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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, 2011

 

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

 

27-1855740

(State or other jurisdiction of
incorporation or organization)

 

(IRS Employer
Identification number)

 

 

 

1001 Fannin Street
Suite 2500
Houston, TX

 

77002

(Address of principal executive offices)

 

(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 x   No o

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of November 4, 2011, there were 34,492,245 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, 2011, and those described from time to time in our future reports filed with the Securities and Exchange Commission.

 

i



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (unaudited)

1

 

 

 

 

Consolidated Statements of Earnings and Comprehensive Income for the Three and Six Months Ended September 30, 2011 and 2010

1

 

Consolidated Balance Sheets as of September 30, 2011 and March 31, 2011

2

 

Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2011 and 2010

3

 

Consolidated Statement of Changes in Members’ Equity for the Six Months Ended September 30, 2011

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

28

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

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 and Comprehensive Income

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

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Long-term contract

 

$

29,495

 

$

28,394

 

$

59,075

 

$

58,018

 

Short-term contract

 

5,739

 

9,547

 

11,305

 

17,776

 

Optimization, net

 

40,425

 

39,895

 

51,044

 

43,686

 

 

 

75,659

 

77,836

 

121,424

 

119,480

 

Expenses (income):

 

 

 

 

 

 

 

 

 

Operating

 

14,351

 

10,115

 

25,179

 

21,271

 

General and administrative

 

7,324

 

7,754

 

14,467

 

15,272

 

Depreciation and amortization

 

10,807

 

13,244

 

20,807

 

23,340

 

Interest

 

19,370

 

19,412

 

38,022

 

38,167

 

Loss on extinguishment of debt

 

883

 

 

883

 

 

Foreign exchange losses (gains)

 

389

 

(96

)

382

 

29

 

Other income

 

(22

)

(12

)

(40

)

(24

)

 

 

 

 

 

 

 

 

 

 

EARNINGS BEFORE INCOME TAXES

 

22,557

 

27,419

 

21,724

 

21,425

 

Income tax benefit

 

(5,032

)

(4,018

)

(10,492

)

(10,547

)

 

 

 

 

 

 

 

 

 

 

NET EARNINGS AND COMPREHENSIVE INCOME

 

27,589

 

31,437

 

32,216

 

31,972

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

36,234

 

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

 

$

27,589

 

$

31,437

 

$

32,216

 

$

(4,262

)

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Managing Member

 

$

545

 

$

1,105

 

$

636

 

$

392

 

Common unitholders

 

$

13,681

 

$

15,166

 

$

15,949

 

$

(2,327

)

Subordinated unitholder

 

$

13,363

 

$

15,166

 

$

15,631

 

$

(2,327

)

 

 

 

 

 

 

 

 

 

 

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

 

$

0.40

 

$

0.45

 

$

0.47

 

$

(0.07

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per unit allocated to subordinated unitholders

 

 

 

 

 

 

 

 

 

- basic and diluted

 

$

0.40

 

$

0.45

 

$

0.47

 

$

(0.07

)

 

(See Notes to Unaudited Consolidated Financial Statements)

 

1



Table of Contents

 

Niska Gas Storage Partners LLC

Consolidated Balance Sheets

(in thousands of U.S. dollars)

(Unaudited)

 

 

 

September 30,

 

March 31,

 

 

 

2011

 

2011

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

26,679

 

$

117,742

 

Margin deposits

 

46,941

 

79,107

 

Trade receivables

 

1,644

 

2,434

 

Accrued receivables

 

32,166

 

45,293

 

Natural gas inventory

 

358,361

 

133,576

 

Prepaid expenses

 

3,795

 

5,830

 

Short-term risk management assets

 

64,857

 

59,717

 

 

 

534,443

 

443,699

 

Long-term assets

 

 

 

 

 

Property, plant and equipment, net

 

975,858

 

964,146

 

Goodwill

 

495,604

 

495,604

 

Long-term natural gas inventory

 

15,264

 

15,264

 

Intangible assets, net

 

92,106

 

98,846

 

Deferred charges, net

 

19,542

 

22,215

 

Other assets

 

1,546

 

 

Long-term risk management assets

 

21,714

 

21,496

 

 

 

1,621,634

 

1,617,571

 

TOTAL

 

$

2,156,077

 

$

2,061,270

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of debt

 

$

89,000

 

$

 

Trade payables

 

1,683

 

2,408

 

Accrued liabilities

 

88,828

 

86,662

 

Deferred revenue

 

12,718

 

4,738

 

Accrued cushion gas purchases

 

53,485

 

 

Current portion of deferred taxes

 

26,379

 

29,022

 

Short-term risk management liabilities

 

41,501

 

48,719

 

 

 

313,594

 

171,549

 

Long-term liabilities

 

 

 

 

 

Long-term risk management liabilities

 

22,240

 

22,629

 

Asset retirement obligations

 

1,401

 

1,484

 

Funds held on deposit

 

217

 

121

 

Deferred income taxes

 

140,537

 

148,514

 

Long-term debt

 

769,340

 

800,000

 

 

 

1,247,329

 

1,144,297

 

Members’ equity

 

 

 

 

 

Common units

 

512,018

 

510,275

 

Subordinated units

 

380,708

 

390,283

 

Managing Member’s interest

 

16,022

 

16,415

 

 

 

908,748

 

916,973

 

Commitments and contingencies (Note 2)

 

 

 

 

 

TOTAL

 

$

2,156,077

 

$

2,061,270

 

 

(See Notes to Unaudited Consolidated Financial Statements)

 

2



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,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net earnings

 

$

32,216

 

$

31,972

 

Adjustments to reconcile net earnings to net cash used in operating activities:

 

 

 

 

 

Unrealized foreign exchange loss

 

698

 

397

 

Deferred income tax benefit

 

(10,585

)

(10,834

)

Unrealized risk management gain

 

(12,972

)

(8,450

)

Depreciation and amortization

 

20,807

 

23,340

 

Deferred charges amortization

 

2,046

 

2,072

 

Loss on extinguishment of debt

 

883

 

 

Changes in non-cash working capital

 

(114,195

)

(120,924

)

Net cash used in operating activities

 

(81,102

)

(82,427

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Capital expenditures

 

(27,848

)

(15,159

)

Net cash used in investing activities

 

(27,848

)

(15,159

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from revolver drawings

 

307,883

 

281,431

 

Revolver payments

 

(218,883

)

(281,431

)

Repurchase of long-term debt

 

(30,914

)

 

Payment of debt issuance costs

 

 

(2,086

)

Net proceeds from issuance of common units

 

11,000

 

333,459

 

Distributions to partners

 

(49,265

)

