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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

 

x

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

 

For the quarterly period ended September 30, 2010

 

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 1-34733

 

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
(IRS Employer
Identification number)

 

 

 

1001 Fannin Street
Suite 2500
Houston, TX

(Address of principal executive offices)

 

77002
(Zip Code)

 

Registrant’s telephone number, including area code:

(281) 404-1890

 

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 Date 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 o  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. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x
(Do not check if a
smaller reporting company)

 

Smaller reporting company o

 

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

 

As of November 11, 2010, there were 33,804,745 Common Units and 33,804,745 Subordinated 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 generally 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, 2010, 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 Six Months Ended September 30, 2010 and 2009

1

 

Consolidated Balance Sheets as of September 30, 2010 and March 31, 2010

2

 

Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2010 and 2009

3

 

Consolidated Statement of Changes in Members’ Equity for the Six Months Ended September 30, 2010

4

 

Notes to Unaudited Consolidated Financial Statements

5

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 6.

Exhibits

31

 

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

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

(Niska Predecessor)

 

 

 

(Niska Predecessor)

 

Revenues:

 

 

 

 

 

 

 

 

 

Long-term contract

 

$

28,394

 

$

26,655

 

$

58,018

 

$

53,516

 

Short-term contract

 

9,547

 

12,337

 

17,776

 

24,910

 

Optimization, net

 

39,895

 

(31,153

)

43,686

 

(39,956

)

 

 

77,836

 

7,839

 

119,480

 

38,470

 

Expenses (income):

 

 

 

 

 

 

 

 

 

Operating

 

10,115

 

8,298

 

21,271

 

18,189

 

General and administrative

 

7,754

 

5,069

 

15,272

 

10,324

 

Depreciation and amortization

 

13,244

 

10,528

 

23,340

 

20,790

 

Interest

 

19,412

 

9,088

 

38,167

 

13,436

 

Foreign exchange (gains) losses

 

(96

)

(19,127

)

29

 

(11,800

)

Other income

 

(12

)

(68

)

(24

)

(79

)

EARNINGS (LOSS) BEFORE INCOME TAXES

 

27,419

 

(5,949

)

21,425

 

(12,390

)

Income tax (benefit) expense

 

(4,018

)

24,347

 

(10,547

)

32,569

 

 

 

 

 

 

 

 

 

 

 

NET EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS)

 

31,437

 

$

(30,296

)

31,972

 

$

(44,959

)

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

Net earnings prior to initial public offering on May 17, 2010

 

N/A

 

N/A

 

36,234

 

N/A

 

Net earnings (loss) subsequent to initial public offering on May 17, 2010

 

$

31,437

 

N/A

 

$

(4,262

)

N/A

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) subsequent to initial public offering allocated to:

 

 

 

 

 

 

 

 

 

Managing Member

 

$

1,105

 

N/A

 

$

392

 

N/A

 

Common unitholders

 

$

15,166

 

N/A

 

$

(2,327

)

N/A

 

Subordinated unitholder

 

$

15,166

 

N/A

 

$

(2,327

)

N/A

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per unit allocated to common unitholders - basic and diluted (Note 7)

 

$

0.45

 

N/A

 

$

(0.07

)

N/A

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per unit allocated to subordinated unitholders - basic and diluted (Note 7)

 

$

0.45

 

N/A

 

$

(0.07

)

N/A

 

 

(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)

 

 

 

September 30,

 

March 31,

 

 

 

2010

 

2010

 

 

 

 

 

(Niska Predecessor)

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

39,097

 

$

131,559

 

Margin deposits

 

28,278

 

 

Trade receivables

 

2,340

 

3,467

 

Accrued receivables

 

72,472

 

62,948

 

Natural gas inventory

 

261,491

 

129,390

 

Prepaid expenses

 

5,142

 

1,708

 

Short-term risk management assets

 

110,507

 

100,864

 

 

 

519,327

 

429,936

 

Long-term assets

 

 

 

 

 

Property, plant and equipment, net

 

958,413

 

983,016

 

Goodwill

 

483,908

 

486,258

 

Long-term natural gas inventory

 

15,264

 

15,264

 

Intangible assets, net

 

123,379

 

131,286

 

Deferred charges, net

 

24,267

 

24,253

 

Long-term risk management assets

 

25,097

 

34,812

 

 

 

1,630,328

 

1,674,889

 

TOTAL

 

$

2,149,655

 

$

2,104,825

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Margin deposits

 

$

 

$

11,784

 

Trade payables

 

750

 

2,147

 

Accrued liabilities

 

87,140

 

61,403

 

Deferred revenue

 

12,442

 

1,427

 

Accrued cushion gas purchases

 

28,791

 

 

Current portion of deferred taxes

 

44,698

 

57,059

 

Short-term risk management liabilities

 

34,355

 

46,331

 

 

 

208,176

 

180,151

 

Long-term liabilities

 

 

 

 

 

Long-term risk management liabilities

 

38,148

 

34,694

 

Asset retirement obligations

 

1,171

 

1,378

 

Funds held on deposit

 

114

 

115

 

Deferred income taxes

 

158,701

 

158,701

 

Long-term debt

 

800,000

 

800,000

 

 

 

1,206,310

 

1,175,039

 

Members’ equity

 

 

 

 

 

Partners’ capital

 

 

849,991

 

Retained earnings

 

 

79,795

 

Common units

 

