Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Niska Gas Storage Partners LLC (NYSE:NKA)

F3Q13 (Qtr End 12/31/2012) Earnings Call

January 31, 2013 10:00 AM ET

Executives

Simon Dupéré - President and Chief Executive Officer

Rick Staples - Executive Vice President

Vance Powers - Chief Financial Officer

Jason Dubchak - Vice President, General Counsel and Corporate Secretary

Analysts

Tom Nowak - Advent Capital

David Neuhauser - Livermore Partners

Helen Ryoo - Barclays

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2013 Niska Gas Storage Partners LLC earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Simon Dupéré, President and CEO.

Simon Dupéré

Thanks everyone for joining us. On our call today, we will discuss our results for the quarter ended December 31, 2012, and provide an update on our operations and market outlook. Speaking on the call will be Rick Staples, our Executive Vice President, who will provide a market update; and Vance Powers, our CFO, who will provide financial details. Following our prepared remarks, we will open the call to questions.

But first, Jason Dubchak, our Vice President, General Counsel and Corporate Secretary, will read the customary cautionary statements.

Jason Dubchak

Thank you, Simon. Before we begin, I'd like to advise everyone that we may make statements on the call that could be considered forward-looking statements as defined by the SEC. Future financial performance and operational results are subject to numerous contingencies, many of which are beyond our control. Any forward-looking statements we make are qualified by the Risk Factors and other information set forth in our Form 10-K filed in June and the Form 10-Q we will file shortly with the SEC.

In addition, in discussing our results, we will refer to the financial measures, adjusted EBITDA and cash available for distribution, which are non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures, net earnings, is included in the press release we issued this morning and is available on our website at www.niskapartners.com.

With that, I'll hand things back to Simon.

Simon Dupéré

Thank you, Jason. We are pleased to discuss our results and activities for the third quarter of fiscal 2013 today. As you saw in our press release this morning, Niska's adjusted EBITDA for the quarter was $15 million and cash available for distribution was negative $1.6 million.

Year-to-date adjusted EBITDA was $104 million and cash available for distribution was $53.3 million compared to $81 million and $24 million last year, including the current year amounts are $11.4 million for the quarter and $17.8 million year-to-date of earnings benefits from inventory write-downs we recorded in March 2012 and June 2012.

Excluding these benefits, adjusted EBITDA could have been $3.6 million for the quarter and $86.2 million year-to-date. Also we've maintained our fix-charge coverage ratio at 2.221, calculated on a trailing 12 months basis.

Despite a challenging commercial environment, our effort to lock-in early in the year has contributed to the positive year-to-date results. Accordingly, we are reaffirming our guidance for adjusted EBITDA of $130 million to $140 million and our cash available for distribution of $65 million to $75 million.

As mention in our press release, we've also declared quarterly distributions of $0.35 per common unit, to unitholders of record on February 11, 2013. The distribution is unchanged from previous quarter and we have maintained a suspension of distributions on our subordinated units.

Let's take a moment to discuss some of our organic growth opportunities. We completed the pipeline tie-ins from our Wild Goose facility to the second mainlines under PG&E system in Northern California this quarter. This new tie-in enhanced the injection and withdrawal capability of our Wild Goose facility and provides higher cycling for our customers.

In addition, we continue the regulatory process for the expansion of Wild Goose by 25 Bcf, which would increase the capacity from 50 Bcf to 75 Bcf. We're anticipating obtaining a decision in early fiscal year 2014.

As you may remember a year ago, we purchased a development project in Southwestern Louisiana called, Starks, from our private equity sponsor Riverstone. Because of Starks unique location amongst producers, pipelines and petrochemical processor, we are evaluating the potential for liquid hydrocarbon storage instead of natural gas at this site.

We are in the early stage of this evaluation, but our work so far have shown promise for liquid storage applications. We will keep you inform of developments in the potential project. These efforts with Wild Goose and Starks, illustrate our commitment to growth and building value for our unitholders.