(326,316

)

Acquisition of interest in parent company

 

(2,176

)

 

Net cash provided by financing activities

 

17,645

 

5,057

 

 

 

 

 

 

 

Effect of translation on foreign currency cash and cash equivalents

 

242

 

67

 

Net decrease in cash and cash equivalents

 

(91,063

)

(92,462

)

Cash and cash equivalents, beginning of period

 

117,742

 

131,559

 

Cash and cash equivalents, end of period

 

$

26,679

 

$

39,097

 

 

Supplemental cash flow disclosures (Note 14)

 

(See Notes to Unaudited Consolidated Financial Statements)

 

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Table of Contents

 

Niska Gas Storage Partners LLC

Consolidated Statement of Changes in Members’ Equity

(in thousands of U.S. dollars)

(Unaudited)

 

 

 

 

 

 

 

Managing

 

 

 

 

 

Common

 

Subordinated

 

Member

 

 

 

 

 

Units

 

Units

 

Interest

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2011

 

$

510,275

 

$

390,283

 

$

16,415

 

$

916,973

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

15,949

 

15,631

 

636

 

32,216

 

 

 

 

 

 

 

 

 

 

 

Distributions to unitholders

 

(24,140

)

(24,140

)

(985

)

(49,265

)

 

 

 

 

 

 

 

 

 

 

Acquisition of interest in parent company

 

(1,066

)

(1,066

)

(44

)

(2,176

)

 

 

 

 

 

 

 

 

 

 

Issuance of common units

 

11,000

 

 

 

11,000

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2011

 

$

512,018

 

$

380,708

 

$

16,022

 

$

908,748

 

 

(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 Coöperatief 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 Company’s Incentive Distribution Rights (“IDRs”). As a result of these transactions, Niska Partners became the owner of substantially all of the assets of Niska Predecessor. 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, 2011, Niska Partners had 34,492,245 common units and 33,804,745 subordinated units outstanding. Of these amounts, 16,992,245 common units and all of the subordinated units are owned by Sponsor Holdings, along with a 1.98% Managing Member’s interest in the Company and all of the Company’s IDRs. Including all of the common and subordinated units owned by Sponsor Holdings, along with the 1.98% Managing Member’s interest, Sponsor Holdings has a 74.88% ownership interest in the Company, excluding the IDRs. The remaining 17,500,000 common units, representing a 25.12% ownership interest excluding the IDRs, are owned by the public.

 

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 California and Oklahoma, respectively. Each of these facilities markets gas storage services in addition to optimizing storage capacity with its 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 Partners and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

 

In the opinion of management, the accompanying consolidated financial statements of Niska Partners, which are unaudited except that the balance sheet at March 31, 2011 is derived from audited financial statements, include all adjustments necessary to present fairly Niska Partners’ financial position as of September 30, 2011, along with the results of Niska Partners’ operations and its cash flows for the three and six months ended September 30, 2011 and 2010. The results of operations for the three and six months ended September 30, 2011 are not necessarily representative of the results to be expected for the full fiscal year ending March 31, 2012.  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 typically the 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.

 

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Table of Contents

 

Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), the unaudited consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements should be read in conjunction with the consolidated financial statements of Niska Partners and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

 

Recent Accounting Pronouncements

 

Accounting Standards Update 2011-04

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that updates the previous reporting requirement under Accounting Standards Codification (“ASC”) 820.  This update, which will become effective for interim and annual periods beginning after December 15, 2011, requires additional disclosures about the transfers between Level 1 and Level 2 of the fair value hierarchy, the sensitivity of unobservable inputs to the fair value measurements within Level 3 of the fair value hierarchy, and disclosure of the categorization by level of the fair value hierarchy for items for which fair value disclosure is required but that are not measured at fair value in the statement of financial position.

 

In September 2011, the FASB issued guidance that updates the requirements for testing for goodwill impairment. This update, which will become effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011, permits entities testing for goodwill impairment the option of performing a qualitative assessment before calculating the fair value of the reporting unit. If it is determined that the fair value of the reporting unit is more likely than not less than the carrying amount on the basis of qualitative factors, the two step impairment test is required. The update does not change how goodwill is calculated or assigned to reporting units.

 

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 six months ended September 30, 2011 and 2010, the Company entered into a series of transactions to sell cushion gas, which is recorded as component of property, plant and equipment in the accompanying financial statements. The Company concurrently entered into firm commitments to re-acquire this cushion gas in the fourth quarter of the fiscal year ending March 31, 2012 and 2011, respectively. The repurchase price is accrued as a liability. The difference between the proceeds received and the repurchase price, along with the proceeds of short-term firm transactions designed to replace the cushion gas during the intervening period, is being recorded as an expense over the period of the arrangement.

 

4. Debt

 

Niska Partners’ debt obligations consist of the following:

 

 

 

September 30,

 

March 31,

 

 

 

2011

 

2011

 

 

 

 

 

 

 

Senior Notes due 2018

 

$

769,340

 

$

800,000

 

Revolving credit facility

 

89,000

 

 

Total

 

858,340

 

800,000

 

Less portion classified as current

 

(89,000

)

 

 

 

$

769,340

 

$

800,000

 

 

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Table of Contents

 

Senior Notes

 

On March 5, 2010, Niska Partners, through its subsidiaries Niska Gas Storage US, LLC (“Niska US”) and Niska Gas Storage Canada ULC (“Niska Canada”), completed a non-public offering of 800,000 units, each unit consisting of $218.75 principal amount of 8.875% senior notes due 2018 of Niska US and $781.25 principal amount of 8.875% senior notes of Niska Canada (the “Senior Notes”). The Senior Notes were sold for par value of $800.0 million in an offering exempt from registration under the Securities Act.

 

On February 4, 2011, the SEC declared effective Niska Partners’ exchange offer whereby holders of the Senior Notes were permitted to exchange such Senior Notes for new freely transferable Senior Notes.  The terms of the new units are identical to the units described above, except that the new units have been registered under the Securities Act and do generally not contain restrictions on transfer.  The exchange offer was completed on March 2, 2011 and all of the previously outstanding Senior Notes were exchanged.

 

During the quarter ended September 30, 2011, Niska Partners paid $30.9 million, excluding accrued interest, to repurchase Senior Notes with a principal amount of $30.7 million. The Company recognized a loss of $0.9 million on these repurchases, which was recorded as a loss on extinguishment of debt. The loss on the repurchases was measured based on the carrying value of the repurchased portion of the Senior Notes, which included a portion of the unamortized debt issue costs on the dates of repurchase. The related accrued interest costs were recorded in interest expense.

