such as notional volumes, contract prices and contract terms as well as forward market prices and basis differentials for natural gas obtained from third-party service providers (typically the New York Mercantile Exchange, or NYMEX). There were no changes in Niska Partners’ approach to determining fair value and there were no transfers out of Level 2 during the periods ended December 31, 2013 and March 31, 2013.

 

14



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

6. Members’ Equity

 

Equity restructuring

 

As described in Note 1, the Company completed an equity restructuring on April 2, 2013 to eliminate its subordinated units and previous IDRs in exchange for new IDRs. This was accounted for as an exchange of equity between the subordinated unit holder and the Managing Member.

 

Distribution Reinvestment Plan

 

Niska Partners filed a registration statement with the SEC to authorize the issuance of up to 7,500,000 common units in connection with a distribution reinvestment plan (“DRIP”).  The DRIP provides unitholders of record and beneficial owners of common units a voluntary means by which unitholders can increase the number of common units owned by reinvesting the quarterly cash distributions unitholders would otherwise receive in the purchase of additional common units.  This registration statement became effective on July 31, 2013. Common units purchased under the DRIP will come from the Company’s authorized but unissued common units or from common units purchased on the open market.

 

During the nine months ended December 31, 2013, the Carlyle/Riverstone Funds elected to participate in the DRIP and were issued 808,955 common units in lieu of receiving cash distributions of $12.0 million.

 

Phantom Unit Performance Plan

 

Effective April 1, 2011, the Company maintains a compensatory phantom unit performance plan (the “PUPP” or “the Plan”) to provide long-term incentive compensation for certain employees and directors and to align their economic interest with those of common unitholders.

 

A Phantom Unit is a notional unit granted under the PUPP that represents the right to receive a cash payment equal to the fair market value of a unit of the Company’s common units, following the satisfaction of certain time periods and/or certain performance criteria. Phantom Units are granted unvested and subject to both time and performance conditions.  The default time period over which a Phantom Unit vests is three years from the date of grant. The performance measure is based upon total unitholder return (“TUR”) metrics compared to such metrics of a select group of peer companies. The TUR metrics are calculated based on the Company’s percentile ranking during the applicable performance period compared to the peer group.  Provided that the Company has satisfied its minimum quarterly distribution targets for the underlying units, the Phantom Units will vest variably according to the Company’s performance relative to its peer group.

 

The plan was amended effective April 1, 2012. The performance measure for Phantom Units granted after that date is based on TUR metrics compared to such metrics of a select group of peer companies. The TUR metrics are calculated based on the Company’s percentile ranking during the applicable performance period compared to a peer group. Provided that the Company has satisfied its minimum quarterly distribution targets for the common units, the Phantom Units will vest variably according to the Company’s performance relative to its peer group.

 

During the nine months ended December 31, 2013, 438,036 Phantom Units were granted at a weighted average price of $12.68.  During the nine months ended December 31, 2012, 695,349 Phantom Units were granted at a weighted average price of $9.99.

 

The Plan is administered by the Compensation Committee of the Board of Directors.  The Plan permits the grant of unit awards, restricted units, phantom units, unit options, unit appreciation rights, other unit-based awards, distribution equivalent rights and substitution awards covering an aggregate of 3,380,474 units. As of December 31, 2013, 1,519,679 units (March 31, 2013 - 2,045,693 units) were available for grant.

 

15



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

6. Members’ Equity (continued)

 

The following is a reconciliation of Phantom Units Outstanding as of December 31, 2013:

 

 

 

Number of Time-
Based Units

 

Number of 
Performance-Based 
Units

 

Total Units

 

Balance at March 31, 2013

 

624,518

 

307,489

 

932,007

 

Granted

 

219,018

 

219,018

 

438,036

 

Vested and paid

 

(61,498

)

(61,498

)

(122,996

)

Forfeited

 

(23,718

)

(23,719

)

(47,437

)

Distribution equivalent rights

 

55,260

 

32,718

 

87,978

 

Balance at December 31, 2013

 

813,580

 

474,008

 

1,287,588

 

 

Unit-based compensation costs for the three and nine months ended December 31, 2013 were $2.1 million and $8.7 million respectively ($1.3 million and $5.0 million for the three and nine months ended December 31, 2012, respectively).