Because we are in the middle of the winter, withdrawal season as well as in our annual budget processing process, it is too early to provide guidance with respect to our next fiscal year, ending March 31, 2014. However, at this time, we believe that results for next year could be similar to results for this fiscal year ending March 31, 2013, assuming similar market condition prevail.

We are ahead of schedule with our recontracting effort, and I'm pleased to report that we are on target to achieve 55% to 60% of fixed fee-based contract services by April 1, 2013. Just in time for the beginning of next fiscal year. We plan to give you a clearer picture of our outlook for fiscal 2014 at our yearend conference call in May.

Now, I'll turn the call over to Rick, to discuss the commercial environment.

Rick Staples

Thank you, Simon, and good morning. As Simon mentioned, we're about halfway through the core of the winter heating season, and so far average temperatures in the United States have been warmer than normal similar to last year. As a result, natural gas prices for the rest of this winter have come under pressure and in fact are now trading below next summer.

These conditions create incentives to roll existing inventory into next summer. The consequence of this is that we see fuel in this fiscal year and we see a slight widening of the seasonal spreads for fiscal 2014. In general, next year's natural gas market fundamentals are shaping up similar to this year, but it's too early to make a call on next year's storage spreads for certain.

I want to take a moment now to talk about the Western Canadian natural gas market. As you know, Western Canada is home to our flagship facility, the AECO Hub. Historically, Western Canada has been a key exporter of natural gas to major markets in the United States, Midwest, the Northeast and along the West Coast.

Niska's AECO Hub is strategically positioned to balance seasonal supply and demand imbalances across these dynamic markets. Western Canada is a key producing region in the North American natural gas industry. The provinces are British Columbia located along Pacific Coast, and Alberta, together produce approximately 12.5 Bcf of natural gas per day, which is roughly equivalent to 20% of the daily production capacity of the entire United States.

As much as half of the natural gas produced in Western Canada is consumed domestically, while the remainder is exported to major North American markets. While the abundance of low cost shale gas in the Eastern United States has led to reduced volumes headed to Eastern North American markets, the impacts of the shales have already been absorbed by the Western Canadian gas market.

We expect to continue to serve major markets in the United States, including the Midwest and the West Coast, and to some extent Eastern markets for the foreseeable future. Niska's AECO Hub remains a critical component in Western Canada's ability to serve these markets.

I'd now like to turn the discussion towards our current contracting efforts at AECO and our U.S. based facilities. We're currently more than halfway through our recontracting season for next year, and we are ahead of schedule in marketing our capacity.

Recontracting rates are generally soft as a consequence of a lower spread environment existing today. As far as our fiscal 2014 strategy for optimization goes, after taking into account, capacity allocated to fixed fee-based revenue, this still leaves us over 50 Bcf of capacity available for optimization strategy.

We feel this allows us to preserve our flexibility and to appropriately respond to market opportunities as they arise. While we're not in a position to provide guidance for fiscal year 2014, as Simon mentioned earlier, results for next year could be similar to this fiscal year ending March 31, 2013.

With that, I'll turn it over to Vance for our financial overview.

Vance Powers

Thank you, Rick. As Simon mentioned, our adjusted EBITDA for the quarter was $15 million compared to $12.5 million last year. Cash available for distribution was negative $1.6 million in the quarter compared to negative $7.8 million in the same period last year.

Adjusted EBITDA for the nine months ended December 31, 2012, was $104 million, while cash available for distribution was $55.3 million. Adjusted EBITDA and cash available for distribution include benefits of $11.4 million in the three months, $17.8 million in the nine months ended December 31, 2012, related to the inventory write-downs we recorded in March 2012 and June 2012.

Excluding these benefits, year-to-date adjusted EBITDA would have been $86.2 million or 6% higher than last year, and year-to-date cash available for distribution would have been $37.5 million compared to $24.2 million last year. Our distribution coverage ratio, using our common units only and excluding the inventory write-downs benefits, was 1.01 times year-to-date and 1.54 times on a trailing 12 months basis.

