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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2014

 

OR

 

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

 

For the transition period from              to             

 

Commission file number: 001-34733

 

Niska Gas Storage Partners LLC

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

170 Radnor Chester Road, Suite 150
Radnor, PA

(Address of principal executive offices)

 

19087
(Zip Code)

 

(484) 367-7432

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

(Do not check if a smaller reporting company)

 

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

 

As of October 31, 2014, there were 36,647,511 Common Units outstanding.

 

 

 



Table of Contents

 

Cautionary Statement Regarding Forward-Looking Information

 

This report contains information that may constitute “forward-looking statements.” Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which typically are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future—including statements relating to general views about future operating results—are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include changes in general economic conditions, competitive conditions in our industry, actions taken by third-party operators, processors and transporters, changes in the availability and cost of capital, operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control, the effects of existing and future laws and governmental regulations, the effects of future litigation, and certain factors described in Part II, “Item 1A. Risk Factors” and elsewhere in this report and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014, 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 (Loss) and Comprehensive Income (Loss) for the Three and Six Months Ended September 30, 2014 and 2013

1

 

Consolidated Balance Sheets as of September 30, 2014 and March 31, 2014

2

 

Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2014 and 2013

3

 

Consolidated Statements of Changes in Members’ Equity for the Six Months Ended September 30, 2014 and 2013

4

 

Notes to Unaudited Consolidated Financial Statements

5

 

 

 

Item 2.

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

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

36

 

 

 

Item 1A.

Risk Factors

36

 

 

 

Item 6.

Exhibits

37

 

ii



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1.  Financial Statements (unaudited)

 

Niska Gas Storage Partners LLC

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

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

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Fee-based revenue

 

$

15,633

 

$

33,197

 

$

58,387

 

$

64,667

 

Optimization, net

 

(5,043

)

3,666

 

7,580

 

29,384

 

 

 

10,590

 

36,863

 

65,967

 

94,051

 

 

 

 

 

 

 

 

 

 

 

Expenses (income):

 

 

 

 

 

 

 

 

 

Operating

 

12,062

 

8,877

 

23,015

 

19,321

 

General and administrative

 

6,205

 

9,515

 

16,279

 

20,804

 

Depreciation and amortization

 

16,012

 

10,298

 

65,978

 

20,631

 

Interest

 

12,735

 

16,397

 

25,047

 

32,603

 

Loss on disposal of assets

 

20

 

 

6

 

 

Foreign exchange (gains) losses

 

(262

)

(410

)

(312

)

447

 

Other (income) expense

 

(2

)

(17

)

(3

)

374

 

 

 

 

 

 

 

 

 

 

 

EARNINGS (LOSS) BEFORE INCOME TAXES

 

(36,180

)

(7,797

)

(64,043

)

(129

)

Income tax (benefit) expense

 

(7,348

)

48

 

(16,240

)

(252

)

 

 

 

 

 

 

 

 

 

 

NET EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS)

 

$

(28,832

)

$

(7,845

)

$

(47,803

)

$

123

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) allocated to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managing Member

 

$

(538

)

$

(154

)

$

(896

)

$

4

 

Common unitholders

 

$

(28,294

)

$

(7,691

)

$

(46,907

)

$

119

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(0.78

)

$

(0.22

)

$

(1.30

)

$

 

 

(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,

 

 

 

2014

 

2014

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

7,334

 

$

7,704

 

Margin deposits

 

57,986

 

32,626

 

Trade receivables

 

1,761

 

5,760

 

Accrued receivables

 

27,757

 

150,628

 

Natural gas inventory

 

273,971

 

75,140

 

Prepaid expenses and other current assets

 

3,182

 

4,330

 

Short-term risk management assets

 

20,235

 

20,949

 

 

 

392,226

 

297,137

 

Long-term assets

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation

 

862,323

 

908,274

 

Goodwill

 

245,604

 

245,604

 

Intangible assets, net of accumulated amortization

 

47,602

 

65,462

 

Deferred charges, net of accumulated amortization

 

12,828

 

14,640

 

Other assets

 

3,226

 

3,268

 

Long-term risk management assets

 

6,783

 

4,806

 

 

 

1,178,366

 

1,242,054

 

TOTAL

 

$

1,570,592

 

$

1,539,191

 

 

 

 

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

 

 

 

 

 

Current liabilities

 

 

 

 

 

Revolving credit facilities

 

$

243,500

 

$

119,500

 

Current portion of obligations under capital lease

 

1,319

 

1,299

 

Trade payables

 

771

 

1,023

 

Current portion of deferred taxes

 

5,660

 

5,678

 

Deferred revenue

 

17,976

 

6,036

 

Accrued liabilities

 

83,215

 

111,118

 

Short-term risk management liabilities

 

23,107

 

19,105

 

 

 

375,548

 

263,759

 

Long-term liabilities

 

 

 

 

 

Long-term risk management liabilities

 

9,621

 

12,209

 

Asset retirement obligations

 

2,054

 

1,975

 

Other long-term liabilities

 

1,162

 

1,809

 

Deferred income taxes

 

103,103

 

119,373

 

Obligations under capital lease

 

10,262

 

10,926

 

Long-term debt

 

575,000

 

575,000

 

 

 

701,202

 

721,292

 

Members’ equity

 

 

 

 

 

Common units

 

220,685

 

279,604

 

Managing Member’s interest

 

273,157

 

274,536

 

 

 

493,842

 

554,140

 

Commitments and contingencies (Note 2)

 

 

 

 

 

TOTAL

 

$

1,570,592

 

$

1,539,191

 

 

(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,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

Net earnings (loss)

 

$

(47,803

)

$

123

 

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

 

 

 

 

 

Unrealized foreign exchange (gains) losses

 

(66

)

370

 

Deferred income tax benefit

 

(16,249

)

(252

)

Unrealized risk management losses (gains)

 

151

 

(6,486

)

Depreciation and amortization

 

65,978

 

20,631

 

Deferred charges amortization

 

1,825

 

1,670

 

Gain on disposal of assets

 

(14

)

 

Non-cash compensation expense

 

1,243

 

 

Write-down of inventory

 

10,500

 

 

Changes in assets and liabilities

 

(122,901

)

8,817

 