 

Interest on 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, 2011, the estimated fair value of the Senior Notes was $792.4 million.

 

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

 

Under this limitation the indenture would have permitted the Company to distribute approximately $41.7 million as at September 30, 2011.

 

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

 

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

 

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

 

·                  the aggregate net cash proceeds received as a capital contribution or from the issuance of equity interests, including the approximately $336 million of net cash proceeds from the IPO, reduced by the approximately $271.4 million Niska Partners distributed to Holdings Canada (as defined below) shortly before the IPO.

 

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

 

·      $75.0 million; and

 

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

 

The limitations are applied without regard to whether the restricted payments that are compared to the restricted payment basket were made when the fixed charge coverage ratio was or was not less than 1.75 to 1.0, meaning that if the fixed charge coverage ratio becomes less than 1.75 to 1.0 and Niska Partners has previously made restricted payments in excess of the restricted payment basket, Niska Partners will be prohibited from making restricted payments other than the permitted payments referred to above.

 

The permitted payments, which are applicable regardless of the fixed charge ratio, include a general basket of $75.0 million.

 

At September 30, 2011, the fixed charge coverage ratio was 2.44 to 1.0 and Niska Partners was permitted to pay the distribution described in Note 16.

 

$400 Million Credit Agreement

 

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 million Credit Agreement”). The $400 million Credit Agreement provides for revolving loans and letters of credit in an aggregate principal amount of up to $200 million for each of the U.S. revolving credit facility and the Canadian revolving credit facility. Subject to certain conditions, each of the revolving credit facilities may be expanded up to a maximum of $100.0 million in additional commitments, and the commitments in each facility may be reallocated on terms and according to procedures to be determined. Loans under the U.S. revolving facility will be denominated in U.S. dollars and loans under the Canadian revolving facility may be denominated, at the Company’s option, in either U.S. or Canadian dollars. Each revolving credit facility matures on March 5, 2014.

 

Niska Partners had $89.0 million in drawings outstanding under the $400 million Credit Agreement at September 30, 2011 (March 31, 2011 - $ nil). Amounts committed in support of letters of credit totaled $71.0 million at September 30, 2011 (March 31, 2011—$3.1 million). Any borrowings under the $400 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. Borrowings will bear interest at a floating rate, which (1) in the case of U.S. dollar loans can be either LIBOR plus an applicable margin or, at the Company’s option, a base rate plus an applicable margin, and (2) in the case of Canadian dollar loans can be either the bankers’ acceptance rate plus an applicable margin or, at the Company’s option, a prime rate plus an applicable margin. 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, 2011, the borrowing base collateral totaled $538.1million.

 

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

 

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As of September 30, 2011, Niska Partners was in compliance with all covenant requirements under the Senior Notes and the $400 million Credit Agreement.

 

Niska Partners has no independent assets or operations other than its investments in its subsidiaries. Both the Senior Notes and the $400 million Credit Agreement have been jointly and severally guaranteed by Niska Partners and substantially all of its subsidiaries. Niska Partners’ subsidiaries have no significant restrictions on their ability to pay distributions or make loans to Niska Partners, which are prepared and measured on a consolidated basis, and have no restricted assets as of September 30, 2011.

 

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.

 

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

 

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

 

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

 

To limit its exposure to changes in commodity prices, Niska Partners enters into purchases and sales of natural gas inventory and concurrently matches the volumes in these transactions with offsetting forward contracts. To comply with its internal risk management policies, Niska Partners is required to limit its exposure of unmatched volumes of proprietary current natural gas inventory to an aggregate overall limit of 8.0 billion cubic feet (“Bcf”). At September 30, 2011, 89.9 Bcf of natural gas inventory was offset with forward contracts, representing 99.9% of total current inventory. Non-cycling working gas, which is included in long-term inventory, and fuel gas used for operating the facilities are excluded from the coverage requirement. Total volumes of long-term inventory and fuel gas at September 30, 2011 are 3.4 Bcf and 0.0 Bcf, respectively.

 

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Counterparty Credit Risk

 

Niska Partners is exposed to counterparty credit risk on its trade and accrued accounts receivable and risk management assets. Counterparty credit risk is the risk of financial loss to the Company if a customer fails to perform its contractual obligations. Niska Partners engages in transactions for the purchase and sale of products and services with major companies in the energy industry and with industrial, commercial, residential and municipal energy consumers.  Credit risk associated with trade accounts receivable is mitigated by the high percentage of investment grade customers, collateral support of receivables and Niska Partners’ ability to take ownership of customer owned natural gas stored in its facilities in the event of non-payment.  For the six months ended September 30, 2011, no trade receivables were deemed to be uncollectible. It is management’s opinion that no allowance for doubtful accounts is required at September 30, 2011 or March 31, 2011 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 35.9% of gross optimization revenue for the six months ended September 30, 2011 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 53.0% of Niska Partners’ commodity risk management assets at September 30, 2011. 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, 2011, Niska Partners was only exposed to interest rate risk resulting from the variable rates associated with its $400 million Credit Agreement of which $89.0 million was drawn at September 30, 2011.

 

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, 2011 was $119.0 million (March 31, 2011—$142.8 million). These contracts expire on various dates between October 1, 2011 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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Table of Contents

 

The following tables show the fair values of Niska Partners’ risk management assets and liabilities at September 30, 2011 and March 31, 2011:

 

 

 

Energy

 

Currency

 

 

 

September 30, 2011 

 

Contracts

 

Contracts

 

Total

 

 

 

 

 

 

 

 

 

Short-term risk management assets

 

$

61,357

 

$

3,500

 

$

64,857

 

Long-term risk management assets

 

20,772

 

942

 

21,714

 

Short-term risk management liabilities

 

(41,167

)

(334

)

(41,501

)

Long-term risk management liabilities

 

(22,240

)

 

(22,240

)

 

 

$

18,722

 

$

4,108

 

$

22,830

 

 

 

 

Energy

 

Currency

 

 

 

March 31, 2011 

 

Contracts

 

Contracts

 

Total

 

 

 

 

 

 

 

 

 

Short-term risk management assets

 

$

59,717

 

$

 

$

59,717

 

Long-term risk management assets

 

21,496

 

 

21,496

 

Short-term risk management liabilities

 

(43,556

)

(5,163

)

(48,719

)

Long-term risk management liabilities

 

(21,441

)

(1,188

)

(22,629

)

 

 

$

16,216

 

$

(6,351

)

$

9,865

 

 

The Company expects to recognize risk management assets and liabilities outstanding at September 30, 2011 into net earnings and comprehensive income in the fiscal periods as follows:

 

 

 

Energy

 

Currency

 

 

 

 

 

Contracts

 