523,197

 

 

Subordinated units

 

403,205

 

 

Managing Member’s interest

 

16,943

 

 

 

 

943,345

 

929,786

 

Commitments and contingencies (Note 2)

 

 

 

 

 

TOTAL

 

$

2,149,655

 

$

2,104,825

 

 

(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)

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

 

 

 

 

(Niska Predecessor)

 

Operating Activities

 

 

 

 

 

Net earnings (losses)

 

$

31,972

 

$

(44,959

)

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

 

 

 

 

 

Unrealized foreign exchange loss (gain)

 

397

 

(5,792

)

Deferred income tax (benefit) expense

 

(10,834

)

32,029

 

Unrealized risk management (gain) loss

 

(8,450

)

46,914

 

Depreciation and amortization

 

23,340

 

20,790

 

Deferred charges amortization

 

2,072

 

3,519

 

Changes in non-cash working capital

 

(120,924

)

(125,436

)

Net cash used in operating activities

 

(82,427

)

(72,935

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures

 

(15,159

)

(31,465

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net proceeds from issuance of common units

 

333,459

 

 

Proceeds from revolver drawings

 

281,431

 

122,746

 

Revolver payments

 

(281,431

)

(20,000

)

Debt payments

 

 

(2,953

)

Payment of debt issuance costs

 

(2,086

)

 

Distributions to partners

 

(326,316

)

(10,795

)

Net cash provided by financing activities

 

5,057

 

88,998

 

 

 

 

 

 

 

Effect of translation on foreign currency cash and cash equivalents

 

67

 

97

 

Net decrease in cash and cash equivalents

 

(92,462

)

(15,305

)

Cash and cash equivalents, beginning of period

 

131,559

 

25,760

 

Cash and cash equivalents, end of period

 

$

39,097

 

$

10,455

 

 

 

 

 

 

 

Supplemental cash flow disclosures (Note 13)

 

 

 

 

 

 

(See Notes to Unaudited Consolidated Financial Statements)

 

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Niska Gas Storage Partners LLC

 

Consolidated Statement of Changes in Members’ Equity

 

(in thousands of U.S. dollars)

 

(Unaudited)

 

 

 

Niska Gas Storage Partners LLC

 

Niska Predecessor

 

 

 

 

 

 

 

 

 

Managing

 

 

 

 

 

 

 

 

 

Common

 

Subordinated

 

Member’s

 

Partners’

 

Retained

 

 

 

 

 

Units

 

Units

 

Interest

 

Capital

 

Earnings

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2010

 

$

 

$

 

$

 

$

849,991

 

$

79,795

 

$

929,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings, April 1, 2010 - May 16, 2010

 

 

 

 

 

36,234

 

36,234

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash distributions to Partners

 

 

 

 

(153,614

)

(159,726

)

(313,340

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash distribution of Starks Gas Storage LLC and Coastal Bend Gas Storage, LLC

 

 

 

 

(15,604

)

(10,122

)

(25,726

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange of Partners’ capital for common and subordinated units, Incentive Distribution Rights, and Managing Member’s interest

 

198,340

 

411,807

 

16,807

 

(680,773

)

53,819

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net proceeds from initial public offering

 

333,459

 

 

 

 

 

 

 

333,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss), May 17, 2010

 

(2,327

)

(2,327

)

392

 

 

 

(4,262

)

- September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions to Unitholders

 

(6,275

)

(6,275

)

(256

)

 

 

(12,806

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2010

 

$

523,197

 

$

403,205

 

$

16,943

 

$

 

$

 

$

943,345

 

 

(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) that was formed on January 27, 2010 to acquire certain assets of Niska GS Holdings I, LP and Niska GS Holdings II, LP (collectively, “Niska Predecessor”). On May 11, 2010, Niska Partners priced its initial public offering (the “IPO”) of 17,500,000 common units at an offering price of $20.50 per unit. Upon closing of the IPO on May 17, 2010, Niska Partners received net proceeds of $333.5 million, after deducting the underwriters’ discount, structuring fees and offering expenses. Upon closing the IPO, Niska Predecessor’s parent Niska Sponsor Holdings Cooperatief U.A. (“Sponsor Holdings” or “Holdco”), exchanged 100% of its equity interest in Niska Predecessor for a 2% Managing Member’s interest, 33,804,745 subordinated units, 13,679,745 common units of Niska Partners, and all of the Incentive Distribution Rights (“IDRs”). Prior to the closing, Niska Partners had no activity.

 

As partial consideration for the contribution of 100% of Niska Predecessor’s equity interest to Niska Partners, Sponsor Holdings held the right to receive any common units not purchased pursuant to the expiration of a 30-day option granted to the underwriters of the IPO to purchase up to an additional 2,625,000 common units. Upon the close of business on June 10, 2010, the 30-day option granted to the underwriters expired unexercised. Pursuant to the Contribution Agreement, 2,625,000 common units were issued to Sponsor Holdings on June 11, 2010.

 

At September 30, 2010, Niska Partners had 33,804,745 common units outstanding and 33,804,745 subordinated units outstanding. Of these amounts, 16,304,745 common units and all of the subordinated units are owned by Sponsor Holdings, along with a 2% Managing Member’s interest in the Company and all of the IDRs. Including all of the common and subordinated units owned by Sponsor Holdings, along with the 2% Managing Member’s interest, Sponsor Holdings has a 74.6% ownership interest in the Company, excluding the IDRs. The remaining 17,500,000 common units, representing a 25.4% ownership interest excluding the IDRs, are owned by the public.

