Niska Gas Storage Partners' CEO Presents at Restructuring Announcement Conference (Transcript)

Apr. 3.13 | About: Niska Gas (NKA)

Niska Gas Storage Partners LLC (NYSE:NKA)

Restructuring Announcement Conference Call

April 3, 2013 9:00 am ET

Executives

Vance E. Powers – Chief Financial Officer

Simon Dupéré – President & Chief Executive Officer

Rick J. Staples – Executive Vice President

Analysts

Theodore Durbin – Goldman Sachs

Brett Reilly – Credit Suisse Securities (NYSE:USA) LLC

Mona Yee – Schroder Investment Management

John K. Tysseland – Citigroup Global Markets

Steven Horowitz – Bainbridge

Operator

Good day, ladies and gentlemen, and welcome to the Restructuring Niska Conference Call. My name is Nina and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Vance Powers, Chief Financial Officer. Please proceed, sir. Thank you.

Vance E. Powers

Thank you, Nina. Good morning. My name is Vance Powers, and I am that Chief Financial Officer of Niska Gas Storage Partners LLC. We welcome you to Niska's equity restructuring conference call. The slide presentation for today's call is available under the presentations and webcasts tab of the Investor Center section of our website at www.niskapartners.com. I would like to mention that throughout the call we will refer to Niska Gas Storage Partners LLC as simply Niska, or the Company.

Today's call will be chaired by Simon Dupéré, President and Chief Executive Officer of Niska. Following our prepared remarks, we will open the call to questions. In order to assist in answering any questions that may come in, we have some of the management team present in addition to Simon and me

Before we begin, I would like to advise everyone that we may make statements on the call that could be considered forward-looking statements, as defined by the Securities and Exchange Commission. Further, 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 most recently filed Form 10-K and Form 10-Q.

And with that, I will turn the call over to Simon.

Simon Dupéré

Thank you, Vance. Good morning, everyone, and thank you for joining us. As we stated in our January 31, 2013, earnings conference call, we are committed to growth and building value for unitholders. We believe that our announcement today is tangible evidence of that commitment. Yesterday, Niska completed an equity restructuring with affiliates of Carlyle/Riverstone Energy and Power Fund II; and Carlyle/Riverstone Energy and Power Fund III, which we will refer to as the Carlyle/Riverstone Funds during this call.

We're very pleased to announce this positive and transformative event, which we are confident aligns all unitholders' interest, and paves a favorable path forward for the Company and its stakeholders. Our objective today is to provide you first with an overview of the equity restructuring transaction; second, to discuss the effect of this restructuring to Niska; and, finally, show you the benefits to the common unitholders.

As slide 2 and 3 illustrate in this presentation, the transaction permanently restructures Niska's subordinated units and previous incentive distribution rights, or IDRs, as a new class of IDRs. As a result of the change to subordinated units, the percentage ownership of the Company owned in the Carlyle/Riverstone Funds excluding the previous incentive distribution rights and the new IDRs has decreased from approximately 74.9% to approximately 50.3%.

Post-restructuring, Niska continues to have 34.5 million common units issued and outstanding, of which 17.5 million are owned by the public; and 17 million are owned by the Carlyle/Riverstone Funds. The Carlyle/Riverstone Funds also own a 1.98% managing member interest in the Company. Prior to completion of the restructuring, Niska would have been required to pay the full minimum quarterly distribution, or MQD, of $0.35 per unit on the subordinated units, requiring additional distribution of approximately $12 million per quarter, prior to increasing the quarterly distribution under Niska's common units.

You may recall a quarterly distribution on the subordinated units had been suspended since November 2011. The new IDRs entitle the Carlyle/Riverstone Funds to receive 48% of any quarterly cash distributions by the Company after Niska's common unitholders have received a full MQD, which remained at $0.35 per unit for each quarter, plus any arrearages from prior quarters.

The transaction was unanimously approved by Niska's Board of Directors, under unanimous approval and recommendation of its Conflicts Committee, which is composed solely of independent directors. No further approvals or consents are required; and, as such, the restructuring was effective upon approval.

Moving onto slide number 4 of the presentation, you can see that the organizational structure is unchanged, except for the replacement of the subordinated units and previous incentive distribution rights with the new IDR. The prior incentive distribution rights provided for the Carlyle/Riverstone Funds to receive increasing percentages raging from 13% to 48% of incremental cash distribution after Niska's unitholders, both common and subordinated, exceeded quarterly distribution ranging from $0.4025 per unit to $0.5250 per unit.