Net cash (used in) provided by operating activities

 

(107,336

)

24,873

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Property, plant and equipment expenditures

 

(1,698

)

(915

)

Proceeds on sale of assets

 

14

 

 

Net cash used in investing activities

 

(1,684

)

(915

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Proceeds from revolver drawings

 

498,500

 

227,000

 

Revolver payments

 

(374,500

)

(231,500

)

Payments of deferred financing costs

 

(857

)

 

Repayments of obligations under capital lease

 

(644

)

(625

)

Distributions to unitholders

 

(13,737

)

(21,313

)

Net cash provided by (used in) financing activities

 

108,762

 

(26,438

)

 

 

 

 

 

 

Effect of translation on foreign currency cash and cash equivalents

 

(112

)

59

 

Net decrease in cash and cash equivalents

 

(370

)

(2,421

)

Cash and cash equivalents, beginning of period

 

7,704

 

10,610

 

Cash and cash equivalents, end of period

 

$

7,334

 

$

8,189

 

 

 

 

 

 

 

Supplemental cash flow disclosures (Note 14)

 

 

 

 

 

 

(See Notes to Unaudited Consolidated Financial Statements)

 

3



Table of Contents

 

Niska Gas Storage Partners LLC

Consolidated Statements of Changes in Members’ Equity

(in thousands of U.S. dollars)

(Unaudited)

 

 

 

 

 

 

 

Managing

 

 

 

 

 

Common

 

Subordinated

 

Member

 

 

 

 

 

Units

 

Units

 

Interest

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2013

 

$

321,642

 

$

265,877

 

$

9,858

 

$

597,377

 

Cancellation of subordinated units

 

 

(265,877

)

265,877

 

 

Net earnings (loss)

 

119

 

 

4

 

123

 

Distributions to unitholders

 

(26,721

)

 

(540

)

(27,261

)

Issuance of common units

 

5,947

 

 

 

5,947

 

Balance, September 30, 2013

 

$

300,987

 

$

 

$

275,199

 

$

576,186

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2014

 

$

279,604

 

$

 

$

274,536

 

$

554,140

 

Net earnings (loss)

 

(46,907

)

 

(896

)

(47,803

)

Distributions to unitholders

 

(26,159

)

 

(507

)

(26,666

)

Issuance of common units

 

12,928

 

 

 

12,928

 

Non-cash equity contribution from parent

 

480

 

 

10

 

490

 

Non-cash compensation expense

 

739

 

 

14

 

753

 

Balance, September 30, 2014

 

$

220,685

 

$

 

$

273,157

 

$

493,842

 

 

(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

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

1. Organization and Basis of Presentation

 

Organization

 

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

 

At September 30, 2014, Niska Partners had 36,647,511 common units outstanding. Of this amount, 19,147,428 common units are owned by affiliates of Carlyle/Riverstone Global Energy and Power Fund II, L.P. and Carlyle/Riverstone Global Energy and Power Fund III, L.P. (collectively, the “Carlyle/Riverstone Funds”), which include Niska Holdings, L.P. and Niska Sponsor Holdings Coopertief, U.A., along with a 1.87% Managing Member’s interest in the Company and all of the Company’s Incentive Distribution Rights (“IDRs”). Including all of the common units owned by the Carlyle/Riverstone Funds, along with the 1.87% Managing Member’s interest, the Carlyle/Riverstone Funds have a 53.14% ownership interest in the Company excluding the IDRs, which are a variable interest. The remaining 17,500,083 common units, representing a 46.86% ownership interest excluding the IDRs, were owned by the public.

 

Basis of Presentation

 

The accounting policies applied in these unaudited interim financial statements are consistent with the policies applied in the consolidated financial statements of Niska Partners and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014.

 

In the opinion of management, the accompanying consolidated financial statements of Niska Partners, which are unaudited except for the balance sheet at March 31, 2014 which is derived from audited financial statements, include all adjustments necessary to present fairly Niska Partners’ financial position as of September 30, 2014, the results of Niska Partners’ operations for the three and six months ended September 30, 2014 and 2013, along with its cash flows for the six months ended September 30, 2014 and 2013. The results of operations for the three and six months ended September 30, 2014 are not necessarily representative of the results to be expected for the full fiscal year ending March 31, 2015. The optimization of proprietary gas purchases is seasonal with the majority of the revenues and costs associated with the physical sale of proprietary gas generally occurring during the third and fourth fiscal quarters, when demand for natural gas is typically the strongest.

 

Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), the unaudited consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements should be read in conjunction with the consolidated financial statements of Niska Partners and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2014.

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

2. Commitments and Contingencies

 

Commitments

 

Niska Partners has entered into non-cancelable operating leases for office space, land use rights at its operating facilities, storage capacity at other facilities, equipment, and vehicles used in its operations. The remaining lease terms expire between October 2014 and February 2058 and require the payment of taxes, insurance and maintenance by the lessee.

 

Contingencies

 

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

 

3. Recent Accounting Pronouncement

 

In May 2014, the Financial Accounting Standards Board adopted Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606). Under the new rules, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The rules also require more detailed disclosures related to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. These rules are effective for interim and annual periods beginning after December 15, 2016. Management is currently evaluating the impact of the pending adoption of ASU 2014-09 on the Company’s consolidated financial statements and has not yet determined the method by which it will adopt the standard in 2017.

 

4. Property, Plant and Equipment

 

On July 15, 2014, Niska Partners entered into an agreement with Talisman Energy Canada whereby, for an immaterial amount of consideration, the Company acquired the necessary reservoir, storage and land interests to develop a natural gas storage facility in northwestern Alberta, Canada. If developed, the project will have a working gas storage capacity of approximately 55 billion cubic feet (“Bcf”), expandable up to 70 Bcf (the “Sundance Project”). The requisite underlying regulatory approvals have been obtained from the Alberta Energy Regulator and the Sundance Project has significant access to pipeline infrastructure and the associated western Canadian markets.