 

As a result of these transactions, Niska Partners became the owner of substantially all of the assets of Niska Predecessor, except for the assets of Starks Gas Storage LLC (“Starks”) and Coastal Bend Gas Storage, LLC (“Coastal Bend”), two projects under development that were distributed to an affiliate of Niska Partners. These projects represented assets and partners’ equity of approximately $25.7 million at March 31, 2010. The transfers of the equity interests in Starks and Coastal Bend were treated as equity distributions in the accompanying financial statements.

 

Niska Partners operates the Countess and Suffield gas storage facilities (collectively, the AECO Hub™) in Alberta, Canada, and the Wild Goose and Salt Plains gas storage facilities in northern California and Oklahoma, respectively. Each of these facilities market gas storage services in addition to optimizing storage capacity with their own proprietary gas purchases.

 

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 Predecessor and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010.

 

The exchange of equity interests pursuant to the Contribution Agreement has been accounted for as a transfer between entities under common control as described in the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 805-50-15. Accordingly, the financial information for Niska Partners included in this report includes the financial information for Niska Predecessor for all periods presented prior to the closing of the IPO.

 

In the opinion of Management, the accompanying consolidated financial statements of Niska Partners, which are unaudited except that the balance sheet at March 31, 2010 is derived from audited financial statements, include all adjustments necessary to present fairly Niska Partners’ financial position as of September 30, 2010, along with the results of Niska Partners’ and Niska Predecessor’s operations for the three and six months ended September 30, 2010 and 2009, respectively, and their cash flows for the six months ended September 30, 2010. The results of operations for the three and

 

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six months ended September 30, 2010 are not necessarily representative of the results to be expected for the full fiscal year ending March 31, 2011.  The optimization of proprietary gas purchases is seasonal with the majority of the revenues and cost associated with the physical sale of proprietary gas occurring during the third and fourth fiscal quarters, when demand for natural gas is strongest.

 

As the closing of the Company’s IPO occurred on May 17, 2010, the earnings for the six months ended September 30, 2010 have been pro-rated to reflect earnings on a pre- and post-IPO basis. As part of the process of allocating revenues and expenses to both periods, the Company assessed the fair value of its risk management assets and liabilities as of the closing date, resulting in an unrealized gain for the pre-IPO period and an unrealized loss for the post-IPO period. The net unrealized loss for the period from May 17, 2010 to September 30, 2010 is reflected in the per-unit information presented in the consolidated statement of earnings and comprehensive income.  Net earnings for the three months ended September 30, 2010 were not pro-rated as all such earnings occurred in the post- IPO period.

 

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 Predecessor and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2010.

 

Recent Accounting Pronouncements

 

The following new accounting pronouncement was adopted effective April 1, 2010:

 

Fair Value Measurement (ASC 810-10)

 

This new standard requires disclosures of fair value information of financial instruments at each interim reporting period. The disclosures include the relevant carrying value as well as the methods and significant assumptions used to estimate the fair value. The guidance was effective for interim and annual periods beginning after December 15, 2009. Therefore, for periods beginning April 1, 2010, Niska Partners is required to disclose additional fair value measurement information such as transfers into and out of the three levels of the fair value hierarchy (described as Level 1, Level 2 and Level 3), as well as additional details about movements within Level 3. The new standard clarifies the level of disaggregation required and the inputs and valuation techniques used to measure fair value. The adoption of this standard did not impact how the Company accounts for balances recorded at fair value.

 

2. Commitments and Contingencies

 

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. Accrued Cushion Gas Purchases

 

During the three months ended September 30, 2010, the Company entered into a series of transactions to sell cushion gas.  The Company concurrently entered into firm commitments to re-acquire this cushion gas in the fourth quarter of the fiscal year ending March 31, 2011.  These transactions are being accounted for in a manner similar to a product financing arrangement with the repurchase price being accrued as a liability.  The difference between the proceeds received and the repurchase price, along with the proceeds of the short-term firm transactions designed to replace the cushion gas during the intervening period,  is being recorded as interest expense over the period of the arrangement.

 

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4. Debt

 

Niska Partners’ debt obligations consist of the following:

 

 

 

September

 

March 31,

 

 

 

2010

 

2010

 

 

 

 

 

(Niska Predecessor)

 

 

 

 

 

 

 

Non-public Senior Notes due 2018

 

$

800,000

 

$

800,000

 

Revolving credit facility

 

 

 

Total

 

800,000

 

800,000

 

Less portion classified as current

 

 

 

 

 

$

 800,000

 

$

800,000

 

 

Interest on the Non-public Senior Notes (the “Senior Notes”) is payable semi-annually on March 15 and September 15 at a rate of 8.875% per annum, commencing September 15, 2010. The Senior Notes will mature on March 15, 2018. As at September 30, 2010, the estimated fair value of the Senior Notes was $862.0 million.

 

The indenture governing the Senior Notes limits Niska Partners’ ability to pay distributions in respect of, repurchase or pay dividends on its membership interests (or other capital stock) or make other restricted payments. The limitation changes depending on a fixed charge coverage ratio, which is defined as the ratio of consolidated cash flow 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 $115.0 million.

 

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 closing of its IPO, excluding certain types of permitted payments, are less than the sum 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.