Now the common units will share approximately equally with the Carlyle/Riverstone Funds, which own both the new IDRs and the 1.98% managing members' interest in any distribution increase above the MQD. In addition, for a period of five years, and provided that the Carlyle/Riverstone continue to own a majority of both Niska's managing member and the new IDRs, the Carlyle/Riverstone Funds are deemed to own 33.8 million Notional Subordinated Units with respect to voting rights to remove and replace Niska's managing member. These Notional Subordinated Units are not entitled to distributions, but merely preserve the Carlyle/Riverstone Funds' voting rights with respect to the removal of the managing member.

If you now turn to slide number 5, you can see that the restructuring has positioned common unitholders well to participate in the potential future increases in distributions. As this slide illustrates, instead of receiving no distribution increases until total annual distribution totaled almost $100 million, with the elimination of the subordinated units, common unitholders now share approximately equally in any increased distributions above the MQD on the common units.

Let me give you a hypothetical example to help you illustrate this point. If Niska, for example, were to increase its paid distributions from the approximately $12 million quarterly amount to-date $15 million under the new structure, common unitholders would receive approximately one-half, or $1.5 million, of the incremental $3 million distribution.

Under the previous structure, the common units would have received no increase, as the $3 million increase fell short of the incremental $12 million that would have been needed to pay all common units and subordinated units, as well. For clarity, this is just an example. We cannot predict, and we are not predicting, if and when an increase in distribution might be declared. That decision remains with our Board of Directors.

Moving onto our last slide on page number 6, we have summarized the key benefits of this transaction to our common unitholders. First, common unitholders are better positioned for growth as they participate immediately in any distribution increases, and are no longer required to wait until an additional $12 million of quarterly distributions are declared to see an increase.

Second, in addition to eliminating the uncertainties surrounding the declaration of the subordinated units distribution, the restructuring also simplifies our capital structure. And we believe it also improves our ability to access the equity capital markets if required. Finally, this restructuring demonstrates the continued support of our private equity sponsor, and more clearly aligns the interests of our public common unitholders and the Carlyle/Riverstone Funds. For all the above reasons, we believe that the restructuring is a very positive step forward. It is a transformative event for Niska, and in the best interest of our common unitholders.

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

Question-and-Answer Session

Operator

Thank you (Operator Instructions). And thank you, we have a question and your first question is coming from [Raymond Adwidrol] from Raymond James. Please go ahead. Your line is open.

Unidentified Analyst

All right, good morning.

Simon Dupéré

Good morning.

Vance E. Powers

Good morning.

Unidentified Analyst

Recognizing the improved capital structure could potentially translate to distribution growth. But looking at the fixed charge coverage ratio of 1.75, and we're heading into weaker fiscal 1Q and 2Q, the ratio gets kind of tight. How much of the $50 million of inventory have you guys sold? And have you guys allocated that to reducing that even further?

Vance E. Powers

As of March 31, we have, in fact, liquidated a good portion of our inventory. We have not collected the in cash yet because a fair number of the fourth-quarter transactions were executed in March. We haven't changed our plans with respect to our previous disclosures regarding liquidation of the additional $50 million, nor have we changed our plans that we could use it for among debt repurchases, organic growth projects, or even potentially acquisitions.

Unidentified Analyst

All right, very good. And with the seasonal spreads, moving onto contract mix, with seasonal spreads even weaker than last year, how far are you guys along in the target of the 20/20 split of short-term firm and optimization? And how are you guys looking at longer-term contracts, given the tight seasonal spreads?

Rick J. Staples

Good morning, Raymond. It's Rick Staples here. Raymond, with respect to our contracting program, we are staying with the program that we laid out to the analysts earlier this year. And so we're right on track to meet our contracting targets for this year, and also holding to our targeted mix of 60/20/20 for this coming year. And we're in very good shape for that.

Unidentified Analyst

All right, that's all I had. Thank you.

Operator

Thank you, if you can move onto the next question. And your next question is coming from the line of Ted Durbin from Goldman Sachs, please go ahead.

Theodore Durbin – Goldman Sachs

Thanks. Hi. I'm just wondering if you can talk about how this change affects your stance towards organic growth, capital investments; how you are thinking about your cost of capital now with restructuring?