Contracts

 

Total

 

 

 

 

 

 

 

 

 

Fiscal year ending March 31, 2012

 

$

9,272

 

$

553

 

$

9,825

 

Fiscal year ending March 31, 2013

 

7,985

 

3,102

 

11,087

 

Fiscal year ending March 31, 2014

 

1,026

 

396

 

1,422

 

Thereafter

 

439

 

57

 

496

 

 

 

$

18,722

 

$

4,108

 

$

22,830

 

 

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,

 

 

 

 

 

2011

 

2010

 

2011

 

2010

 

Classification

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy contracts

 

$

(32,052

)

$

25,223

 

$

(22,085

)

$

39,684

 

Optimization, net

 

Currency contracts

 

7,024

 

(1,847

)

4,895

 

(2,645

)

Optimization, net

 

 

 

$

(25,028

)

$

23,376

 

$

(17,190

)

$

37,039

 

 

 

 

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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:

 

September 30, 2011 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

82,129

 

$

 

$

82,129

 

Currency derivatives

 

 

4,442

 

 

4,442

 

Total assets

 

 

86,571

 

 

86,571

 

Liabilities

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

 

63,407

 

 

63,407

 

Currency derivatives

 

 

334

 

 

334

 

Total liabilities

 

 

63,741

 

 

63,741

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

 

$

22,830

 

$

 

$

22,830

 

 

March 31, 2011

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

81,213

 

$

 

$

81,213

 

Currency derivatives

 

 

 

 

 

Total assets

 

 

81,213

 

 

81,213

 

Liabilities

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

 

64,997

 

 

64,997

 

Currency derivatives

 

 

6,351

 

 

6,351

 

Total liabilities

 

 

71,348

 

 

71,348

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

 

$

9,865

 

$

 

$

9,865

 

 

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7. Members’ Equity

 

Unit Issuance and Sale of Common Units

 

On August 24, 2011, the Company completed the issuance and sale 687,500 common units at a price of $16.00 per unit to Sponsor Holdings. Total proceeds of $11.0 million were used to reduce amounts owing under the Senior Notes. See Notes 4 and 12.

 

Acquisition of Interest in Parent

 

Sponsor Holdings is wholly-owned, directly and indirectly, by Niska GS Holdings Canada, L.P (“Niska Holdings Canada”).  Niska Holdings Canada’s equity consists of Class A, Class B and Class C units.  Niska Holdings Canada’s Class A Units are owned principally by Carlyle/Riverstone Global Energy and Power Fund III, L.P. and Carlyle/Riverstone Global Energy and Power Fund II, L.P. and affiliated entities (together, the “Carlyle/Riverstone Funds”) and certain current and former members of Niska Partners’ management.  The Class B and Class C units, which have identical rights and obligations in Niska Holdings Canada, are owned by certain current and former members of Niska Partners’ management and non-executive employees.  The Class B and Class C units were originally issued by Niska Predecessor in conjunction with a long-term incentive plan and were subject to service and performance conditions, all of which were satisfied in May 2009.  The Class B and Class C units were, therefore, fully vested.  Niska Predecessor had previously recorded compensation expense with respect to the Class B and Class C units throughout the vesting period. Upon vesting and the holders of the units being exposed to the risks and rewards of ownership for a reasonable period of time, the compensation arrangement became equity classified.

 

On June 24, 2011, certain Class B units of Niska Holdings Canada held by non-executive employees were purchased by Niska Partners at fair value. The aggregate purchase price of $2.2 million was recorded as a reduction of equity in the accompanying financial statements, with no gain or loss recognized.

 

The Class B units represent profit interests in Niska Holdings Canada, and entitle the holders to share in distributions made by Niska Holdings Canada once the Class A units have received distributions equal to their contributed capital plus an 8% cumulative rate of return. The Class B units held by Niska Partners do not currently participate in the earnings of or distributions paid by Niska Partners.

 

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

 

Six Months Ended

 

 

 

September 30,

 

to September 30

 

Net Earnings Allocation and Earnings per Unit Calculation

 

2011

 

2011

 

Numerator:

 

 

 

 

 

Net earnings attributable to Niska Partners

 

$

27,589

 

$

32,216

 

Less:

 

 

 

 

 

Managing Member’s 1.98% interest

 

(545

)

(636

)

Net earnings attributable to common and subordinated unitholders

 

$

27,044

 

$

31,580

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Basic:

 

 

 

 

 

Weighted average units outstanding

 

67,838,657

 

67,724,073

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

Weighted average units outstanding

 

67,838,657

 

67,724,073

 

 

 

 

 

 

 

Earnings per unit:

 

 

 

 

 

Basic

 

$

0.40

 

$

0.47

 

Diluted

 

$

0.40

 

$

0.47

 

 

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8. Optimization Revenue

 

Optimization, net consists of the following:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Realized optimization revenue, net

 

$

16,633

 

$

19,174

 

$

38,072

 

$

35,236

 

Unrealized risk management gains

 

23,792

 

20,721

 

12,972

 

8,450

 

Total

 

$

40,425

 

$

39,895

 

$

51,044

 

$

43,686

 

 

9. Stock-Based Compensation

 

Effective April 1, 2011, the Company implemented The Niska Gas Storage Partners LLC Phantom Unit Performance Plan (the “PUPP”), which is designed to further align the interests of participants in the PUPP, including the Company’s executive officers, employees, directors and certain service providers, with the interests of the Company’s unit holders by providing these individuals with a phantom unit award.  A “Phantom Unit” is a notional unit granted under the PUPP that represents the right to receive a cash payment equal to the fair market value of a unit of the Company’s common units, following the satisfaction of certain time periods and/or certain performance criteria. The PUPP is primarily administered by the Compensation Committee of the Board (the “Committee”) which grants Phantom Units to eligible participants at such times as the Committee may determine to be appropriate.

 

Phantom Units are generally unvested at the date of grant and subject to both time and performance conditions.  The default period over which the Phantom Units vest is three years from the date of grant.  For Phantom Units which are subject to a performance measure which is based on a combination of distributed cash flow (“DCF”) and total Unitholder return (“TUR”) metrics, compared to such metrics at a select group of Niska Partners’ peer companies. The DCF and TUR metrics are calculated based on the Company’s percentile ranking during the applicable performance period compared to the peer group.  Vesting in the phantom units is also subject to the Company satisfying at least its minimum quarterly distributions for the underlying common units.

 

Effective April 1, 2011, the Company issued 518,425 of the 3,380,474 Phantom Units authorized under the PUPP. During the six months ended September 30, 2011, Niska Partners did not issue any additional Phantom Units and 161,579 Phantom Units were forfeited.