 

At September 30, 2010, the fixed charge coverage ratio was 2.94 to 1.0 and Niska Partners was permitted to pay the distribution described in Note 7.

 

In March 2010, Niska Partners, through its subsidiaries, Niska Gas Storage US, LLC and AECO Gas Storage Partnership entered into new senior secured asset-based revolving credit facilities, consisting of a U.S. revolving credit facility and a Canadian revolving credit facility (the “Credit Facilities” or the “$400.0 million Credit Agreement”). These Credit Facilities provide for revolving loans and letters of credit in an aggregate principal amount of up to $200.0 million for each of the U.S. revolving credit facility and the Canadian revolving credit facility. Each revolving credit facility matures on March 5, 2014.

 

Niska Partners had no drawings outstanding under the $400.0 million Credit Agreement at September 30, 2010 and March 31, 2010. Amounts committed in support of letters of credit totaled $3.8 million at September 30, 2010 (March 31, 2010—$3.5 million). Any borrowings under the $400.0 million Credit Agreement are classified as current.

 

Borrowings under the Credit Facilities are limited to a borrowing base calculated as the sum of specified percentages of eligible cash and cash equivalents, eligible accounts receivable, the net liquidating value of hedge positions in broker accounts, eligible inventory, issued but unused letters of credit, and certain fixed assets minus the amount of any reserves and other priority claims. 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 September 30, 2010, the borrowing base totaled $ 494.8 million.

 

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The $400.0 million Credit Agreement contains limitations on Niska Partners’ ability 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 substantially similar to those contained in the indenture governing the Senior Notes. Under these limitations, the $400.0 million credit agreement would have permitted the Company to distribute approximately $40.0 million.

 

As of September 30, 2010, Niska Partners was in compliance with all covenant requirements under the Senior Notes and the $400.0 million Credit Agreement.

 

Niska Partners has no independent assets or operations other than its investments in its subsidiaries. Both the Senior Notes and the $400.0 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 September 30, 2010.

 

5. Risk Management Activities and Financial Instruments

 

Risk Management Overview

 

Niska Partners has exposure to commodity price, foreign currency, counterparty credit, interest rate, and liquidity risk. 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.

 

Forwards and futures are contractual agreements to purchase or sell a specific financial instrument or natural gas at a specified price and date in the future. Niska Partners enters into forwards and futures 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 forward contracts. To comply with its 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 Bcf. At September 30, 2010, 69.3 Bcf of natural gas inventory was offset, representing 99.9% of total current inventory. Non-cycling working gas, which is included in long-term inventory, and fuel gas used for operating our facilities are excluded from the coverage requirement. Total volumes of long-term inventory and fuel gas at September 30, 2010 are 3.6 Bcf and 0.0 Bcf, respectively.

 

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

 

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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. It is Management’s opinion that no allowance for doubtful accounts is required at September 30, 2010 or March 31, 2010 on accrued and trade accounts receivable.

 

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. Although the Company relies on a few counterparties for a significant portion of its revenues, one counterparty making up 51% of gross optimization revenue 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. Gross optimization revenue means realized optimization revenue prior to deducting cost of gas sold.

 

Exchange traded futures and options comprise approximately 67% of Niska Partners’ commodity risk management assets at September 30, 2010. 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 September 30, 2010, Niska Partners was only exposed to interest rate risk resulting from the variable rates associated with its $400.0 million revolving credit facility. As no balance was drawn on the credit facilities at September 30, 2010, Niska Partners had no exposure to interest rate fluctuations; however future drawings will result in exposure to changes in interest rates. Niska Partners had no interest rate swap or swaption agreements at September 30, 2010 or March 31, 2010.

 

Liquidity Risk

 

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.

 

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 US dollar could positively or negatively affect earnings. Niska Partners is exposed to cash flow risk to the extent that Canadian currency outflows do not match inflows. The Company enters into currency swaps to mitigate the impact of changes in foreign exchange rates. The notional value of currency swaps at September 30, 2010 was $100.4 million (March 31, 2010—$148.5 million). These contracts expire on various dates between October 1, 2010 and August 1, 2014. Niska Partners has not elected hedge accounting treatment for financial reporting purposes and, therefore, changes in fair value are recorded directly in earnings.

 

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The following tables show the fair values of Niska Partners’ risk management assets and liabilities at September 30, 2010 and March 31, 2010:

 

 

 

Energy

 

Currency

 

 

 

 

 

Contracts

 

Contracts

 

Total

 

September 30, 2010

 

 

 

 

 

 

 

Short-term risk management assets

 

$

110,421

 

$

86

 

$

110,507

 

Long-term risk management assets

 

24,890

 

207

 

25,097

 

Short-term risk management liabilities

 

(33,759

)

(596

)

(34,355

)

Long-term risk management liabilities

 

(37,980

)

(168

)

(38,148

)

 

 

$

63,572

 

$

(471

)

$

63,101

 

 

 

 

Energy

 

Currency

 

 

 

 

 

Contracts

 

Contracts

 

Total

 

March 31, 2010 (Niska Predecessor)

 

 

 

 

 

 

 

Short-term risk management assets

 

$

100,864

 

$

 

$

100,864

 

Long-term risk management assets

 

34,812

 

 

34,812

 

Short-term risk management liabilities

 

(42,773

)

(3,558

)

(46,331

)