 

5. Debt

 

Niska Partners’ debt obligations consist of the following:

 

 

 

September 30,

 

March 31,

 

 

 

2014

 

2014

 

 

 

 

 

 

 

Senior Notes due 2019

 

$

575,000

 

$

575,000

 

Revolving credit facilities

 

243,500

 

119,500

 

Total

 

818,500

 

694,500

 

Less portion classified as current

 

(243,500

)

(119,500

)

 

 

$

575,000

 

$

575,000

 

 

6



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

5. Debt (continued)

 

Senior Notes due 2019

 

In March 2014, Niska Partners completed a private placement of senior unsecured notes due 2019 (the “6.50% Senior Notes” or “Notes”) through its subsidiaries Niska Gas Storage Finance Corp. and Niska Gas Storage Canada ULC (together, the “Issuers”). The 6.50% Senior Notes are senior unsecured obligations which are: (1) effectively junior to Niska Partners’ secured obligations to the extent of the value of the collateral securing such debt; (2) equal in right of payment with all existing and future senior unsecured indebtedness of the Company; and (3) senior in right of payment to any future subordinated indebtedness of Niska Partners. The 6.50% Senior Notes are fully and unconditionally guaranteed by Niska Partners and certain of its direct and indirect subsidiaries on a senior unsecured basis, and are: (1) effectively junior to each guarantor’s secured obligations; (2) equal in right of payment with all existing and future senior unsecured indebtedness of each guarantor and (3) senior in right of payment to any future subordinated indebtedness of each guarantor.

 

Interest on the 6.50% Senior Notes is payable semi-annually on October 1 and April 1, commencing on October 1, 2014, and will mature on April 1, 2019. As of September 30, 2014, the estimated fair market value of the Notes was $510.3 million.

 

Prior to October 1, 2016, the Company has the option to redeem up to 35% of the aggregate principal amount of the 6.50% Senior Notes using net cash proceeds from certain equity offerings at a price of 106.5% plus accrued and unpaid interest. The Company may also redeem all or a part of the 6.50% Senior Notes at redemption prices (expressed as percentages of principal amount) equal to 103.25% during the twelve-month period beginning on October 1, 2016, 101.625% during the twelve-month period beginning on October 1, 2017 and during the twelve month period beginning October 1, 2018 thereafter at par, plus accrued and unpaid interest. The Company is not required to make mandatory redemptions or sinking fund payments with respect to the 6.50% Senior Notes.

 

The indenture governing the 6.50% 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 adjusted earnings before interest, taxes, depreciation and amortization to fixed charges, each as defined in the indenture governing the 6.50% Senior Notes, and measured for the preceding four quarters.

 

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 our 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 our Operating Agreement) calculated as of the end of our preceding fiscal quarter; and

 

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

 

If the fixed charge coverage ratio is less than 1.75 to 1.0, Niska Partners is permitted to make restricted payments if the aggregate restricted payments 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:

 

·                  $75.0 million; and

 

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

 

As of September 30, 2014, the fixed charge coverage ratio was 2.6 to 1.0 and the indenture governing the Notes would have permitted the Company to distribute approximately $373.4 million. The fixed charge amount used in the calculation of fixed charge coverage ratio was calculated on a pro-forma basis, taking into account the redemption of the 8.875% Senior Notes due 2018 as if the redemption had occurred on April 1, 2013. The indenture does not prohibit certain types or amounts of restricted payments, including a general basket of $75.0 million of restricted payments.

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

5. Debt (continued)

 

Senior Notes due 2019 (continued)

 

The indenture governing the Notes contains certain other covenants that, among other things, limit Niska Partners and certain of its subsidiaries’ ability to:

 

·                  incur additional debt or issue certain capital stock;

 

·                  pay dividends on, repurchase or make distributions in respect of its capital stock or repurchase or retire subordinated indebtedness;

 

·                  make certain investments;

 

·                  sell assets;

 

·                  create liens;

 

·                  consolidate, merge, sell or otherwise dispose of all or substantially all of its assets;

 

·                  enter into certain transactions with its affiliates; and

 

·                  permit restrictions on the ability of its subsidiaries to make distributions.

 

The occurrence of events involving the Company or certain of its subsidiaries may constitute an event of default under the indenture. Such events include failure to pay interest, principal, or the premium on the notes when due; failure to comply with the merger, asset sale or change of control covenants; certain defaults on other indebtedness; and certain insolvency proceedings. In the case of an event of default, the holders of the notes are entitled to remedies, including the acceleration of payment of the notes by request of the holders of at least 25% in aggregate principal amount of the notes, and any action by the trustee to collect payment of principal, interest or premium in arrears.

 

Upon the occurrence of a change of control together with a decrease in the ratings of the 6.50% Senior Notes by either Moody’s or S&P by one or more gradations within 90 days of the change of control event, Niska Partners must offer to repurchase the Notes at 101% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.

 

The Company’s ability to repurchase the 6.50% Senior Notes upon a change of control will be limited by the terms of its debt agreements, including its asset-based revolving credit facility. In addition, the Company cannot assure that it will have the financial resources to repurchase the Notes upon a change of control.

 

$400 Million Credit Agreement

 

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

 

As of September 30, 2014, $243.5 million in borrowings, with a weighted average interest rate of 3.61% (March 31, 2014 - $119.5 million of borrowings had a weighted average interest rate of 3.56%), were outstanding under the credit facilities. Amounts committed in support of letters of credit totaled $19.8 million at September 30, 2014 (March 31, 2014 - $4.8 million). Any borrowings under the $400 million Credit Agreement are classified as current.

 

8



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

5. Debt (continued)

 

$400 Million Credit Agreement (continued)

 

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, 2014, the borrowing base collateral totaled $445.2 million.

 

The $400 million Credit Agreement contains limitations on Niska Partners’ ability to incur additional debt or to pay distributions in respect of, repurchase or pay distributions 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 6.50% Senior Notes, but contain certain substantive differences. As a result of these differences, the limitations on restricted payments contained in the Credit Agreement should be less restrictive than the limitations contained in the indenture. As of September 30, 2014, Niska Partners was in compliance with all covenant requirements under the indenture governing the 6.50% 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 6.50% 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 and have no restricted assets as of September 30, 2014.

 

6. Risk Management Activities and Financial Instruments

 

Risk Management Overview

 

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

 

Commodity Price Risk

 

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

 

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.