 

At September 30, 2011 and for the three and six months then ended, Niska Partners recorded no liability for the units under the PUPP plan which are subject to performance measures and did not record any compensation expense, because the DCF and TUR performance measures were below the minimum threshold for accrual.

 

At September 30, 2011 and for the three and six months then ended, Niska Partners recorded a liability and compensation expense of $0.3 million and $0.9 million for the units under the PUPP plan which are subject to time conditions.

 

10. Interest Expense

 

Interest expense consists of the following:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$

19,277

 

$

18,640

 

$

37,770

 

$

37,066

 

Deferred charges amortization

 

1,020

 

1,109

 

2,046

 

2,072

 

Capitalized interest

 

(927

)

(337

)

(1,794

)

(971

)

Total

 

$

19,370

 

$

19,412

 

$

38,022

 

$

38,167

 

 

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11. Income Taxes

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

$

(5,032

)

$

(4,018

)

$

(10,492

)

$

(10,547

)

 

 

 

 

 

 

 

 

 

 

Effective income tax rate

 

-22

%

-15

%

-48

%

-49

%

 

Income tax (benefit) expense was a benefit of $10.5 million for the six months ended September 30, 2011 compared to a benefit of $10.5 million in the same period of the prior year. The income tax benefit in the current period is due mainly to the recognition of losses in certain taxable Canadian entities and the recognition of income in certain non-taxable entities.

 

The effective tax rate for the six months ended September 30, 2011 differs from the U.S. statutory federal rate of 35% primarily due to the recognition of income in non-taxable entities and the recognition of losses in taxable entities.

 

12. Related Parties

 

During the six months ended September 30, 2011, a subsidiary of Niska Partners purchased certain Class B units of Niska Holdings Canada from certain non-executive officers and employees of Niska Partners for $2.2 million. The amount has been reflected as a reduction of members’ equity.

 

During the three and six months ended September 30, 2011, the Carlyle/Riverstone Funds reinvested through Sponsor Holdings $11.0 million in additional common units of Niska Partners at a price of $16.00 per unit.

 

Included in accrued receivables at September 30, 2011, was $1.4 million (March 31, 2011 - $1.8 million) that is owed from affiliated entities owned by Sponsor Holdings or its parent company for payments made by Niska Partners on behalf of the affiliated entities. The amounts owning are non-interest bearing and have no fixed terms of repayment.

 

13. Changes in Non-Cash Working Capital

 

Changes in non-cash working capital for the six months ended consists of the following:

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Margin deposits

 

$

32,166

 

$

(40,062

)

Trade receivables

 

865

 

5,334

 

Accrued receivables

 

13,917

 

(8,807

)

Natural gas inventory

 

(224,784

)

(132,086

)

Prepaid expenses

 

685

 

(3,430

)

Other assets

 

(264

)

 

Trade payables

 

358

 

(5,577

)

Accrued liabilities

 

54,818

 

52,721

 

Deferred revenue

 

7,981

 

10,985

 

Funds held on deposit

 

63

 

(2

)

Total

 

$

(114,195

)

$

(120,924

)

 

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14. Supplemental Cash Flow Disclosures

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Interest paid

 

$

36,832

 

$

38,605

 

Taxes paid

 

$

755

 

$

342

 

Interest capitalized

 

$

1,794

 

$

971

 

 

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, 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,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

External revenues, net realized

 

 

 

 

 

 

 

 

 

U.S.

 

$

18,788

 

$

22,335

 

$

38,891

 

$

38,258

 

Canada

 

33,080

 

34,779

 

69,561

 

72,772

 

Inter-entity

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

Canada

 

 

 

 

 

 

 

$

51,868

 

$

57,114

 

$

108,452

 

$

111,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

March 31,

 

 

 

2011

 

2011

 

Long-lived assets (at period end)

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

382,770

 

$

365,534

 

Canada

 

608,352

 

613,876

 

 

 

$

991,122

 

$

979,410

 

 

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16. Subsequent Events

 

Distributions

 

On November 2, 2011, the Board of Directors of Niska Partners unanimously approved a distribution of $0.35 per common unit, payable on November 17, 2011 to unitholders of record on November 14, 2011. The total distribution is expected to be approximately $12.3 million. No distribution was declared on the subordinated units.

 

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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, 2011.

 

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, 2011 and remained unchanged as of September 30, 2011.

 

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 California and Oklahoma, respectively. Niska Partners markets gas storage services of working gas capacity in addition to optimizing storage capacity with its own proprietary gas purchases at each of these facilities. We earn revenues by leasing storage on a long-term firm (“LTF”) contract basis for which we receive monthly reservation fees for fixed amounts of storage, leasing storage on a short-term firm (“STF”) contract basis, where customers inject and withdraw specified amounts of gas and pay fees on specific dates, and optimization, where we purchase and sell gas on an economically hedged basis in order to improve facility utilization at margins higher than those from third party contracts.

 

The Company has a total of 206.5 Bcf of working gas capacity among its facilities, including 8.5 Bcf leased from a third-party pipeline company.

 

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

 

Because the closing of the IPO occurred on May 17, 2010, we have pro-rated net earnings for the six months ended September 30, 2010 on a pre- and post-IPO basis. 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.

 

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Table of Contents

 

Factors that Impact Our Business

 

During our fiscal year ended March 31, 2011 and the six months ended September 30, 2011 there was a significant reduction in natural gas price volatility and a narrowing of the difference between winter and summer prices in the natural gas futures market, sometimes referred to as the seasonal spread.  These conditions are the result of numerous factors, including, but not limited to: (i) warmer weather patterns; (ii) an increase in the supply of non-conventional (including shale-gas) natural gas; (iii) real or perceived changes in the overall supply and demand fundamentals; (iv) increased development in the number and size of natural gas storage facilities; and (v) the development of new pipeline infrastructure.  If low volatility and narrow seasonal spreads persist, these conditions will adversely impact our revenues and profitability.