Niska's net earnings were $10.4 million or $0.15 per unit for the quarter and a net loss of $42.3 million or $0.61 per unit year-to-date. Last year, Niska's net losses were $213.6 million or $3.07 per unit and a $181.4 million or $2.62 per unit for the comparable quarterly and nine month periods. Last year's amounts include a charge for goodwill impairment of $250 million.

Our contracted revenues, consisting of LTF and STF strategies were $41.3 million during the quarter and $119.3 million year-to-date compared to $37.2 million and $107.6 million in the comparable periods last year.

Realized optimization losses were $9.5 million in the quarter compared to losses of $9.0 million last year. Year-to-date realized optimization gains were $36.3 million, a $7.3 million or 25% increase over the comparable period last year. Optimization results in the third quarter reflected timing of realized hedging losses in the third quarter, partially offset by physical gains compared to the earlier recognition as hedging gains in our first two quarters of this year.

Last year's optimization losses in the third quarter resulted from losses on the liquidation of substantial excess proprietary optimization inventories with the associated hedge gains being realized in our fiscal fourth quarter of last year. As you recall, we used the proceeds from the liquidation of excess working capital to repurchase a portion of our senior notes.

Operating expenses in the quarter were $8.3 million, 14% lower than operating expense of $9.7 million incurred last year. Year-to-date operating expenses were $25.2 million, $9.6 million or 28% lower than last year. Lower lease costs as well as reduced power costs associated with the absence of inventory cycling in the high inventory environment drove an improvement this year.

General and administrative expenses for the quarter were $8.4 million compared to $6 million in the same quarter last year. Year-to-date G&A costs were $26.3 million compared to $20.5 million last year. These increases are mostly attributable to higher incentive compensation approvals, as other G&A costs were generally lower.

During the quarter, we recognized approximately $18 million of proceeds from the sale of about 5 Bcf of cushion gas at two of our facilities, which resulted in a book loss of about $15 million.

Interest expense was $17.3 million for the quarter or $2.3 million lower than last year. Year-to-date interest was $50.5 million or $7.1 million lower than last year. The significant savings resulted principally from last year's repurchase of $156 million of our 8.78% senior notes. Although, these savings were partially offset by higher average borrowings outstanding under revolving credit facility, which we principally use to fund our optimization strategy.

We have begun to see interest savings from the lower interest rates, resulting from our June 2012 amendment and restatement of our credit facility. Revolver drawings at December 31 were $124 million compared to $150 million at the beginning of the year. In addition, we had $3.3 million of letters of credit outstanding, giving us revolver availability of $272.7 million at the end of fiscal Q3.

Today, we have reduced those borrowing to $95 million drawn again with $3.3 million letters of credit. Our fixed-charge coverage ratio calculated on a trailing 12 month basis was 2.2 to 1. Expansion capital expenditures were $22.6 million so far this year, all of which were related to the completion of our Wild Goose expansion to 50 Bcf.

Expansion capital expenditures for the full fiscal year ending March 31, 2013 are expected to be $25 million or less. Maintenance capital expenditures were $1.1 million year-to-date and are not expected to exceed $2 million this year.

With that I'll turn the call back to Simon.

Simon Dupéré

Thank you, Vance. Overall, we continue to operate well in this challenging environment and remain on target to produce financial results within our guidance. We continue to pursue attractive organic growth opportunities, including the 25 Bcf potential expansions at Wild Goose. And the potential liquid storage project at Starks in Southwestern Louisiana. We continue to operate our assets safely and reliably to benefit our customers.

I'll now turn the call over to operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Tom Nowak of Advent Capital.