Simon Dupéré

Yes, I think in terms of cost of capital, I think the restructuring does improve our cost of capital. I would believe we are more competitive. As you know, we always continue to look at expansion opportunities, whether those are to be existing assets or the acquisition in terms of existing assets. We've mentioned previously, in our last call that we are looking at potential organic growth at Wild Goose with potential 25 Bcf; that’s still under the California Public Utility Commission review. And we've also mentioned our Starks project's potential to store liquids at Starks; still in the early stage.

Theodore Durbin – Goldman Sachs

Okay, but then tying that to the distribution, I mean when do you, are those is sort of expanding those facilities, would that be the catalyst for growing the distribution to the common? Or kind of how do we think about the connection between the organic growth and the distribution growth?

Vance E. Powers

Ted, this is Vance. I think that the connection is that the strategy of the business is unchanged from what we have done before, that we were always interested in driving growth for the business. The question was, in the changes in gas storage markets, who benefits from that organic growth and the change in the business? And previously, you had a substantial portion of distribution growth that would be entirely allocated to the subordinated units, where now any growth that results in increased distributions benefits both the common unitholders and the Carlyle/Riverstone Funds. So, to turn it back to your original question, I think that the strategy of the business is unchanged from what we had previously; it's just that this is a method of sharing any appreciation with common unitholders.

Theodore Durbin – Goldman Sachs

That's great. And then, any change in terms of how you are thinking about the coverage ratio that you would want to be at for the distributions?

Vance E. Powers

We've always wanted to be above one time. If you go all the way back to our IPO, we had anticipated a coverage ratio of 1.2 times. We've disclosed that we expect that ratio to be pretty far above that for this fiscal year, and we haven't changed that any. So I think that our financial approach with respect to coverage is unlikely to change, philosophically.

Theodore Durbin – Goldman Sachs

Great. Okay, thanks. That's it for me.

Operator

Thank you. Your next question comes from the line of Brett Reilly that’s from Credit Suisse. Please go ahead, sir.

Brett Reilly – Credit Suisse Securities (USA) LLC

Good morning, everyone.

Simon Dupéré

Good morning.

Vance E. Powers

Good morning.

Brett Reilly – Credit Suisse Securities (USA) LLC

So if you guys maybe add a little color as to why to do the restructuring now?

Vance E. Powers

Well, I think that Riverstone, it has, it's interested in supporting its investee companies. And it simply felt that now was an appropriate time to make the change, in order to share the distribution increases with common unitholders.

Brett Reilly – Credit Suisse Securities (USA) LLC

Okay.

Vance E. Powers

Okay, it's not related to anything else in particular, and is now a better time than any particular time, as I think that they made the decision; and one once they made the decision, and the Board of Directors and the Conflicts Committee approved it, they wanted to get it done, so sooner rather than later.

Brett Reilly – Credit Suisse Securities (USA) LLC

This change you guys have been pushing for a number of months or quarters, and they finally got around to upgrading to the change?

Vance E. Powers

The change was proposed by the sponsor, Carlyle/Riverstone.

Brett Reilly – Credit Suisse Securities (USA) LLC

Okay.

Vance E. Powers

And when they made it, we went through a corporate governance process and, once approved, here it is.

Brett Reilly – Credit Suisse Securities (USA) LLC

Okay. And then maybe just back on recontracting for a second. No change in the mix between long-term and short-term and optimization, but could you speak to some of the rates you're seeing out in the market? And if you can't really provide any color there, how should we think about the comment from the last call about results next year looking similar to this year?

Simon Dupéré

Brett, I'll mention that in a month from now, we will be giving another earnings call, our earnings call for this fiscal year, end results for fiscal year 2013. And we will provide guidance as well for fiscal year 2014. Therefore, if you want to be patient another month or so, we'll be there at that time.

Brett Reilly – Credit Suisse Securities (USA) LLC

Okay. Thank you, guys. That's all for me.

Operator

Thank you (Operator Instructions) Your next question now is coming from Mona Yee from Schroder Investments. Please go ahead.

Mona Yee – Schroder Investment Management

My question has been answered. Thank you.

Operator

Thank you, your next question is coming from the line of [Owen Douglas] from Robert W Baird. Please go ahead, sir.

Unidentified Analyst

Good morning, guys. Just another quick question regarding the timing, so you said that this was, this restructuring was initiated by the sponsors. And one possibly negative read on this is that the sponsors could have been looking to this to entice other equity holders or other equity investors to invest in the company and rather than this being entirely altruistic, this was their way of hedging their bets with regards to future development of the Company, possibly saying that future investments may not meet their return hurdles. What do you have to say in response to those?