 

Our financial statements include goodwill valued at approximately $495.6 million at September 30, 2011, of which $455.0 relates to our facilities located in Alberta and $40.6 million relates to our facility located in Oklahoma.  The Company performs its annual impairment test for goodwill at March 31 of each year.  The decline in the seasonal spread is expected to materially affect our revenues and profitability in the fiscal year ending March 31, 2012.  However, the Company is unable to determine at this time whether these conditions are likely to persist for periods beyond the current fiscal year.  Accordingly, we have determined that no interim revaluation of goodwill is required at September 30, 2011.  However, management continues to monitor developments in market conditions for seasonal spreads and the market for natural gas storage services.  If management determines that less favorable market conditions are likely to remain for more than a temporary period, we could be required to perform an interim goodwill impairment test at December 31, 2011.  We will perform our annual impairment test in any event at March 31, 2012.  Any impairment of goodwill recognized in either an interim or annual period 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, 2011 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, 2011 and 2010 is as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited)

 

(unaudited)

 

Consolidated Statement of Earnings and Comprehensive Income Data:

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

Long-term contract

 

$

29,495

 

$

28,394

 

$

59,075

 

$

58,018

 

Short-term contract

 

5,739

 

9,547

 

11,305

 

17,776

 

Optimization, net

 

40,425

 

39,895

 

51,044

 

43,686

 

 

 

75,659

 

77,836

 

121,424

 

119,480

 

Expenses (income)

 

 

 

 

 

 

 

 

 

Operating

 

14,351

 

10,115

 

25,179

 

21,271

 

General and administrative

 

7,324

 

7,754

 

14,467

 

15,272

 

Depreciation and amortization

 

10,807

 

13,244

 

20,807

 

23,340

 

Interest

 

19,370

 

19,412

 

38,022

 

38,167

 

Loss on extinguishment of debt

 

883

 

 

883

 

 

Foreign exchange losses (gains)

 

389

 

(96

)

382

 

29

 

Other income

 

(22

)

(12

)

(40

)

(24

)

Earnings before income taxes

 

22,557

 

27,419

 

21,724

 

21,425

 

 

 

 

 

 

 

 

 

 

 

Income tax benefit

 

(5,032

)

(4,018

)

(10,492

)

(10,547

)

 

 

 

 

 

 

 

 

 

 

Net earnings and comprehensive income

 

$

27,589

 

$

31,437

 

$

32,216

 

$

31,972

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Net earnings

 

$

27,589

 

$

31,437

 

$

32,216

 

$

31,972

 

Add/(deduct):

 

 

 

 

 

 

 

 

 

Interest expense

 

19,370

 

19,412

 

38,022

 

38,167

 

Income tax benefit

 

(5,032

)

(4,018

)

(10,492

)

(10,547

)

Depreciation and amortization

 

10,807

 

13,244

 

20,807

 

23,340

 

Unrealized risk management gain

 

(23,792

)

(20,721

)

(12,972

)

(8,450

)

Loss on extinguishment of debt

 

883

 

 

883

 

 

Foreign exchange losses (gains)

 

389

 

(96

)

382

 

29

 

Other income

 

(22

)

(12

)

(40

)

(24

)

Adjusted EBITDA

 

30,192

 

39,246

 

68,806

 

74,487

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

Cash interest expense, net

 

18,350

 

18,303

 

35,976

 

36,095

 

Income taxes paid

 

469

 

222

 

755

 

287

 

Maintenance capital expenditures

 

159

 

622

 

162

 

724

 

Other income

 

(22

)

(12

)

(40

)

(24

)

Cash Available for Distribution

 

$

11,236

 

$

20,111

 

$

31,953

 

$

37,405

 

 

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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, maintenance capital expenditures and other income. Adjusted EBITDA and Cash Available for Distribution are used as supplemental financial measures by our management and by external users of our financial statements, such as commercial banks and ratings agencies, to assess:

 

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

 

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

 

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

 

·                  the viability of acquisitions and capital expenditure projects.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Revenues

 

Revenues for the three months ended September 30, 2011 were $75.7 million compared to $77.8 million in the three months ended September 30, 2010. Revenues for the six months ended September 30, 2011 were $121.4 million compared to $119.5 million in the same period last year. Changes in revenue are described below.

 

LTF Revenues.  LTF revenues for the three months ended September 30, 2011 were $29.5 million compared to $28.4 million for the three months ended September 30, 2010.  LTF revenues for the six months ended September 30, 2011 were $59.1 million, an increase of 1.9% compared to $58.0 million in the six months ended September 30, 2010. An increase in LTF capacity contracted in the current period was offset by a decrease in fees on re-contracted capacity. Additionally, revenues from Canadian operations benefitted from a strengthening of the Canadian dollar versus the U.S. dollar.

 

STF Revenues.  STF revenues for the three months ended September 30, 2011 decreased to $5.7 million compared to $9.5 million for the three months ended September 30, 2010. STF revenues for the six months ended September 30, 2011 were $11.3 million, compared to $17.8 million in the six months ended September 30, 2010.  The revenue decreases resulted from reduced STF margins in a lower seasonal spread environment coupled with a reduction in the capacity that we allocated to our STF strategy compared to the second quarter and first six months of last year .

 

Optimization Revenues.  Net optimization revenues for the three months ended September 30, 2011 increased to $40.4 million from $39.9 million for the three months ended September 30, 2010. Net optimization revenues for the six months ended September 30, 2011 were $51.0 million, an increase of $7.3 million compared to revenues of $43.7 million in the six months ended September 30, 2010. Net optimization revenues consisted of the following:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Realized optimization revenue, net

 

$

16,633

 

$

19,174

 

$

38,072

 

$

35,236

 

Unrealized risk management gains

 

23,792

 

20,721

 

12,972

 

8,450

 

Total

 

$

40,425

 

$

39,895

 

$

51,044

 

$

43,686

 

 

When evaluating the performance of our optimization business, we focus on our realized optimization margins, excluding the impact of unrealized economic hedging gains and losses and inventory write-downs. For accounting purposes, our net optimization revenues include the impact of unrealized economic hedging gains and losses and of inventory write-downs, which cause our reported revenues to fluctuate from period to period. However, because substantially all of our inventory is economically hedged, any inventory write-downs are offset by economic hedging gains and any unrealized economic hedging losses are offset by realized gains from the sale of physical inventory. The components of optimization revenues are as follows:

 

·                  Realized Optimization Revenues. Realized optimization revenues for the three months ended September 30, 2011 decreased to $16.6 million from $19.2 million for the three months ended September 30, 2010. Realized optimization revenues for the six months ended September 30, 2011 increased to $38.1 million from $35.2 million for the six months ended September 30, 2010. During the three and six month periods ended September 30, 2011, we used a greater proportion of our total capacity for our proprietary optimization strategy compared to the prior period. Increased capacity allocated to this strategy allowed us to take advantage of a liquid spot market for natural gas in the current period; however lower margins were realized as a result of the weaker spread environment. Realized financial gains related to the timing of the settlement of financial contracts impacted revenue during the prior three and six month periods.