Tom Nowak - Advent Capital

So in the past you've spoken about a desire to rationalize the capital structure to reflect the new market reality and a lower EBITDA environment. So assuming that fiscal year '14 looks a lot like fiscal '13, which is what's you're saying it will, and if we kind of assume that running forth in the next couple of years, this is really $130 million EBITDA-type company. Are you happy with where the debt level stands now? Or would you like to see further reductions?

Simon Dupéré

As we mentioned, you may recall Tom in our action plan last year, one of our objective was to sell about $200 million of inventory. So far we've sold about $150 million. And we were saying that this year we're going to sell the remaining $50 million of inventory. And the proceeds of debt could be used to either buyback more debts, i.e. reducing our debt or we could use it for our organic growth or potential acquisition. And it's still the case, as we speak right now.

Tom Nowak - Advent Capital

But so, just taking the growth to that level of $768 million at a $130 million EBITDA level, that's 5.9 times of leverage, so it sounds like you're comfortable running at that level into the sort of the next couple of years or for foreseeable future?

Vance Powers

I think that you're up at 5.9 times. We always internally at least, we eliminate the borrowings under the credit agreement only because the borrowings entirely support the optimization inventory that we have on our books. And as we sell that optimization inventory, the credit facility balance naturally comes down.

So if we just look at the long-term debt that we have, our debt-to-EBITDA ratio is probably in the high four's. That's probably a little high and that's why we have the three opportunities as we've often said before, repurchasing debt is certainly the most accessible of the things that you could do with excess capital that you, have but it's not the only thing.

Tom Nowak - Advent Capital

And it looks like though you're following the quarter, and you're able to pay down the revolver with an additional $30 million. Is that correct? Is it $95 million to debt?

Vance Powers

That's correct. We're down about $30 million from the end of the quarter.

Tom Nowak - Advent Capital

And that was the source and that was our working capital?

Vance Powers

Part of it was the $18 million that we realized on the sale of the cushion gas and the other was reductions in working capital.

Tom Nowak - Advent Capital

I guess what I'm trying to get, I mean, you would expect that to ramp up over fiscal year '14 right, as you add inventory?

Vance Powers

Well, what I will say is that to the extent that we liquidate further inventories in the winter withdrawal season, you would expect it to come down even further. But then once you reach the bottom wherever you are at the end of the withdrawal season then it will go back up as you purchase additional optimization inventories in next year.

Tom Nowak - Advent Capital

And just one final question, again going with the $130 million EBITDA level, you've got about $70 million of interest. You've got $48 million in distribution. That really leaves you $12 million for maintenance and growth CapEx. Are you comfortable with that? Will that give you enough capacity to do what you want to do?

Simon Dupéré

I think that it does, yes.

Operator

Your next question comes from the line David Neuhauser of Livermore Partners.

David Neuhauser - Livermore Partners

Actually the previous caller asked most of the questions that I was going to ask anyway. But so given that, what's sort of your outlook on natural gas at this point? It seems that last year of course, it looks like we hit an inflection point at a bottom in the spring time. And that was of course challenging? Trying to figure out where there would stop?

But at this point now, we're almost 12 months past that, and it looks like we're in a higher, but still there is a lower long-term band. Given some of the profiles you guys just described as far as organic growth, and also noted to pay down some debt. It would sound like you are finding some really good organic opportunity there? And that growth has been giving what that would mean to your cash flows could actually help you support increasing EBITDA going into the '14 and '15, is that kind of where I'm gazing from some of your rules?

Rick Staples

I would say that's a pretty accurate reflection, David. I think there is couple of points to make here. First off, last year was a very challenging market environment. And we have seen a recovery, we believe in natural gas markets since that time. And as you point out, I think too, overall pricing levels have come down, but it certainly improved from where they were last year.

So we believe that we've seen the worst of the natural gas pricing environment. And what we're now watching is recoveries especially on the demand side, certainly on the industrial side as well as some recovery that we've seen on the natural gas driven power generation.

