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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2010

OR

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)

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):

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.

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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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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)

(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)

(See Notes to Unaudited Consolidated Financial Statements)

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Niska Gas Storage Partners LLC

Consolidated Statements of Cash Flows

(in thousands of U.S. dollars)

(Unaudited)

(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)

(See Notes to Unaudited Consolidated Financial Statements)

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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:

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:

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:

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

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:

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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:

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.

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.