Long-term risk management liabilities

 

(34,158

)

(536

)

(34,694

)

 

 

$

58,745

 

$

(4,094

)

$

54,651

 

 

The Company expects to recognize risk management assets and liabilities outstanding at September 30, 2010 into net earnings (loss) and comprehensive income (loss) in the fiscal periods as follows:

 

 

 

Energy

 

Currency

 

 

 

 

 

Contracts

 

Contracts

 

Total

 

 

 

 

 

 

 

 

 

Fiscal year ending March 31, 2011

 

$

57,113

 

$

(380

)

$

56,733

 

Fiscal year ending March 31, 2012

 

7,674

 

(139

)

$

7,535

 

Fiscal year ending March 31, 2013

 

(2,158

)

(95

)

$

(2,253

)

Thereafter

 

943

 

143

 

$

1,086

 

 

 

$

63,572

 

$

(471

)

$

63,101

 

 

 

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Table of Contents

 

Realized gains and losses from the settlement of risk management contracts are summarized as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

2010

 

2009

 

2010

 

2009

 

Classification

 

 

 

 

 

(Niska Predecessor)

 

 

 

(Niska Predecessor)

 

 

 

Energy contracts

 

$

25,223

 

$

8,002

 

$

39,684

 

$

4,740

 

Optimization revenue, net

 

Currency contracts

 

(1,847

)

(480

)

(2,645

)

(677

)

Optimization revenue, net

 

Interest contracts

 

 

660

 

 

(1,095

)

Interest expense

 

 

 

$

 23,376

 

$

8,182

 

$

37,039

 

$

2,968

 

 

 

 

6. Fair Value Measurements

 

The carrying amount of cash and cash equivalents, margin deposits, trade receivables, accrued receivables, trade payables, accrued liabilities, and accrued cushion gas purchases 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 4 for disclosures regarding the fair value of debt.

 

Fair values have been determined as follows for Niska Partners:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

September 30, 2010

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

135,311

 

$

 

$

135,311

 

Currency derivatives

 

 

293

 

 

293

 

Total assets

 

 

135,604

 

 

135,604

 

Liabilities

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

 

71,739

 

 

71,739

 

Currency derivatives

 

 

764

 

 

764

 

Total liabilities

 

 

72,503

 

 

72,503

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

 

$

63,101

 

$

 

$

63,101

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

March 31, 2010 (Niska Predecessor)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

135,676

 

$

 

$

135,676

 

Currency derivatives

 

 

 

 

 

Total assets

 

 

135,676

 

 

135,676

 

Liabilities

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

 

76,931

 

 

76,931

 

Currency derivatives

 

 

4,094

 

 

4,094

 

Total liabilities

 

 

81,025

 

 

81,025

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

 

$

54,651

 

$

 

$

54,651

 

 

 

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7. Members’ Equity

 

In connection with the closing of Niska Partners’ IPO on May 17, 2010 and the Contribution Agreement, Sponsor Holdings exchanged its interests in Niska Predecessor for common and subordinated units of, as well as a Managing Member’s interest in, Niska Partners. Because this exchange was treated for accounting purposes as an exchange of interests under common control, the exchange was treated similar to a pooling of interests and, accordingly, all amounts exchanged were recorded at historical cost. Therefore, the Partners’ capital and retained earnings balances that existed at May 17, 2010 were transferred to the Managing Member’s interest, common units and subordinated units of Niska Partners. Immediately subsequent to this exchange, the IPO of 17,500,000 common units was completed.

 

Pursuant to the Contribution Agreement, and as partial consideration for the contribution of 100% of its equity interests to Niska Predecessor, Sponsor Holdings held the right to receive any common units not purchased pursuant to the 30-day option granted to the underwriters of the offering to purchase up to an additional 2,625,000 common units. Upon the close of business on June 10, 2010, the 30-day option granted to the underwriters expired unexercised. Pursuant to the Contribution Agreement, 2,625,000 common units were issued to Sponsor Holdings on June 11, 2010.

 

Summary of Changes in Managing Member, Common, and Subordinated Units:

 

The following is a reconciliation of units outstanding for the period indicated:

 

 

 

Common

 

Subordinated

 

 

 

 

 

Unitholders

 

Unitholders

 

Total

 

 

 

 

 

 

 

 

 

Units outstanding at April 1, 2010

 

 

 

 

Units issued May 17, 2010

 

31,179,745

 

33,804,745

 

64,984,490

 

Units issued June 10, 2010

 

2,625,000

 

 

2,625,000

 

Units outstanding at September 30, 2010

 

33,804,745

 

33,804,745

 

67,609,490

 

 

Subordinated Units

 

All of the subordinated units are held by Sponsor Holdings. The operating agreement provides that, during the subordination period, the common unitholders have the right to receive distributions of Available Cash (as defined in the operating agreement) each quarter in an amount equal to $0.35 per common unit (the “Minimum Quarterly Distribution”), plus any arrearages in the payment of the Minimum Quarterly Distribution on the common units from prior quarters, before any distributions of Available Cash may be made on the subordinated units. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be Available Cash to be distributed on the common units. The subordination period will end on the second business day after among other things, Niska Partners has earned and paid at least the Minimum Quarterly Distribution on each outstanding limited partner unit and Managing Member’s unit for any consecutive twelve quarters, ending on or after March 31, 2013. The subordination period also will end upon the removal of the Managing Member other than for cause if the units held by the Managing Member and its affiliates are not voted in favor of such removal. When the subordination period ends, all remaining subordinated units will convert to common units, on a one-for-one basis, and the common units will no longer be entitled to arrearages.