 

·                  Unrealized Risk Management Gains/(Losses).  Unrealized risk management gains for the three months ended September 30, 2011 were $23.8 million compared to unrealized risk management gains of $20.7 million in the three months ended September 30, 2010. Unrealized risk management gains for the six months ended September 30, 2011 were $13.0 million, compared to gains of $8.5 million in the six months ended September 30, 2010. As all inventory is economically hedged, any unrealized risk management losses (or gains) are offset by future gains (or losses) associated with the sale of proprietary inventory.

 

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Table of Contents

 

Operating Expenses

 

Operating expenses for the three and six months ended September 30, 2011 and 2010 consisted of the following:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

General operating costs, including insurance, lease costs, safety and training costs

 

$

5,931

 

$

5,155

 

$

11,708

 

$

9,396

 

Salaries and benefits

 

1,683

 

1,559

 

3,466

 

3,230

 

Fuel and electricity

 

5,860

 

3,056

 

8,509

 

7,468

 

Maintenance

 

877

 

345

 

1,496

 

1,177

 

Total operating expenses

 

$

14,351

 

$

10,115

 

$

25,179

 

$

21,271

 

 

Operating expenses for the quarter ended September 30, 2011 increased to $14.4 million from $10.1 million for the quarter ended September 30, 2010. Operating expenses for the six months ended September 30, 2011 increased to $25.2 million from $21.3 million for the six months ended September 30, 2010. Higher utility costs during the second quarter of the current year combined with higher volumes cycled at one of our facilities resulted in additional fuel and electricity costs in the three and six months ended in the current year as compared to the same period in the prior year.  General operating costs rose principally as a result of higher lease costs in the quarter and six months ended September 30, 2011. The higher lease costs relate to additional storage capacity leased in Southern California during the period.

 

General and Administrative Expenses

 

General and administrative expenses for the three and six months ended September 30, 2011 and 2010 consisted of the following:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Compensation costs

 

$

4,582

 

$

5,761

 

$

9,368

 

$

10,297

 

General costs, including office and information technology costs

 

1,197

 

958

 

1,625

 

2,139

 

Legal, audit and regulatory costs

 

1,545

 

1,035

 

3,474

 

2,836

 

Total general and administrative expenses

 

$

7,324

 

$

7,754

 

$

14,467

 

$

15,272

 

 

General and administrative costs were $7.3 million in the three months ended September 30, 2011, compared to $7.8 million in the same period last year.  General and administrative expenses decreased to $14.5 million for the six months ended September 30, 2011 compared to $15.3 million for the six months ended September 30, 2010. Compensation costs decreased as a result of a reduction in incentive compensation accruals in the current period.

 

Depreciation and Amortization Expense

 

Depreciation and amortization expense for the three months ended September 30, 2011 was $10.8 million compared to $13.2 million in the three months ended September 30, 2010. Depreciation and amortization expense for the six months ended September 30, 2011 was $20.8 million compared to $23.3 million in the six months ended September 30, 2010. The decrease was primarily attributable to a provision for cushion gas migration at one of the Company’s facilities which is recorded in depreciation and amortization expense. The provision for cushion gas migration amounted to $1.0 million during the three and six months ended September 30, 2011 as compared to $2.8 million during the three and six months ended September 30, 2010. The provision against cushion gas is estimated based on tests of its effectiveness.

 

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Table of Contents

 

Interest Expense

 

Interest expense for the three months ended September 30, 2011 was $19.4 million compared to $19.4 million in the three months ended September 30, 2010. Interest expense for the six months ended September 30, 2011 was $38.0 million compared to $38.2 million in the six months ended September 30, 2010. Interest expense in the three and six months ended September 30, 2011 principally consisted of interest on our 8.875% Senior Notes as well as amortization of deferred financing costs.

 

Earnings before Income Taxes

 

Earnings before income taxes for the quarter ended September 30, 2011 decreased to $22.6 million from earnings of $27.4 million for the quarter ended September 30, 2010. Earnings before income taxes for the six months ended September 30, 2011 increased to $21.7 million from earnings of $21.4 million for the six months ended September 30, 2011.The changes in earnings for the three months ended were primarily attributable to the increase in operating costs. The changes in earnings for the six months ended were attributable to the items discussed above.

 

Income Taxes

 

Income tax benefit was $5.0 million for the three months ended September 30, 2011 compared to $4.0 million for the same period of the prior year.  We had an income tax benefit of $10.5 million for the six months ended September 30, 2011 essentially unchanged from the benefit for the six months ended September 30, 2010. The income tax benefit in the current three and six month periods is due mainly to the recognition of losses in certain taxable Canadian entities and the recognition of income in certain non-taxable entities.

 

The effective tax rate for the three and six months ended September 30, 2011 differs from the U.S. statutory federal rate of 35% primarily due to the recognition of income in non-taxable entities and the recognition of losses in taxable entities.

 

Net Earnings

 

Net earnings for the quarter ended September 30, 2011 were $27.6 million compared to net earnings of $31.4 million for the quarter ended September 30, 2010. Net earnings for the six months ended September 30, 2011 were $32.2 million compared to net earnings of $32.0 million for the quarter ended September 30, 2010. The decrease in earnings for the three month period was primarily attributable to the increased operating costs discussed above. The changes in earnings for the six months ended were attributable to the items discussed above.

 

Liquidity and Capital Resources

 

Shelf Registration Statement

 

On June 17, 2011 we filed a Registration Statement on Form S-3 in order to allow us to issue a combination of equity and debt securities for up to $1.25 billion from time to time. In addition, the filing included registration of the offering for resale of up to 16,304,745 common units that are owned by Sponsor Holdings. The Form S-3 is not yet effective and is currently under review by the SEC.

 

Sources and Uses of Liquidity

 

The Company has $769.3 million in senior notes (“Senior Notes”) outstanding and has access to a $400 million revolving credit facility (“$400 million Credit Agreement”), of which a balance of $240.0 million is available. For further information about our Senior Notes and our $400 million Credit Agreement, including covenants and restrictions, see Note 4 to the accompanying unaudited consolidated financial statements included in this report.

 

Our primary short-term liquidity needs are to pay our quarterly distributions and withholding tax payments, to pay interest and principal payments under our $400 million Credit Agreement and our Senior Notes, to fund our operating expenses and maintenance capital and to pay for the acquisition of optimization inventory along with associated margin requirements. We expect to fund these requirements through a combination of cash on hand, cash from operations and borrowings under our $400 million Credit Agreement.

 

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Table of Contents

 

In certain circumstances, our fixed charge coverage ratio could be below the level of 1.75 to 1.0 in a future quarter.  If our fixed charge coverage ratio were to be below 1.75 to 1.0, we expect we would be permitted to thereafter pay at least an additional $75 million of distributions.