Vance E. Powers

This is Vance Powers again. I think that Riverstone has always been a supportive parent. We did not delve too deeply into the psychology of their motivations. But I will say, again, that they have been a supportive parent all along. And this process is very beneficial to the common unitholders. So what their own return criteria are or something, we're not speculating about that. We just think that we are running the business. Our business philosophy is unchanged. And the opportunities created that by that business benefit everybody, certainly the common unitholders now more than under the previous structure.

Simon Dupéré

And I would add to that, as soon as the sponsor did propose the transaction, the Conflicts Committee was immediately set up. This is made up of the independent directors of Niska. And they also work closely with their legal adviser, and legal financial advisor, to make sure that what was proposed and negotiated was in the best interest of the common unitholders. And they recommended unanimously that it was.

Unidentified Analyst

Okay. Thank you very much, guys.

Operator

Thank you. Your next question comes from John Tysseland from Citigroup, please go ahead sir, your line is open.

John K. Tysseland – Citigroup Global Markets

Hi, guys. Just one quick question, when you look at the business as it stands today, and the new capital structure and IDRs that you have at Niska, what do you think is the right call it, balance sheet; rightsizing of the of the balance sheet under today's kind of conditions? I mean when Niska went public with its $200 million EBITDA [debt], or kind of forward in 12-month forecast, debt-to-EBITDA was in the range of like 4.5 times, and the fixed charge coverage ratio was about 2.7. Do you see that as an ideal kind of balance sheet, even in today's environment? In other words, is this the kind of balance sheet that Niska is going to strive to get back to at some point in time?

Simon Dupéré

Okay. I want to, to answer the question, I'll go back to probably a year ago. You may remember, a year ago, our debt was $800 million, and we came up with a five-point action plan. And one of the key plan was to reduce our debt. And I think we've been very successful at doing it. We went from $800 million to $644 million as we stand right now. Our goal was to reduce our debt. It's been done. As Vance mentioned earlier, we’re also looking at liquidating an additional $50 million of inventory, and this is still in the process. And the goal with that $50 million is three-fold either we use it to reduce further our debt; or we can use it for organic growth; or we could use it for a potential acquisition, as well, if our plan has not changed and we're right on track.

John K. Tysseland – Citigroup Global Markets

So, even taking that additional $50 million off your debt, you still end up with a fixed charge coverage ratio, assuming a $130 million EBITDA in the 2.2 range on the fixed charge coverage ratio, and about 5.5 on debt to EBITDA, so, you are still a little bit more levered than you were when, what your planned balance sheet was when you went public. And I just wanted to know, in today's kind of environment, what do you think the right-size structure is for Niska in today's type of environment, with where spreads are? Are you looking to in other words, are you going to continue to pay down debt until that ratio gets to what kind of ideal range?

Vance E. Powers

I think that, John, that we've financed the business reasonably conservatively. We certainly take conservative actions with respect to the balance sheet since the downturn in business conditions. And we have additional plans that could result in further debt repurchases and rightsizing of the balance sheet. Beyond that, we'll see where we go, Simon?

John K. Tysseland – Citigroup Global Markets

Okay.

Operator

Okay, thank you. If we can move onto the next question and your next question comes from the line of Mrs. Steven Horowitz from Bainbridge. Please go ahead, your line is open.

Steven Horowitz – Bainbridge

Thank you. Good morning, guys. Good morning. I have a quick question for you; I guess it piggybacks on the prior caller. As a bondholder, how should I view this restructuring? Does it affect me or not?

Vance E. Powers

I think that, as a bondholder, I think that it does not directly affect you. I think that, as we said, we're operating to Company as we have before, but it does show a path to future growth for the common unitholders. That being said, I think that we've shown that we've been prudent managers of the business under various kinds of operating environments. And we think that we've delivered for all of our unitholders, given conditions such as they are. This restructuring, we think it is transformative. It is beneficial for the common unitholders. But I would not view it as detrimental to the bondholder.

Steven Horowitz – Bainbridge

Okay. Thank you.

Operator

Thank you. I would now like to turn the call over to Simon Dupéré for closing remarks.

Simon Dupéré

Thank you, Nina. And thank you for joining us today. We do appreciate your time and your interest in Niska. And we look forward to updating you with our year-end results in May, basically a month from now. Therefore, I want to thank you very much for this call this morning.

Operator

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

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