 

Incentive Distribution Rights

 

Sponsor Holdings holds the incentive distribution rights. The following table illustrates the percentage allocations of cash distributions from operating surplus between the unitholders, the Managing Member and the holders of incentive distribution rights, or based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Cash Distributions” are the percentage interests of the Managing Member, the incentive distribution right holders and the unitholders in any cash distributions from operating surplus Niska Partners distributes up to and including the corresponding amount in the “Total Quarterly Distribution per Unit Target Amount” column. The percentage interests shown

 

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for the unitholders and the Managing Member for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution.

 

 

 

Total Quarterly

 

 

 

 

 

Distribution per Unit

 

Marginal Percentage Interest in Cash Distributions

 

 

 

Target Amount

 

Unitholders

 

Managing Member

 

IDR Holder

 

Minimum Quarterly Distribution

 

$0.35

 

98

%

2

%

 

First Target Distribution

 

above $0.35 up to $0.4025

 

98

%

2

%

 

Second Target Distribution

 

above $0.4025 up to $0.4375

 

85

%

2

%

13

%

Third Target Distribution

 

above $0.4375 up to $0.5250

 

75

%

2

%

23

%

Thereafter

 

above $0.5250

 

50

%

2

%

48

%

 

To the extent these incentive distributions are made to Sponsor Holdings, there will be more Available Cash proportionately allocated to Sponsor Holdings than to holders of common and subordinated units.

 

Within 45 days after the end of each quarter Niska Partners will make cash distributions to the members of record on the applicable record date. Niska Partners distributed $12.8 million to the holders of common and subordinated units and the Managing Member during the three month period ended September 30, 2010.

 

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.

 

 

 

Three Months
Ended
September 30,
2010

 

Period May 17,
2010 to
September 30,
2010

 

Net Earnings (Loss) Allocation and Earnings per Share Calculation

 

 

 

 

 

Numerator:

 

 

 

 

 

Net earnings (loss) attributable to Niska Partners

 

$

31,437

 

$

(4,262

)

Less:

 

 

 

 

 

Managing Member’s allocation of incentive distributions

 

(477

)

(477

)

Managing Member’s 2% interest

 

(629

)

85

 

Net earnings (loss) attributable to common and subordinated unitholders

 

$

30,331

 

$

(4,654

)

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Basic:

 

 

 

 

 

Weighted average units outstanding

 

67,609,490

 

67,609,490

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Weighted average units outstanding

 

67,609,490

 

67,609,490

 

 

 

 

 

 

 

Loss per unit:

 

 

 

 

 

Basic

 

$

0.45

 

$

(0.07

)

Diluted

 

$

0.45

 

$

(0.07

)

 

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8. Optimization Revenue

 

Optimization revenue, net consists of the following:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

(Niska Predecessor)

 

 

 

(Niska Predecessor)

 

Realized optimization revenue, net

 

$

19,174

 

$

7,494

 

$

35,236

 

$

8,492

 

Unrealized risk management gains (losses)

 

20,721

 

(38,647

)

8,450

 

(48,448

)

Total

 

$

39,895

 

$

(31,153

)

$

43,686

 

$

(39,956

)

 

9.  Depreciation and Amortization Expense

 

For the three months ended September 30, 2010, depreciation and amortization expense included a total charge of $2.8 million related to the estimated amount of cushion gas that migrated during the period (three months ended September 30, 2009 - $ nil).

 

10. Interest Expense

 

Interest expense consists of the following:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

(Niska Predecessor)

 

 

 

(Niska Predecessor)

 

Interest expense

 

$

18,640

 

$

5,511

 

$

37,066

 

$

11,451

 

Unrealized losses (gains) on interest rate swaps

 

 

791

 

 

(1,534

)

Deferred charges amortization

 

1,109

 

2,786

 

2,072

 

3,519

 

Capitalized interest

 

(337

)

 

(971

)

 

Total

 

$

19,412

 

$

9,088

 

$

38,167

 

$

13,436

 

 

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Table of Contents

 

11. Income Taxes

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

(Niska Predecessor)

 

 

 

(Niska Predecessor)

 

Income tax (benefit) expense

 

$

(4,018

)

$

24,347

 

$

(10,547

)

$

32,569

 

 

 

 

 

 

 

 

 

 

 

Effective income tax rate

 

-15

%

-409

%

-49

%

-263

%

 

Income tax (benefit) expense was a benefit of $4.0 million for the three months ended September 30, 2010 compared to an expense of $24.3 million for the same period of the prior year. The income tax benefit in the current period was due partially to the recognition of the settlement of certain Canadian tax matters associated with Niska Partners’ assets for periods prior to their acquisition by the Company. Additionally, the benefit was a result of earning a higher proportion of income in non-taxable entities as well as certain adjustments to the cost basis of assets for tax reporting purposes resulting from tax planning strategies.

 

Income tax (benefit) expense was a benefit of $10.5 million for the six months ended September 30, 2010 compared to an expense of $32.6 million for the six months ended September 30, 2009. The income tax recovery for the six month period was attributable to the same reasons as noted for the three months ended September 30, 2010, along with the recognition of previously unrecognized tax losses in certain Canadian entities.