 

9



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

6. Risk Management Activities and Financial Instruments (continued)

 

Commodity Price Risk (continued)

 

To limit its exposure to changes in commodity prices, Niska Partners enters into purchases and sales of natural gas inventory and concurrently matches the volumes in these transactions with offsetting derivative contracts. To comply with its internal risk management policies, Niska Partners is required to limit its exposure of unmatched volumes of proprietary current natural gas inventory to an aggregate overall limit of 8.0 Bcf. At September 30, 2014, 67.0 Bcf of natural gas inventory was offset with financial contracts, representing 99.1% of total inventory. At March 31, 2014, 18.4 Bcf of natural gas inventory was offset with financial contracts, representing 97.2% of total inventory. As of September 30, 2014 and March 31, 2014, the volumes of inventories which were economically hedged using each type of contract were:

 

 

 

September 30,

 

March 31,

 

 

 

2014

 

2014

 

 

 

 

 

 

 

Forwards

 

(1.8 Bcf)

 

(1.4 Bcf)

 

Futures

 

68.8 Bcf

 

20.1 Bcf

 

Swaps

 

 

(0.3 Bcf)

 

 

 

67.0 Bcf

 

18.4 Bcf

 

 

Counterparty Credit Risk

 

Niska Partners is exposed to counterparty credit risk on its trade and accrued accounts receivable and risk management assets. Counterparty credit risk is the risk of financial loss to the Company if a customer fails to perform its contractual obligations. Niska Partners engages in transactions for the purchase and sale of products and services with major companies in the energy industry and with industrial, commercial, residential and municipal energy consumers. Credit risk associated with trade accounts receivable is mitigated by the high percentage of investment grade customers, collateral support of receivables and Niska Partners’ ability to take ownership of customer owned natural gas stored in its facilities in the event of non-payment. For the six months ended September 30, 2014 and 2013, no doubtful accounts expense was recognized as a result of receivables deemed to be uncollectible. It is management’s opinion that allowance for doubtful accounts of $ nil and $0.4 million were required as of September 30, 2014 and March 31, 2014, respectively, on the Company’s 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. Credit risk is assessed prior to transacting with any counterparty and each counterparty is required to maintain an investment grade rating, provide a parental guarantee from an investment grade parent, or provide an alternative method of financial assurance (letter of credit, cash, etc.) to support proposed transactions. In addition, the Company’s tariffs contain provisions that permit it to take title to a customer’s inventory should the customer’s account remain unpaid for an extended period of time. Although the Company relies on a few counterparties for a significant portion of its revenues, one counterparty making up 61.0% and 35.3% of gross revenues for the six months ended September 30, 2014 and 2013, respectively, 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.

 

10



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

6. Risk Management Activities and Financial Instruments (continued)

 

Counterparty Credit Risk (continued)

 

Exchange traded futures and options comprise approximately 64.9% of Niska Partners’ commodity risk management assets at September 30, 2014. 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, 2014, Niska Partners was only exposed to interest rate risk resulting from the variable rates associated with its $400 million Credit Agreement of which $243.5 million was drawn.

 

Liquidity Risk

 

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

 

Foreign Currency Risk

 

Foreign currency risk is created by fluctuations in foreign exchange rates. As Niska Partners conducts a portion of its activities in Canadian dollars, earnings and cash flows are subject to currency fluctuations. The performance of the Canadian dollar relative to the U.S. dollar could positively or negatively affect earnings. Niska Partners is exposed to cash flow risk to the extent that Canadian currency outflows exceed Canadian currency inflows. The Company enters into currency swaps to mitigate the impact of changes in foreign exchange rates. The notional value of currency swaps at September 30, 2014 was $13.9 million (March 31, 2014 - $13.0 million). These contracts expire on various dates from October 1, 2014 through June 1, 2016. Niska Partners has not elected hedge accounting treatment, therefore, changes in fair value are recorded directly in earnings.

 

11



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

6. Risk Management Activities and Financial Instruments (continued)

 

The following tables show the fair values of Niska Partners’ risk management assets and liabilities at September 30, 2014 and March 31, 2014:

 

 

 

Energy

 

Currency

 

 

 

September 30, 2014 

 

Contracts

 

Contracts

 

Total

 

 

 

 

 

 

 

 

 

Short-term risk management assets

 

$

19,367

 

$

868

 

$

20,235

 

Long-term risk management assets

 

6,444

 

339

 

6,783

 

Short-term risk management liabilities

 

(23,107

)

 

(23,107

)

Long-term risk management liabilities

 

(9,586

)

(35

)

(9,621

)

 

 

$

(6,882

)

$

1,172

 

$

(5,710

)

 

 

 

 

 

 

 

 

 

 

Energy

 

Currency

 

 

 

March 31, 2014 

 

Contracts

 

Contracts

 

Total

 

 

 

 

 

 

 

 

 

Short-term risk management assets

 

$

18,939

 

$

2,010

 

$

20,949

 

Long-term risk management assets

 

4,260

 

546

 

4,806

 

Short-term risk management liabilities

 

(18,945

)

(160

)

(19,105

)

Long-term risk management liabilities

 

(12,209

)

 

(12,209

)

 

 

$

(7,955

)

$

2,396

 

$

(5,559

)

 

12



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

6. Risk Management Activities and Financial Instruments (continued)

 

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

 

September 30, 2014 

 

Gross Amounts
Recognized

 

Gross Amounts
Offset in the
Balance Sheet

 

Net Amounts
Presented in
the Balance
Sheet

 

Margin
Deposits not
Offset in the
Balance Sheet

 

Net Amounts

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

92,970

 

$

(67,159

)

$

25,811

 

$

(16,596

)

$

9,215

 

Currency derivatives

 

1,499

 

(292

)

1,207

 

(940

)

267

 

Total assets

 

94,469

 

(67,451

)

27,018

 

(17,536

)

9,482

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

99,852

 

(67,159

)

32,693

 

(23,522

)

9,171

 

Currency derivatives

 

327

 

(292

)

35

 

(35

)

 

Total liabilities

 

100,179

 

(67,451

)

32,728

 

(23,557

)

9,171

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

(5,710

)

$

 

$

(5,710

)

$

6,021

 

$

311

 

 

March 31, 2014 

 

Gross Amounts
Recognized

 