 

Earnings per unit:

 

Niska Partners uses the two-class method for allocating earnings per unit. The two-class method requires the determination of net income allocated to member interests as shown below. Net income for the three and nine months ended December 31, 2013, after the allocation to Managing Member’s interest, was only attributable to common unitholders as a result of cancellation of the Company’s subordinated units at the beginning of the current fiscal year. The cancellation of subordinated units has not impacted the prior-period calculation of earnings per unit.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

Numerator:

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to Niska Partners

 

$

(13,409

)

$

10,419

 

$

(13,286

)

$

(42,323

)

Less:

 

 

 

 

 

 

 

 

 

Managing Member’s interest

 

260

 

(206

)

256

 

838

 

Net earnings (loss) attributable to common unitholders

 

$

(13,149

)

$

5,158

 

$

(13,030

)

$

(20,951

)

Net earnings (loss) attributable to subordinated unitholders

 

$

 

$

5,055

 

$

 

$

(20,534

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Weighted average units outstanding

 

35,077,239

 

68,296,990

 

34,756,989

 

68,296,990

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Weighted average units outstanding

 

35,077,239

 

68,296,990

 

34,756,989

 

68,296,990

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per unit allocated to common unitholders - basic and diluted

 

$

(0.37

)

$

0.15

 

$

(0.37

)

$

(0.61

)

Earnings (loss) per unit allocated to subordinated unitholders - basic and diluted

 

$

 

$

0.15

 

$

 

$

(0.61

)

 

16



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

7. Revenues

 

Niska Partners’ fee-based revenue consists of the following:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Long-term contract revenue

 

$

21,278

 

$

26,492

 

$

62,161

 

$

82,283

 

Short-term contract revenue

 

9,206

 

14,763

 

32,990

 

37,031

 

Total

 

$

30,484

 

$

41,255

 

$

95,151

 

$

119,314

 

 

Optimization, net consists of the following:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Realized optimization revenue, net

 

$

24,296

 

$

(9,542

)

$

47,193

 

$

36,316

 

Unrealized risk management (losses) gains

 

(28,933

)

42,118

 

(22,447

)

(37,760

)

Write-down of inventory

 

 

 

 

(22,281

)

Total

 

$

(4,637

)

$

32,576

 

$

24,746

 

$

(23,725

)

 

8. Income Taxes

 

Income taxes included in the consolidated financial statements were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

$

(6,309

)

$

(542

)

$

(6,561

)

$

(19,200

)

 

 

 

 

 

 

 

 

 

 

Effective income tax rate

 

32

%

-5

%

33

%

31

%

 

Income tax benefit was $6.6 million for the nine months ended December 31, 2013 compared to a benefit of $19.2 million in the same period of the prior year. The income tax benefit in the current period is due mainly to the recognition of losses in certain foreign taxable entities.

 

The effective tax rate for the three and nine months ended December 31, 2013 and 2012 differs from the U.S. statutory federal rate of 35% primarily due to the recognition of losses in some entities which have a lower statutory tax rate as well as income attributable to subsidiaries exempt from U.S. Federal income taxes.

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

9. Accrued Liabilities

 

Niska Partners’ accrued liabilities consist of the following:

 

 

 

December 31,

 

March 31,

 

 

 

2013

 

2013

 

 

 

 

 

 

 

Accrued gas purchases

 

$

24,733

 

$

14,213

 

Employee-related accruals

 

16,840

 

13,836

 

Accrued interest

 

17,573

 

2,845

 

Other accrued liabilities

 

6,828

 

8,946

 

 

 

$

65,974

 

$

39,840

 

 

10. Changes in Non-Cash Working Capital

 

Changes in non-cash working capital for the nine months ended December 31, 2013 and 2012 consist of the following:

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Margin deposits

 

$

(35,184

)

$

(33,215

)

Trade receivables

 

(1,273

)

(2,003

)

Accrued receivables

 

42,165

 

16,776

 

Natural gas inventory

 

(99,043

)

17,801

 

Prepaid expenses and other current assets

 

1,199

 

1,310

 

Other assets

 

(88

)

367

 

Trade payables

 

(218

)

454

 

Accrued liabilities

 

24,222

 

19,608

 

Deferred revenue

 

319

 

11,318

 

Other long-term liabilities

 

(60

)

 

Total

 

$

(67,961

)

$

32,416

 

 

During the nine months ended December 31, 2012, changes in non-cash working capital included the receipt of proceeds of $18.0 million (December 31, 2013 - $ nil) and an increase in accrued receivables of $14.6 million (December 31, 2013 - $ nil) from sales of cushion gas. The Company included such proceeds in cash flows from operations since the predominant source of cash flows for natural gas purchases and sales are operating in nature.