 

The effective tax rate for the three months ended and six months ended September 30, 2009 differed from the U.S. statutory federal rate of 35% primarily due to non-deductible foreign exchange adjustments as well as the impact of the items noted above.

 

12. Related Parties

 

In each of the six months ended September 30, 2010 and 2009, Niska Partners paid $0.2 and $1.0 million, respectively, to a company with which certain directors of Niska Partners were and continue to be affiliated. These amounts were paid for management services rendered prior to Niska Partners’ IPO. Subsequent to the IPO, Niska Partners is no longer responsible for such management fees.  No amounts were recorded or paid in the three months ended September 30, 2010 or 2009.  The amounts paid were included in general and administrative expenses.

 

Included in accrued receivables was $0.4 million that is owed from affiliated entities owned by Sponsor Holdings or its parent company.

 

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13. Changes in Non-Cash Working Capital

 

Changes in non-cash working capital for the six months ended September 30, 2010 consist of the following:

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

 

 

 

 

(Niska Predecessor)

 

 

 

 

 

 

 

Margin deposits

 

$

(40,062

)

$

(47,492

)

Trade receivables

 

5,334

 

(5,091

)

Accrued receivables

 

(8,807

)

26,017

 

Natural gas inventory

 

(132,086

)

(108,747

)

Prepaid expenses

 

(3,430

)

10,498

 

Trade payables

 

(5,577

)

15,956

 

Accrued liabilities

 

52,721

 

(5,354

)

Deferred revenue

 

10,985

 

(9,738

)

Funds held on deposit

 

(2

)

(1,485

)

Total

 

$

(120,924

)

$

(125,436

)

 

14. Supplemental Cash Flow Disclosures

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

 

 

 

 

(Niska Predecessor)

 

 

 

 

 

 

 

Interest paid

 

$

38,605

 

$

11,997

 

Taxes paid

 

$

342

 

$

 

Interest capitalized

 

$

971

 

$

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Noncash working capital related to property, plant and equipment expenditures

 

$

 

$

4,685

 

 

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Table of Contents

 

15. Segment Disclosures

 

Niska Partners’ 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.

 

Since inception, Niska Partners has operated along functional lines in their commercial, engineering, and operations teams for operations in Alberta, Northern California, and the U.S. Midcontinent. All operating areas and facilities offer the same services: long-term firm contracts, short-term firm contracts, and optimization. All services are delivered using reservoir storage. Niska Partners measures profitability consistently at each operating area based on revenues and earnings before interest, taxes, depreciation and amortization, and unrealized risk management gains and losses. Niska Partners has aggregated its operating segments into one reportable segment for all periods presented.

 

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

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

(Niska Predecessor)

 

 

 

(Niska Predecessor)

 

External revenues, net realized

 

 

 

 

 

 

 

 

 

U.S.

 

$

22,335

 

$

21,547

 

$

38,258

 

$

53,482

 

Canada

 

34,779

 

24,939

 

72,772

 

33,435

 

Inter-entity

 

 

 

 

 

 

 

 

 

U.S.

 

 

42

 

 

42

 

Canada

 

 

(42

)

 

(42

)

 

 

$

57,114

 

$

46,486

 

$

111,030

 

$

86,917

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

March 31,

 

 

 

 

 

 

 

2010

 

2010

 

 

 

 

 

 

 

 

 

(Niska Predecessor)

 

 

 

 

 

Long-lived assets (at period end)

 

 

 

 

 

 

 

 

 

U.S.

 

$

350,730

 

$

369,229

 

 

 

 

 

Canada

 

622,947

 

629,051

 

 

 

 

 

 

 

$

973,677

 

$

998,280

 

 

 

 

 

 

16. Subsequent Events

 

On October 29, 2010, the Board of Directors of Niska Partners approved a distribution of $0.35 per common unit, payable on November 12, 2010 to unitholders of record on November 11, 2010. The total distribution is expected to be approximately $24.1 million. The distribution is equal to the Minimum Quarterly Distribution of $0.350 set forth in Niska Partners’ prospectus prepared in connection with the IPO.

 

17



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 our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

 

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 our management to make estimates and judgments 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, 2010 and remained unchanged as of September 30, 2010.

 

Overview of Our Business

 

We operate the Countess and Suffield gas storage facilities (collectively, the AECO HubTM) in Alberta, Canada, and the Wild Goose and Salt Plains gas storage facilities in northern California and Oklahoma, respectively. Each of these facilities markets gas storage services of working gas capacity in addition to optimizing storage capacity with its own proprietary gas purchases. 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 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.

 

During the three months ended September 30, 2010, the Company added 13.0 Bcf of working Gas Capacity at AECO Hub TM and now has a total of 198.5 billion cubic feet (“Bcf”) of working gas capacity among our 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.

 

Because the closing of our Initial Public Offering (the “IPO”) occurred on May 17, 2010, we have pro-rated net earnings (loss) for the six months ended September 30, 2010 on a pre- and post-IPO basis. All of our earnings for the three months ended September 30, 2010 occurred post-IPO.  As part of the process of allocating revenues and expenses to the pre- and post-IPO periods, we assessed the fair value of our risk management assets and liabilities to market, which resulted in a gain for the pre-IPO period and a loss for the post-IPO period.