Gross Amounts
Offset in the
Balance Sheet

 

Net Amounts
Presented in
the Balance
Sheet

 

Margin
Deposits not
Offset in the
Balance Sheet

 

Net Amounts

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

113,175

 

$

(89,976

)

$

23,199

 

$

(15,101

)

$

8,098

 

Currency derivatives

 

2,851

 

(295

)

2,556

 

(2,556

)

 

Total assets

 

116,026

 

(90,271

)

25,755

 

(17,657

)

8,098

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

121,130

 

(89,976

)

31,154

 

(21,705

)

9,449

 

Currency derivatives

 

455

 

(295

)

160

 

(160

)

 

Total liabilities

 

121,585

 

(90,271

)

31,314

 

(21,865

)

9,449

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

(5,559

)

$

 

$

(5,559

)

$

4,208

 

$

(1,351

)

 

13



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

6. Risk Management Activities and Financial Instruments (continued)

 

The Company expects to recognize risk management assets and liabilities outstanding at September 30, 2014 into net earnings and comprehensive income in the fiscal periods as follows:

 

 

 

Energy

 

Currency

 

 

 

September 30, 2014 

 

Contracts

 

Contracts

 

Total

 

 

 

 

 

 

 

 

 

Fiscal year ending March 31, 2015

 

$

(5,807

)

$

241

 

$

(5,566

)

Fiscal year ending March 31, 2016

 

482

 

627

 

1,109

 

Fiscal year ending March 31, 2017

 

1,152

 

304

 

1,456

 

Thereafter

 

(2,709

)

 

(2,709

)

 

 

$

(6,882

)

$

1,172

 

$

(5,710

)

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

 

 

 

 

2014

 

2013

 

2014

 

2013

 

Classification

 

 

 

 

 

 

 

 

 

 

 

 

 

Energy contracts

 

 

 

 

 

 

 

 

 

 

 

Realized

 

$

10,314

 

$

14,032

 

$

15,079

 

$

7,690

 

Optimization, net

 

Unrealized

 

1,293

 

(12,234

)

1,071

 

6,856

 

Optimization, net

 

Currency contracts

 

 

 

 

 

 

 

 

 

 

 

Realized

 

(131

)

132

 

1,065

 

1,596

 

Optimization, net

 

Unrealized

 

(295

)

(1,398

)

(1,224

)

(370

)

Optimization, net

 

 

 

$

11,181

 

$

532

 

$

15,991

 

$

15,772

 

 

 

 

14



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

7. Fair Value Measurements

 

The carrying amount of cash and cash equivalents, margin deposits, trade receivables, accrued receivables, trade payables and accrued liabilities reported on the unaudited consolidated balance sheet approximate fair value.

 

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

 

September 30, 2014 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

25,811

 

$

 

$

25,811

 

Currency derivatives

 

 

1,207

 

 

1,207

 

Total assets

 

$

 

$

27,018

 

$

 

$

27,018

 

Liabilities

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

 

32,693

 

 

32,693

 

Currency derivatives

 

 

35

 

 

35

 

Long-term debt

 

 

510,300

 

 

510,300

 

Total liabilities

 

$

 

$

543,028

 

$

 

$

543,028

 

 

March 31, 2014

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

23,199

 

$

 

$

23,199

 

Currency derivatives

 

 

2,556

 

 

2,556

 

Total assets

 

$

 

$

25,755

 

$

 

$

25,755

 

Liabilities

 

 

 

 

 

 

 

 

 

Commodity derivatives

 

$

 

$

31,154

 

$

 

$

31,154

 

Currency derivatives

 

 

160

 

 

160

 

Long-term debt

 

 

570,700

 

 

570,700

 

Total liabilities

 

$

 

$

602,014

 

$

 

$

602,014

 

 

The Company’s derivative assets and liabilities recorded at fair value on a recurring basis have been categorized as Level 2. The determination of the fair value of assets and liabilities for Level 2 valuations is generally based on a market approach. The key inputs used in Niska Partners’ valuation models include transaction-specific details such as notional volumes, contract prices and contract terms as well as forward market prices and basis differentials for natural gas obtained from third-party service providers (typically the New York Mercantile Exchange, or NYMEX). There were no changes in Niska Partners’ approach to determining fair value and there were no transfers out of Level 2 during the periods ended September 30, 2014 and March 31, 2014.

 

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 supported by observable market transactions when available.

 

15



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

8. Members’ Equity

 

Equity Restructuring

 

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

 

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

 

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

 

Distribution Reinvestment Plan

 

During the six months ended September 30, 2014, unitholders, substantially all of which were comprised of the Carlyle/Riverstone Funds, elected to participate in the distribution reinvestment plan and were issued 902,451 common units in lieu of receiving cash distributions of $12.9 million.

 

Class D Partnership Units

 

On May 7, 2014, Niska Holdings L.P. (the “Sponsor Partnership”), the parent of Niska Sponsor Holdings Coöperatief U.A. (which is the direct and indirect parent of the Company) awarded non-voting Class D Units in the Sponsor Partnership (the “Class D Units”) to certain executives. The Class D Units are profits interest awards which have a service condition. As the Class D Units were issued to employees and a director, equity-classified compensation expense has been recorded in the Company’s financial statements.

 

16



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

8. Members’ Equity (continued)

 

Class D Partnership Units (continued)

 

The Class D Units entitle the holders thereof to 15% of distributions made by the Sponsor Partnership to its Class A unitholders after its Class A unitholders receive distributions made by the Sponsor Partnership after May 17, 2014 in excess of the amount of any capital contributions made by the Class A unitholders after May 17, 2014 plus $331.0 million, each increased by 8% per annum compounded quarterly. The Sponsor Partnership will retain distributions (other than tax distributions) in respect of unvested Class D Units until such Class D Units vest. Of the awarded Class D Units, 20% will vest on May 6, 2015. The remaining unvested units will vest at a rate of 5% on the last day of each fiscal quarter during the period commencing on June 30, 2015 and ending on March 31, 2019. The units have no expiry date provided the employee remains employed with the Sponsor Partnership, the Company or one or more of their respective subsidiaries. The fair value of the Class D Units is based on an enterprise value, with allocations of that value calculated under the terms of Niska Holdings L.P.’s operating agreement.