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

11. Supplemental Cash Flow Disclosures

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Interest paid

 

$

32,484

 

$

37,332

 

Taxes paid (recovered)

 

$

73

 

$

(38

)

Interest capitalized

 

$

 

$

2,928

 

 

 

 

 

 

 

Non-cash increase in working capital related to property, plant and equipment classified as operating activity

 

$

 

$

14,648

 

 

 

 

 

 

 

Non-cash (decrease) increase in working capital related to property, plant and equipment classified as investing activities

 

$

(1,993

)

$

5,560

 

 

 

 

 

 

 

Non-cash earnings distribution and reinvestment

 

$

12,039

 

$

 

 

12. Segment Disclosures

 

The Company’s process for the identification of reportable segments involves examining the nature of services offered, the types of customer contracts entered into and the nature of the economic and regulatory environment.

 

Niska Partners operates along functional lines in its commercial, engineering, and operations teams for operations in Alberta, Northern California and the U.S. Mid-continent.  All functional lines and facilities offer the same services: fee-based revenue and optimization. The Company has a small retail marketing business which is an extension of the Company’s proprietary optimization activities. Proprietary optimization activities occur when the Company purchases, stores and sells natural gas for its own account in order to utilize or optimize storage capacity that is not contracted or available to third-party customers. All services are delivered using reservoir storage.  The Company measures profitability consistently along all functional lines based on revenues and earnings before interest, taxes, depreciation and amortization, and unrealized risk management gains and losses.  The Company has aggregated its operating segments into one reportable segment as at December 31, 2013 and March 31, 2013 and for each of the three months and nine months period ended December 31, 2013 and 2012.

 

Information pertaining to the Company’s short-term and long-term contract services and net optimization revenues is presented in the consolidated statements of earnings and comprehensive income.  All facilities have the same types of customers: major companies in the energy industry, industrial, commercial, local distribution companies and municipal energy consumers.

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (continued)

 

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

 

12. Segment Disclosures (continued)

 

The following tables summarize the net revenues and long-lived assets by geographic area:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net realized revenues

 

 

 

 

 

 

 

 

 

U.S.

 

$

16,556

 

$

7,633

 

$

36,330

 

$

38,368

 

Canada

 

38,224

 

24,080

 

106,014

 

94,981

 

Net unrealized revenues

 

 

 

 

 

 

 

 

 

U.S.

 

(15,333

)

16,476

 

(9,025

)

(11,617

)

Canada

 

(13,600

)

25,642

 

(13,422

)

(26,143

)

Inter-entity

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

Canada

 

 

 

 

 

 

 

$

25,847

 

$

73,831

 

$

119,897

 

$

95,589

 

 

 

 

December 31,

 

March 31,

 

 

 

2013

 

2013

 

Long-lived assets (at period end)

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

402,085

 

$

411,420

 

Canada

 

839,992

 

858,604

 

 

 

$

1,242,077

 

$

1,270,024

 

 

13. Subsequent Events

 

Distributions

 

On January 29, 2014, the Board of Directors of Niska Partners approved a distribution of $0.35 per common unit, payable on February 18, 2014 to unitholders of record as of February 10, 2014. The total distribution is expected to be approximately $12.6 million.

 

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Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following information should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this report. The following information and such unaudited consolidated financial statements should also be read in conjunction with the consolidated financial statements and related notes, management’s discussion and analysis of financial condition and results of operations and other information included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013.

 

Overview of Critical Accounting Policies and Estimates

 

The process of preparing financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires estimates and judgments to be made regarding certain items and transactions. It is possible that materially different amounts could be recorded if these estimates and judgments change or if the actual results differ from these estimates and judgments. Our most critical accounting estimates, which involve the judgment of our management, were fully disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013 and remained unchanged as of December 31, 2013.

 

Overview of Our Business

 

We operate the AECO HubTM, which consists of the Countess and Suffield gas storage facilities in Alberta, Canada, and the Wild Goose and Salt Plains gas storage facilities in California and Oklahoma, respectively. Niska Partners markets gas storage services of working gas capacity in addition to optimizing storage capacity with its own proprietary gas purchases at each of these facilities. We also operate a natural gas marketing business which is an extension of our propriety optimization activities in Canada.