 

Factors that Impact Our Business

 

In our second fiscal quarter ended September 30, 2010, the natural gas summer-winter storage spread narrowed significantly. If this narrowing of the natural gas summer-winter storage spread continues, our revenues from STF contracts and optimization activities may be reduced.  Depending on weather conditions in North America and other economic factors, which we are unable to predict or control, the summer-winter spread, and therefore our STF and optimization revenues, may vary in amounts that could be material.

 

Other than the above, there were no material changes in the disclosure made in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 regarding this matter.

 

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Table of Contents

 

Results of Operations

 

A summary of financial data for the three and six months ended September 30, 2010 and 2009 is as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

in thousands of U.S. dollars

 

in thousands of U.S. dollars

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

(Niska Predecessor)

 

 

 

(Niska Predecessor)

 

Consolidated Statement of Earnings and Comprehensive Income Data:

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Long-term contract

 

$

28,394

 

$

26,655

 

$

58,018

 

$

53,516

 

Short-term contract

 

9,547

 

12,337

 

17,776

 

24,910

 

Optimization, net

 

39,895

 

(31,153

)

43,686

 

(39,956

)

 

 

77,836

 

7,839

 

119,480

 

38,470

 

Expenses (income)

 

 

 

 

 

 

 

 

 

Operating

 

10,115

 

8,298

 

21,271

 

18,189

 

General and administrative

 

7,754

 

5,069

 

15,272

 

10,324

 

Depreciation and amortization

 

13,244

 

10,528

 

23,340

 

20,790

 

Interest

 

19,412

 

9,088

 

38,167

 

13,436

 

Foreign exchange losses

 

(96

)

(19,127

)

29

 

(11,800

)

Other (income) expenses

 

(12

)

(68

)

(24

)

(79

)

Earnings (losses) before income taxes

 

27,419

 

(5,949

)

21,425

 

(12,390

)

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(4,018

)

24,347

 

(10,547

)

32,569

 

 

 

 

 

 

 

 

 

 

 

Net earnings (deficit) and comprehensive income (loss)

 

$

31,437

 

$

(30,296

)

$

31,972

 

$

(44,959

)

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Net earnings (losses)

 

$

31,437

 

$

(30,296

)

$

31,972

 

$

(44,959

)

Add/(deduct):

 

 

 

 

 

 

 

 

 

Interest expense

 

19,412

 

9,088

 

38,167

 

13,436

 

Income tax (benefit) expense

 

(4,018

)

24,347

 

(10,547

)

32,569

 

Depreciation and amortization

 

13,244

 

10,528

 

23,340

 

20,790

 

Unrealized risk management (gains) losses

 

(20,721

)

38,647

 

(8,450

)

48,448

 

Foreign exchange (gains) losses

 

(96

)

(19,127

)

29

 

(11,800

)

Other income

 

(12

)

(68

)

(24

)

(79

)

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

39,246

 

33,119

 

74,487

 

58,405

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

Cash interest expense, net

 

18,303

 

5,511

 

36,095

 

11,451

 

Income taxes paid

 

222

 

(3,783

)

287

 

540

 

Maintenance capital expenditures

 

622

 

127

 

724

 

158

 

Other income

 

(12

)

(68

)

(24

)

(79

)

Cash Available for Distribution

 

$

20,111

 

$

31,332

 

$

37,405

 

$

46,335

 

 

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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, foreign exchange gains and losses, unrealized 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 and the effects of unrealized gains or losses on interest rate swaps), income taxes paid and maintenance capital expenditures.    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.

 

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Table of Contents

 

Revenues

 

Revenues for the three months ended September 30, 2010 were $77.8 million compared to $7.8 million in the three months ended September 30, 2009. Revenues for the six months ended September 30, 2010 were $119.5 million compared to $38.5 million in the same period last year.  Changes in revenue were attributable to the following:

 

LTF Revenues.  LTF revenues for the three months ended September 30, 2010 increased by 6.5% to $28.4 million from $26.7 million for the three months ended September 30, 2009. LTF revenues for the six months ended September 30, 2010 were $58.0 million, an increase of 8.4% compared to $53.5 million in the six months ended September 30, 2009.  The increases in both the three and six month periods resulted principally from higher fees realized from contracts expiring at the end of the previous fiscal year that were re-contracted at higher rates.  Capacity utilized for LTF contracts increased by 1.4 Bcf compared to  the same periods in the prior year, which also contributed to increased LTF revenues.

 

STF Revenues.  STF revenues for the three months ended September 30, 2010 decreased by 22.6% to $9.5 million compared to $12.3 million for the three months ended September 30, 2009.  STF revenues for the six months ended September 30, 2010 were $17.8 million, a decrease of 28.6% compared to $24.9 million in the six months ended September 30, 2009.   A reduction in the capacity that we used in our STF strategy is the primary reason for the decline in both respective periods in fiscal 2011. Excess cash on hand at the beginning of the year caused us to increase the capacity that was used by our optimization strategy, because we typically generate greater unit margins by optimizing our capacity than we do by entering into STF transactions.

 

Optimization Revenues.  Net optimization revenues for the three months ended September 30, 2010 increased by $71.1 million to $39.9 million from a loss of $31.2 million for the three months ended September 30, 2009. Net optimization revenues for the six months ended September 30, 2010 were $43.7 million, an increase of $83.7 million compared to a loss of $40.0 million in the six months ended September 30, 2009.  Net optimization revenues consisted of the following:

 

 

 

Three Months Ended