 

For the three and six months ended September 30, 2014, non-cash compensation expense amounted to $0.2 million and $0.5 million, respectively, related to the Class D Units.

 

Phantom Unit Performance Plan

 

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

 

The Plan permits the grant of unit awards, restricted units, phantom units, unit options, unit appreciation rights, other unit-based awards, distribution equivalent rights and substitution awards covering an aggregate of 3,380,474 units. As of September 30, 2014, 951,112 units (March 31, 2014 - 1,483,708 units) were available for grant.

 

The following tables summarize the Company’s Phantom Units Outstanding and nonvested Phantom Units as of September 30, 2014:

 

 

 

Number of Time-
Based Units

 

Number of
Performance-Based
Units

 

Total Units

 

Phantom Units outstanding - March 31, 2014

 

835,360

 

487,200

 

1,322,560

 

Granted

 

486,195

 

 

486,195

 

Exercised

 

(501,512

)

(237,833

)

(739,345

)

Forfeited

 

(88,736

)

(55,619

)

(144,355

)

Distribution equivalent rights

 

36,683

 

9,718

 

46,401

 

Phantom Units outstanding - September 30, 2014

 

767,990

 

203,466

 

971,456

 

 

17



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

8. Members’ Equity (continued)

 

Phantom Unit Performance Plan (continued)

 

 

 

Number of Time-
Based Units

 

Number of
Performance-Based
Units

 

Total Units

 

Nonvested Phantom Units - March 31, 2014

 

466,858

 

312,764

 

779,622

 

Granted

 

486,195

 

 

486,195

 

Vested

 

(133,010

)

(63,397

)

(196,407

)

Forfeited

 

(88,736

)

(55,619

)

(144,355

)

Distribution equivalent rights

 

36,683

 

9,718

 

46,401

 

Nonvested Phantom Units - September 30, 2014

 

767,990

 

203,466

 

971,456

 

 

As of September 30, 2014, there was $7.1 million of total unrecognized compensation cost related to nonvested Phantom Units granted that were subject to both time and performance conditions. This cost is expected to be recognized over the next three years.

 

Information on the weighted average unit price at grant date and number of Phantom Units granted is as follows:

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

Weighted average price per unit at grant date

 

$

13.65

 

$

12.68

 

Number of Phanton Units granted

 

486,195

 

270,042

 

 

Compensation (reduction) costs related to the Phantom Units for the three and six months ended September 30, 2014 were ($1.0) million and $0.4 million, respectively ($2.3 million and $5.6 million for the three and six months ended September 30, 2013, respectively). Cash paid to employees who exercised their Phantom Units for the six months ended September 30, 2014 and 2013 was $10.6 million and $2.3 million, respectively.

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

8. Members’ Equity (continued)

 

Earnings per unit:

 

Niska Partners uses the two-class method for allocating earnings per unit. The two-class method requires the determination of net earnings (loss) allocated to member interests as shown below.

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Numerator:

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to Niska Partners

 

$

(28,832

)

$

(7,845

)

$

(47,803

)

$

123

 

Less:

 

 

 

 

 

 

 

 

 

Managing Member’s interest

 

538

 

154

 

896

 

(4

)

Net earnings (loss) attributable to common unitholders

 

$

(28,294

)

$

(7,691

)

$

(46,907

)

$

119

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Weighted average units outstanding

 

36,398,996

 

34,698,604

 

36,156,526

 

34,595,988

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Weighted average units outstanding

 

36,398,996

 

34,698,604

 

36,156,526

 

34,595,988

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per unit:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.78

)

$

(0.22

)

$

(1.30

)

$

 

Diluted

 

$

(0.78

)

$

(0.22

)

$

(1.30

)

$

 

 

9. Revenues

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Long-term contract revenue

 

$

14,101

 

$

20,287

 

$

54,584

 

$

40,883

 

Short-term contract revenue

 

1,532

 

12,910

 

3,803

 

23,784

 

Total

 

$

15,633

 

$

33,197

 

$

58,387

 

$

64,667

 

 

Long-term contract revenue for the six months ended September 30, 2014 included a one-time contract termination payment of $26.0 million as a result of the termination by TransCanada Gas Storage Partnership (“TransCanada”), the Company’s largest volumetric customer, of its previous storage service agreement.

 

19



Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

9. Revenues (continued)

 

Optimization, net consists of the following:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Realized optimization revenue, net

 

$

4,458

 

$

17,298

 

$

18,231

 

$

22,898

 

Unrealized risk management gains (losses)

 

999

 

(13,632

)

(151

)

6,486

 

Write-down of inventory

 

(10,500

)

 

(10,500

)

 

Total

 

$

(5,043

)

$

3,666

 

$

7,580

 

$

29,384

 

 

10. Depreciation and Amortization

 

Depreciation and amortization for the three and six months ended September 30, 2014 and 2013 consists of the following:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

$

12,919

 

$

7,811

 

$

48,042

 

$

15,623

 

Amortization of intangible assets

 

3,052

 

2,483

 

17,860

 

4,966

 

Accretion of asset retirement obligations

 

41

 

4

 

76

 

42

 

Total

 

$

16,012

 

$

10,298

 

$

65,978

 

$

20,631

 

 

Depreciation for the three and six months ended September 30, 2014 includes $5.7 million and $33.6 million, respectively (September 30, 2013 - $ nil) related to migration of cushion gas at two of the Company’s facilities. The Company records a provision for migration when it has been determined that cushion gas is no longer providing effective cushion support.

 

Amortization of intangible assets for the six months ended September 30, 2014 includes an amortization of $11.7 million (September 30, 2013 - $ nil) related to the termination of the prior storage service agreement with TransCanada, to reflect the timing of cash flows related to this customer relationship. Future amortization of customer relationships is expected to be $2.7 million per quarter for the remaining portion of the fiscal year.

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

11. Income Taxes

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

$

(7,348

)

$

48

 

$

(16,240

)

$

(252

)

 

 

 

 

 

 

 

 

 

 

Effective income tax rate

 

20

%

-1

%

25

%

195

%

 

Tax benefits increased by $16.0 million compared to the six months ended September 30, 2013 due to an increase in losses recognized associated with Canadian taxable entities.