 

We earn revenues by leasing storage on a long-term firm (“LTF”) contract basis for which we receive monthly reservation fees for fixed amounts of storage, leasing storage on a short-term firm (“STF”) contract basis, where customers inject and withdraw specified amounts of gas and pay fees on specific dates, and optimization, where we purchase and sell gas on an economically hedged basis in order to improve facility utilization at margins higher than those from third-party contracts. Proprietary optimization activities occur when the Company purchases and sells natural gas for its own account. Our revenues related to our marketing business are included in proprietary optimization activities.

 

The Company has a total of 250.5 billion cubic feet (“Bcf”) of working gas capacity among its facilities, including 8.5 Bcf leased from a third-party pipeline company.

 

We have aggregated all of our activities in one reportable operating segment for financial reporting purposes. Our consolidated financial statements are prepared in accordance with GAAP.

 

Factors that Impact Our Business

 

During the past year, future market values for natural gas storage in North America have continued to decline, led primarily by a narrowing of the difference between summer and winter prices in the natural gas futures market, which we refer to as the seasonal spread.  These market conditions affect the prices that we are able to charge for contracted storage services, as well as revenues realizable by us in our optimization activities.  If current market conditions persist, our results of operation could be adversely impacted to a material extent.

 

Market conditions can change rapidly as a result of a number of factors, including weather, overall storage levels across North America and in the markets we serve, current and anticipated levels of natural gas supply and demand, and pipeline infrastructure capacity.  Accordingly, current market conditions may not be a reliable predictor of future events.  Longer term, we believe several factors will contribute to meaningful growth in North American natural gas demand, including: (i) exports of North American volumes of Liquefied Natural Gas, or LNG; (ii) sustained fuel switching from coal to natural gas; (iii) construction of new gas-fired power plants; and (iv) growth in base-level industrial demand, all of which would bolster the market need for, and the commercial value of, natural gas storage.  However, we are unable to predict the timing or magnitude of such events and the ultimate impact they may have on our results of operations.

 

In addition, our largest volumetric customer is party to a storage services agreement which contains an option to terminate (by either party) every five years, with one year’s notice.  This option is exercisable at the end of fiscal 2014 and it is unclear whether our customer will exercise its option.  If the contract is terminated and a new contract is negotiated, we would expect that the terms of the contract would be more favorable to the customer than the current terms. However, if a party exercises its option to terminate, which would be effective at the end of fiscal 2015, that party is required to pay a substantial early termination fee.  If the contract is terminated, the adverse effect of such termination would not impact our results of operation until fiscal 2016.

 

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Table of Contents

 

Results of Operations

 

A summary of financial data for each of the three and nine months ended December 31, 2013 and 2012 is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss) Data:

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Fee-based revenue

 

$

30,484

 

$

41,255

 

$

95,151

 

$

119,314

 

Optimization, net

 

(4,637

)

32,576

 

24,746

 

(23,725

)

 

 

25,847

 

73,831

 

119,897

 

95,589

 

Expenses (income):

 

 

 

 

 

 

 

 

 

Operating

 

8,426

 

8,330

 

27,747

 

25,250

 

General and administrative

 

9,361

 

8,417

 

30,164

 

26,332

 

Depreciation and amortization

 

10,518

 

14,831

 

31,149

 

39,896

 

Interest

 

17,114

 

17,279

 

49,718

 

50,459

 

Loss on disposal of assets

 

 

15,072

 

 

15,072

 

Loss on extinguishment of debt

 

 

 

 

599

 

Foreign exchange losses (gains)

 

160

 

22

 

606

 

(314

)

Other (income) expense

 

(14

)

3

 

360

 

(182

)

Loss before income taxes

 

(19,718

)

9,877

 

(19,847

)

(61,523

)

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

(6,309

)

(542

)

(6,561

)

(19,200

)

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) and comprehensive income (loss)

 

$

(13,409

)

$

10,419

 

$

(13,286

)

$

(42,323

)

 

 

 

 

 

 

 

 

 

 

Reconciliation of Adjusted EBITDA and Cash Available for Distribution to Net Earnings (Loss)

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

(13,409

)

$

10,419

 

$

(13,286

)

$

(42,323

)

Add/(deduct):

 

 

 

 

 

 

 

 

 

Interest expense

 

17,114

 

17,279

 

49,718

 

50,459

 

Income tax benefit

 

(6,309

)

(542

)

(6,561

)

(19,200

)

Depreciation and amortization

 

10,518

 

14,831

 

31,149

 

39,896

 

Unrealized risk management losses (gains)

 

28,933

 

(42,118

)

22,447

 

37,739

 

Loss on disposal of assets

 

 

15,072

 

 

15,072

 