Both of those two factors seem to be driving demand growth in the United States. And as we look a little further out in the curve, we see the prospect of new petrochemical facilities coming into play, as well as LNG projects have been announced both in the U.S. and in Canada. So we think that overall where we are going to trend, up into the right with natural gas prices, and we do see future improvements for this market and that's good for storage.

David Neuhauser - Livermore Partners

What I found really interesting is like some of the new areas, the new various source out of Louisiana, because obviously there are a number of projects that are coming online. And again, over the next several years from thermal coal to Sasol, there are a number of companies that are looking to put facilities to work down there with low feedstock cost. How about in terms of gas itself? I mean, I know we're in this lower band but it also looks like we've seen some good volatility even in the quarter. Is that helping you guys in March or are you seeing people make some moves there, is that helping the spread at all?

Simon Dupéré

We've seen some movement in the spreads for next year as a consequence of volatility in the near-term. And that's certainly is good for storage. As we know storage is positioned to take advantage of and ready-to-serve volatility. So it has been constructive for our business.

Vance Powers

I would like to add, David, that Wile Goose is a very low cost expansion, a potential expansion with that 25 Bcf and it will be tailored, I know, depending of customer, what they want, how much we want to cycle, that's a nice item for us. And again, Starks, we're looking for liquid storages, it's still early in the process. But it looks interesting at this point in time for future growth.

David Neuhauser - Livermore Partners

I think both opportunities seem exciting to the company. It actually will add obviously. I know you guys aren't commenting on future, but I think those are a promising and that should help.

Operator

And your next question comes from the line of Helen Ryoo of Barclays.

Helen Ryoo - Barclays

Just going back to your comments about the spread environment, could you just compare what you're seeing now versus what you saw a year from now? Did I understand that it's pretty much flat year-over-year, and therefore, I know you gave a little bit of a preliminary color on the '14 guidance, but given if it is a flattish environment and if that's what you're seeing now? Are you saying that that's probable that your EBITDA guidance would probably stay flat?

Simon Dupéré

Helen, the way I would characterize the spread environment for as we see it right now for next year, it certainly has improved from where we saw it a few months ago. However, it is somewhat weaker than what we saw this time last year. We're probably $0.10 to $0.15 behind last year's spread environment.

At the same time, there're other factors that go into our EBITDA forecast and they include things like operating cost, and capacity, and of course some of the renewal of contracts that we might be facing. So we've kind of blend all of this into the mix when we take a look at our earnings for the year.

Helen Ryoo - Barclays

And the inventory write-down, I guess you had, was it 79 year-to-date. Did you have any of this in previous fiscal year?

Simon Dupéré

What we're seeing, Helen, to be clear is that we had an inventory write-down of about $23 million in the fourth quarter of last year and we had about $22 million in the first quarter of this year. What we told you is that we would extract the benefits of those inventory write-downs from our EBITDA going forward. So what we were disclosing was those previous write-downs that we had in Q4 and Q1 of this year. The benefit flowing through adjusted EBITDA was $11.4 million and $17.8 million year-to-date.

Helen Ryoo - Barclays

And then just lastly, I know this is very early in the process but could you elaborate a little bit more about the liquids project. What maybe the size? And if you decide to go ahead, how long it may take for you to build up that facility? And possibly how you would fund it?

Vance Powers

No. I would say, Helen, at this point in time, it's still too early to tell. But the only thing we can say in terms of timing, it could be sometime in Q4 2014 or sometime in 2015.

Helen Ryoo - Barclays

So Q4 of '14 or '15 calendar that's when, you may have this facility up and running?

Vance Powers

It could. But it's still early.

Operator

This ends today's Q&A session. And now I'd like to hand the call back over to Mr. Dupéré for any closing remarks.

Simon Dupéré

Thank you for joining us today. I want to wish everybody an excellent rest on winter, and we will look forward to updating you in the spring. Thank you very much.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Niska Gas Storage Partners' CEO Discusses F3Q13 Results - Earnings Call Transcript
This Transcript
All Transcripts