 

The effective tax rate for the six months ended September 30, 2014 and 2013 differs from the U.S. statutory federal rate of 35% primarily due to the recognition of losses in some entities which have a lower statutory tax rate as well as income attributable to subsidiaries exempt from U.S. Federal income taxes.

 

12. Accrued Liabilities

 

Niska Partners’ accrued liabilities consist of the following:

 

 

 

September 30,

 

March 31,

 

 

 

2014

 

2014

 

 

 

 

 

 

 

Accrued gas purchases

 

$

48,072

 

$

75,454

 

Accrued interest

 

20,749

 

2,037

 

Employee-related accruals

 

5,386

 

22,315

 

Other accrued liabilities

 

9,008

 

11,312

 

 

 

$

83,215

 

$

111,118

 

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

13. Changes in Assets and Liabilities

 

Changes in assets and liabilities for the six months ended September 30, 2014 and 2013 consist of the following:

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Margin deposits

 

$

(25,360

)

$

(3,498

)

Trade receivables

 

4,093

 

1,670

 

Accrued receivables

 

122,578

 

83,937

 

Natural gas inventory

 

(209,331

)

(91,744

)

Prepaid expenses and other current assets

 

1,148

 

1,563

 

Other assets

 

 

(63

)

Trade payables

 

(278

)

110

 

Accrued liabilities

 

(27,010

)

17,109

 

Deferred revenue

 

11,904

 

(193

)

Other long-term liabilities

 

(645

)

(74

)

Net changes in assets and liabilities

 

$

(122,901

)

$

8,817

 

 

14. Supplemental Cash Flow Disclosures

 

 

 

Six Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Interest paid

 

$

4,243

 

$

30,641

 

Taxes paid

 

$

288

 

$

6

 

 

 

 

 

 

 

Non-cash changes related to property, plant and equipment

 

$

(395

)

$

(324

)

 

 

 

 

 

 

Non-cash earnings distribution and reinvestment

 

$

12,928

 

$

5,947

 

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

15. Segment Disclosures

 

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

 

Niska Partners operates along functional lines in its commercial, engineering, and operations teams for operations in Alberta, Northern California and the U.S. Mid-continent. All functional lines and facilities offer the same services: fee-based revenue and optimization. The Company has a small retail marketing business which is an extension of the Company’s proprietary optimization activities. Proprietary optimization activities occur when the Company purchases, stores and sells natural gas for its own account in order to utilize or optimize storage capacity that is not contracted or available to third-party customers. All services are delivered using reservoir storage. The Company measures profitability consistently along all functional lines based on revenues and earnings before interest, taxes, depreciation and amortization, and unrealized risk management gains and losses. The Company has aggregated its operating segments into one reportable segment as at September 30, 2014 and March 31, 2014 and for each of the three and six months ended September 30, 2014 and 2013.

 

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

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net realized revenues

 

 

 

 

 

 

 

 

 

U.S.

 

$

8,022

 

$

11,282

 

$

12,066

 

$

19,775

 

Canada

 

12,068

 

39,213

 

64,552

 

67,790

 

Net unrealized revenues

 

 

 

 

 

 

 

 

 

U.S.

 

(1,486

)

(6,146

)

873

 

6,308

 

Canada

 

2,486

 

(7,486

)

(1,024

)

178

 

Write-down of inventory

 

 

 

 

 

 

 

 

 

U.S.

 

(6,400

)

 

(6,400

)

 

Canada

 

(4,100

)

 

(4,100

)

 

Inter-entity

 

 

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

Canada

 

 

 

 

 

 

 

$

10,590

 

$

36,863

 

$

65,967

 

$

94,051

 

 

 

 

September 30,

 

March 31,

 

 

 

2014

 

2014

 

Long-lived assets (at period end)

 

 

 

 

 

 

 

 

 

 

 

U.S.

 

$

391,069

 

$

397,331

 

Canada

 

780,514

 

839,917

 

 

 

$

1,171,583

 

$

1,237,248

 

 

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Table of Contents

 

Niska Gas Storage Partners LLC

 

Notes to Unaudited Consolidated Financial Statements (Continued)

 

(Thousands of U.S. dollars, except per Unit amounts and unless otherwise noted)

 

16. Subsequent Events

 

Distributions

 

On October 29, 2014, the Board of Directors of Niska Partners approved a distribution of $0.35 per common unit, payable on November 20, 2014 to unitholders of record as of November 12, 2014. The total distribution is expected to be approximately $13.1 million. The Carlyle/ Riverstone Funds have indicated their intention to reinvest 100% of their distributions this quarter, which represents a reinvestment of approximately $6.7 million.

 

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Table of Contents

 

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

 

The following information should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this report. The following information and such unaudited consolidated financial statements should also be read in conjunction with the consolidated financial statements and related notes, management’s discussion and analysis of financial condition and results of operations and other information included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014.

 

Overview of Critical Accounting Policies and Estimates

 

The process of preparing financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires estimates and judgments to be made regarding certain items and transactions. It is possible that materially different amounts could be recorded if these estimates and judgments change or if the actual results differ from these estimates and judgments. Our most critical accounting estimates, which involve the judgment of our management, were fully disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014 and remained unchanged as of September 30, 2014.

 

Overview of Our Business

 

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

 

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

 

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

 

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

 

Factors that Impact Our Business

 

During the first six months of the fiscal year ending March 31, 2015, there was a significant reduction in natural gas price volatility from levels which had existed in the winter of 2014. In addition, natural gas markets continued to experience a continued narrowing of the difference between summer and winter prices in the natural gas futures market, which is sometimes referred to as the seasonal spread. These conditions are the result of numerous factors, including, but not limited to: (i) strong injections during the summer months, which resulted in storage filling faster than anticipated; (ii) cooler summer weather patterns which reduced demand for natural gas across North America, (iii) an increase in supply of natural gas, including shale gas, (iv) real or perceived changes in overall supply and demand fundamentals; and (v) the development of new pipeline infrastructure. These market conditions have negatively impacted our revenues in the first six months of fiscal 2015 by lowering demand for long-term and short-term firm contracting and eroding the prices we can charge for those services, as well as reducing the profitability of the opportunities we have to make hedged natural gas purchases for our own account as part of our optimization activities. If low levels of volatility and narrow seasonal spreads persist, our revenues and profitability will be adversely affected to a material extent. In addition, volatility and the seasonal spread affect the price we charge for long-term contracts. Accordingly, as long-term contracts expire in future years, we could be in a situation where new contracts are entered into at lower rates than the expiring contracts, and the impact on revenues could be material.