Loss on extinguishment of debt

 

 

 

 

599

 

Foreign exchange losses (gains)

 

160

 

22

 

606

 

(314

)

Other (income) expense

 

(14

)

3

 

360

 

(182

)

Write-down of inventory

 

 

 

 

22,281

 

Adjusted EBITDA

 

36,993

 

14,966

 

84,433

 

104,027

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

Cash interest expense, net

 

16,278

 

16,421

 

47,212

 

47,882

 

Income taxes paid (recovered)

 

67

 

(31

)

73

 

(38

)

Maintenance capital expenditures

 

123

 

193

 

1,082

 

1,107

 

Other (income) expense

 

(14

)

3

 

360

 

(182

)

Cash Available for Distribution

 

$

20,539

 

$

(1,620

)

$

35,706

 

$

55,258

 

 

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Table of Contents

 

Non-GAAP Financial Measures

 

Adjusted EBITDA and Cash Available for Distribution

 

We use the non-GAAP financial measures Adjusted EBITDA and Cash Available for Distribution in this report. A reconciliation of Adjusted EBITDA and Cash Available for Distribution to net earnings, the most directly comparable financial measure as calculated and presented in accordance with GAAP, is shown above.

 

We define Adjusted EBITDA as net earnings before interest, income taxes, depreciation and amortization, unrealized risk management gains and losses, loss on extinguishment of debt, foreign exchange gains and losses, inventory impairment write-downs, gains and losses on asset dispositions, asset impairments and other income. We believe the adjustments for other income are similar in nature to the traditional adjustments to net earnings used to calculate EBITDA and adjustment for these items results in an appropriate representation of this financial measure. Cash Available for Distribution is defined as Adjusted EBITDA reduced by interest expense (excluding amortization of deferred financing costs), income taxes paid, maintenance capital expenditures and other income. Adjusted EBITDA and Cash Available for Distribution are used as supplemental financial measures by our management and by external users of our financial statements, such as commercial banks and ratings agencies, to assess:

 

·                  the financial performance of our assets, operations and return on capital without regard to financing methods, capital structure or historical cost basis;

 

·                  the ability of our assets to generate cash sufficient to pay interest on our indebtedness and make distributions to our equity holders;

 

·                  repeatable operating performance that is not distorted by non-recurring items or market volatility; and

 

·                  the viability of acquisitions and capital expenditure projects.

 

The non-GAAP financial measures of Adjusted EBITDA and Cash Available for Distribution should not be considered as alternatives to net earnings. Adjusted EBITDA and Cash Available for Distribution are not presentations made in accordance with GAAP and have important limitations as analytical tools. Neither Adjusted EBITDA nor Cash Available for Distribution should be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA and Cash Available for Distribution exclude some, but not all, items that affect net earnings and are defined differently by different companies, our definition of Adjusted EBITDA and Cash Available for Distribution may not be comparable to similarly titled measures of other companies.

 

We recognize that the usefulness of Adjusted EBITDA as an evaluative tool may have certain limitations, including:

 

·                  Adjusted EBITDA does not include interest expense. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and impacts our ability to generate profits and cash flows. Therefore, any measure that excludes interest expense may have material limitations;

 

·                  Adjusted EBITDA does not include depreciation and amortization expense. Because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate profits. Therefore, any measure that excludes depreciation and amortization expense may have material limitations;

 

·                  Adjusted EBITDA does not include provision for income taxes. Because the payment of income taxes is a necessary element of our costs, any measure that excludes income tax expense may have material limitations;

 

·                  Adjusted EBITDA does not reflect cash expenditures or future requirements for capital expenditures or contractual commitments;

 

·                  Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and

 

·                  Adjusted EBITDA does not allow us to analyze the effect of certain recurring and non-recurring items that materially affect our net earnings or loss.

 

Similarly, Cash Available for Distribution has certain limitations because it accounts for some, but not all, of the above limitations.

 

23



Table of Contents

 

Revenues

 

Revenues include fee-based revenue and optimization revenue, net. Fee-based revenue consists of long-term contracts for storage fees that are generated when we lease storage capacity on a term basis and short-term fees associated with specified injections and withdrawals of natural gas. Optimization revenue results from the purchase of natural gas inventory and its forward sale to future periods through financial and physical energy trading contracts, with our facilities being used to store the inventory between acquisition and disposition of the natural gas inventory.

 

Revenues for the three and nine months ended December 31, 2013 and 2012, respectively, consisted of the following:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2013

 

2012

 

2013