 

Our medium-term and long-term liquidity needs primarily relate to potential organic expansion opportunities and asset acquisitions. We expect to finance the cost of any expansion projects and acquisitions from the proceeds of our IPO, borrowings under our existing and possible future credit facilities or a mix of borrowings and additional equity offerings as well as cash on hand and cash from operations. We anticipate that our primary sources of funds for our long-term liquidity needs will be from cash from operations and/or debt or equity financings.

 

In the absence of material acquisitions, we believe that our existing sources of liquidity will be sufficient to fund our short-term liquidity needs as well as our organic expansion opportunities through March 31, 2012. Funding of material acquisitions and longer-term liquidity needs will depend on the availability and cost of capital in the debt and equity markets. Accordingly, the availability of any such potential funding on economic terms is uncertain.

 

Historical Cash Flows

 

Our cash flows are significantly influenced by our level of natural gas inventory, margin deposits and related forward sale contracts or economic hedging positions at the end of each accounting period and may fluctuate significantly from period to period. In addition, our period to period cash flows are heavily influenced by the seasonality of our proprietary optimization activities. For example, we generally purchase significant quantities of natural gas during the summer months and sell natural gas during the winter months. The storage of natural gas for our own account can have a material impact on our cash flows from operating activities for the period we pay for and store the natural gas and the subsequent period in which we receive proceeds from the sale of natural gas. When we purchase and store natural gas for our own account, we use cash to pay for the gas and record the gas as inventory and thereby reduce our cash flows from operating activities. We typically borrow on our revolving credit facilities to fund these purchases, and these borrowings increase our cash flows from financing activities. Conversely, when we collect the proceeds from the sale of natural gas that we purchased and stored for our own account, the impact on our cash flows from operating activities is positive and the impact on our cash flows from financing activities is negative. Therefore, our cash flows from operating activities fluctuate significantly from period-to-period as we purchase gas, store it, and then sell it in a later period. In addition, we have margin requirements on our economically hedged positions. As the cash deposits we make to satisfy our margin requirements increase and decrease with our volume of derivative positions and changes in commodity prices, our cash flows from operating activities may fluctuate significantly from period to period.

 

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Table of Contents

 

Cash Flows from Operations

 

The following table summarizes our sources and uses of cash for the six month periods ended September 30, 2011 and 2010, respectively:

 

 

 

Six Months Ended

 

 

 

September 30,

 

Operating Activities: 

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

 

 

 

 

Net earnings

 

$

32,216

 

$

31,972

 

Adjustments to reconcile net earnings to net cash used in operating activities:

 

 

 

 

 

Unrealized foreign exchange loss

 

698

 

397

 

Deferred income tax benefit

 

(10,585

)

(10,834

)

Unrealized risk management gain

 

(12,972

)

(8,450

)

Depreciation and amortization

 

20,807

 

23,340

 

Deferred charges amortization

 

2,046

 

2,072

 

Loss on extinguishment of debt

 

883

 

 

Changes in non-cash working capital

 

(114,195

)

(120,924

)

Net cash used in operating activities

 

(81,102

)

(82,427

)

 

 

 

 

 

 

Net cash used in investing activities

 

(27,848

)

(15,159

)

 

 

 

 

 

 

Net cash provided by financing activities

 

17,645

 

5,057

 

 

 

 

 

 

 

Effect of translation of foreign currency on cash and cash equivalents

 

242

 

67

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

$

(91,063

)

$

(92,462

)

 

The decrease in cash is primarily due to cash paid for inventory purchases, interest payments and principal repurchases on our Senior Notes, capital expenditures, and distributions to unit holders.  These decreases are offset by cash from operations and drawings on our Credit Facilities, in addition to cushion gas sales entered into during the six months ended September 30, 2011, for total proceeds of $49.0 million. We have sold cushion gas during the six months ended September 30, 2011 and entered into firm commitments to reacquire an equivalent amount of cushion gas in the fourth quarter of the fiscal year ending March 31, 2012 and, accordingly, expect to spend approximately $53.8 million to reacquire the cushion gas at that time. In conjunction with the sale of cushion gas, we entered into STF contracts which provided cash inflows of $2.1 million for the six months ended September 30, 2011 and will provided a further $2.1 million of cash inflows during the fourth quarter of the fiscal 2012 fiscal year.

 

For a discussion of changes in cash flow resulting from adjustments to reconcile net earnings to net cash used in operations, please refer to the discussion “Results of Operations,” above.

 

Market conditions remain challenging and have continued to deteriorate compared to both the fourth quarter of the 2011 fiscal year and this point last year.  There are a number of factors beyond our control that may impact our operations through the remainder of this fiscal year.  Unless conditions improve, we believe it is unlikely that we will earn in this fiscal year Cash Available for Distribution equal to all of the cash distributions we expect to pay with respect to this fiscal year.

 

We believe that we will have sufficient cash flow from operations and borrowing capacity under our credit agreement to meet our financial commitments, debt service obligations, contingencies and anticipated capital expenditures through March 31, 2012.  However, we are subject to business and operational risks that could adversely affect our cash flow.  A material decrease in our cash flows would likely produce an adverse effect on our ability to incur new debt as well as our ability to pay distributions.

 

26



Table of Contents

 

Changes in non-cash working capital consisted of the following:

 

 

 

Six Months Ended

 

 

 

September 30,

 

Changes in non-cash working capital: 

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

 

 

 

 

Margin deposits

 

$

32,166

 

$

(40,062

)

Trade receivables

 

865

 

5,334

 

Accrued receivables

 

13,917

 

(8,807

)

Natural gas inventory

 

(224,784

)

(132,086

)

Prepaid expenses

 

685

 

(3,430

)

Other assets

 

(264

)

 

Trade payables

 

358

 

(5,577

)

Accrued liabilities

 

54,818

 

52,721

 

Deferred revenue

 

7,981

 

10,985

 

Funds held on deposit

 

63

 

(2

)

 

 

 

 

 

 

Net changes in non-cash working capital

 

$

(114,195

)

$

(120,924

)

 

For the period ended September 30, 2011, consistent with the prior year, we continued to allocate a significant proportion of our capacity to our optimization strategy, accumulating inventory and economically hedging it forward to future periods. However, unlike the prior year, forward commodity prices softened after we hedged our inventory and this resulted in a return of substantial cash that had been posted as margin deposits.

 

Investing Activities

 

Substantially all of our investing activities consisted of capital expenditures in each of the six months ended September 30, 2011 and 2010. Capital expenditures in each six month period consisted of the following:

 

 

 

Six Months Ended

 

 

 

September 30,

 

Capital expenditures 

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

 

 

 

 

Maintenance capital

 

$

162

 

$

724

 

Expansion capital

 

27,686

 

14,435