 

Our financial statements include goodwill valued at $245.6 million at September 30, 2014, of which $228.0 million relates to our facilities in Alberta and $17.6 million relates to our facility located in Oklahoma. We evaluate goodwill for impairment at March 31 of each year. The declines in volatility and the seasonal spread are expected to materially affect our revenues and profitability in the fiscal year ending March 31, 2015. However, we are not able to determine at this time, with a reasonable degree of certainty, 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, 2014. However, we continue 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, 2014. We will perform our annual impairment test in any event at March 31, 2015. Any impairment of goodwill recognized in either an interim or annual test could be material.

 

25



Table of Contents

 

Market conditions for natural gas storage can change rapidly as a result of a number of factors, including weather patterns, overall storage levels across North America and in the markets we serve, natural gas production levels, current and anticipated levels of natural gas supply and demand, and constraints on pipeline infrastructure capacity. Accordingly, current market conditions may not be a reliable predictor of future market conditions. Longer term, we believe several factors will contribute to meaningful growth in North American natural gas demand, including: (i) exports of North American Liquefied Natural Gas, or LNG; (ii) fuel switching for power generation from coal to natural gas; (iii) construction of new gas-fired power plants; and (iv) growth in base-level industrial demand, all of which would bolster the demand for, and the commercial value of, natural gas storage. We are unable to predict the timing or magnitude of such events nor can we predict the ultimate impact they may have on our results of operations.

 

As noted above, during the winter of the fiscal year ended March 31, 2014, the market for natural gas storage services was dynamic. The extremely cold weather events in the late autumn and during the winter months significantly benefited optimization activities and realized optimization revenues. Following the significant withdrawal of inventory during the winter 2014 storage season, we identified migration of our proprietary cushion gas at one of our facilities. During the second quarter additional migration occurred at our facilities in the normal course of our operations. Cushion gas migration occurs when hydrocarbons move to an area of the storage reservoir where it no longer provides effective support in cycling a facility’s working gas. During the three and six months ended September 30, 2014, we recorded charges to depreciation expense of $5.7 million and $33.6 million, respectively, related to 0.5 Bcf and 3.1 Bcf of proprietary cushion gas estimated to have migrated at our facilities. Using current natural gas prices, we currently estimate that ongoing cushion gas migration could require an annual expenditure of approximately $8 - $10 million. These estimates include assumptions about storage levels and cycling requirements which can vary significantly depending on operating conditions.

 

Our storage facilities may require additional natural gas to provide temporary pressure support during periods of high activity to meet cycling requirements and performance demands related to our gas in storage. These volumes fluctuate from year to year along with our cycling requirements. These cycling requirements are managed through a combination of strategies which are adapted to changes in natural gas market conditions. Typically, the use of gas to provide temporary pressure support results in net revenue gains because the cost to acquire natural gas in the nearer term is lower than the price of natural gas for future delivery.

 

Backwardation, a condition where the cost of natural gas in the near term is higher than the price for future delivery, occurred in the winter and spring of 2014 and resulted in an increase in our costs to manage our cycling requirements through temporary pressure support. To mitigate the cost of our forecasted cycling requirements over the next 2 to 6 years, we implemented a hedging program to purchase and lease gas. The expected hedged cost of gas as part of this strategy, for gas to be used for pressure support over the next 2 to 6 years, is currently estimated to be $25 million to $30 million over a 6 year period. In the event that storage market conditions return to more favorable summer/winter differentials, the cost of managing our operational requirements could be reduced during that period.

 

In May 2014, we entered into a new contract with TransCanada Gas Storage Partnership, or TransCanada, our largest volumetric customer. This new contract replaced a previous storage agreement with TransCanada which provided TransCanada with approximately 40 Bcf of storage capacity at our AECO facilities and had a term that extended to 2030. Under the previous storage agreement both parties had the option to terminate at the end of defined five-year intervals, including April 1, 2015. TransCanada elected to terminate this agreement and entered into a new agreement with us which extends until 2020. The new agreement provides TransCanada with an initial storage capacity of approximately 40 Bcf which will be reduced to approximately 20 Bcf on April 1, 2017. By exercising its early termination rights, TransCanada became obligated to make an early termination payment to us of $26.0 million. This payment has been recognized in long-term firm revenue for the six months ended September 30, 2014. The new rates under the renegotiated contract are lower than the rate in effect for the current fiscal year and are expected to reduce LTF revenues by approximately $13 million in fiscal 2016 compared to revenues recognized in fiscal 2015.

 

26



Table of Contents

 

Results of Operations

 

A summary of financial data for each of the three and six months ended September 30, 2014 and 2013 is as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(unaudited)

 

(unaudited)

 

Consolidated Statement of Earnings and Comprehensive Income Data:

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Fee-based revenue

 

$

15,633

 

$

33,197

 

$

58,387

 

$

64,667

 

Optimization, net

 

(5,043

)

3,666

 

7,580

 

29,384

 

 

 

10,590

 

36,863

 

65,967

 

94,051

 

Expenses (income):

 

 

 

 

 

 

 

 

 

Operating

 

12,062

 

8,877

 

23,015

 

19,321

 

General and administrative

 

6,205

 

9,515

 

16,279

 

20,804

 

Depreciation and amortization

 

16,012

 

10,298

 

65,978

 

20,631

 

Interest

 

12,735

 

16,397

 

25,047

 

32,603

 

Loss on disposal of assets

 

20

 

 

6

 

 

Foreign exchange (gains) losses

 

(262

)

(410

)

(312

)

447

 

Other (income) expense

 

(2

)

(17

)

(3

)

374

 

Earnings (loss) before income taxes

 

(36,180

)

(7,797

)

(64,043

)

(129

)

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(7,348

)

48

 

(16,240

)

(252

)

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) and comprehensive income (loss)

 

$

(28,832