Niska Gas Storage Partners' CEO Discusses F4Q13 Results - Earnings Call Transcript

May. 9.13 | About: Niska Gas (NKA)

Niska Gas Storage Partners LLC. (NYSE:NKA)

F4Q13 Earnings Call

May 9, 2013, 10:00 AM ET

Executives

Simon Dupéré – President and CEO

Jason Dubchak – VP, General Counsel and Corporate Secretary

Rick Staples – EVP

Vance Powers – CFO

Analysts

Edward Rowe – Raymond James

Tom Novak – Advent Capital

Operator

Very good morning ladies and gentlemen and thank you all for joining. Welcome to the Fourth Quarter 2013 Niska Gas Storage Partners LLC Earnings Conference Call. My name is Lisa and I’ll be coordinator for today. At this time all participants are in listen-only mode. Following the company’s remarks, we will conduct a question-and-answer session and instructions will be provided at that time to queue for any questions. (OPERATOR INSTRUCTIONS) Also like to remind you this conference is being recorded. I’d now like to turn the conference over to Mr. Simon Dupéré, President and Chief Executive Officer. Please proceed sir, thank you.

Simon Dupéré

(Inaudible) 113 and provide an update on our operations and our market outlooks. Speaking in call with me will be Rick Staples; our Executive Vice President will provide a market update and Vance Powers, our Chief Financial Officer 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 a customary cautionary statement.

Jason Dubchak

Thank you Simon. Before we begin, I’d like to advice 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 we will file, in June 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 measure, 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. Let’s now begin with our results and activities for the year ended March 31st, 2013. Adjusted EBITDA for fiscal year was $138.6 million and cash available for distribution was $74 million excluding inventory write-down benefits of $43 million. These results were at the high end of our guidance range of $130 million to $140 million for adjusted EBITDA and $65 million to $75 million for Cash Available for Distribution.

Adjusted EBITDA was 2% and cash available for distribution was 16% ahead of last year. We’ve declared our quarterly distribution of $0.35 per unit to unitholders of record on May 20th, 2013. The distribution is unchanged from the previous quarter and will be payable Thursday, May 23rd, 2013. Fiscal 2013 was a year of significant accomplishments for Niska.

We focused on furthering our platform for future growth during the year and we found many opportunities to adjust that. Among these accomplishments are achieving our of adjusted EBITDA of cash and Cash Available for Distribution at the high end of our guidance with ranges. We further our organic expansion program, growing the AECO facility by 4 Bcf bringing our total, across our all facilities to 226 Bcf.

We apply to the California Public Utilities Commission or the CPUC for a significant expansion of up to 25 Bcf at our Wild Goose facility, which when approved, will bring the total capacity of that facility up from 50 Bcf, 75 Bcf. In the fiscal fourth quarter, we completed the liquidation of the remaining $50 million of our $200 million target of excess working capital.

As we said before, we intent to use this working capital that we are freed up to allocate to higher-value opportunities such as debt repurchases, organic growth or potential acquisitions. We made good progress in the evaluation of our Starks opportunity in Louisiana as a liquids storage facility for either natural gas liquids or crude oil.

We are preparing the required regulator applications and we are currently discussing the project with key potential customers. Finally, as we’ve announced on April 2nd, 2013 we completed an equity restructuring which cancel all of our subordinated units and allows Niska common unitholders to participate immediately in any quarterly distribution increases above $0.35 per unit.

In addition to the elimination of the subordinated units. These enhanced Niska’s access to capital markets, if required. As we begin our fiscal 2014, we continue to face a challenging natural gas storage market. Particularly due to the extreme cold late winter weather, which grow [ph] up near term natural gas prices and narrowed the storage spreads? However, our balance approach to capacity management allowed us to lock-insignificant fee-based revenue prior to these events.

Assuming market conditions fall within our range of expectations, we estimate that adjusted EBITDA and cash available for distribution for fiscal 2014 will be in the range of $125 million to $135 million and $60 million to $70 million respectively. Within these range, our robust coverage ratio will be 1.2 to 1.4 times. With a strong balance sheet and restructured equity, we are looking forward to further achievements in fiscal 2014.

We look forward to expanding our Wild Goose facility and expect to receive approval from the CPUC in early summer 2013. In addition, we will continue to pursue the liquid storage project at Starks. Let me take a moment to tell you about Starks development project. Starks is located in Louisiana approximately 20 miles west of Lake Charles, in the midst of a major commercial and industrial zone.

In addition to numerous existing refineries, there are multiple new facilities being developed. There are several pipelines surrounding our Starks location, which support infrastructure and transport (inaudible) NGLs ethane, propane, butane and crude oil. We continue to believe the existence of the substantial hydrocarbon liquids infrastructure creates the opportunity to provide NGLs and crude oil related storage and salt caverns located in the Stark Salt Dome.

Over the course of this year, we will be applying for permit convert the first cavern, as we work to move this project towards commercial operations. So you can see that we are well prepared and well positioned coming into fiscal 2014 both operationally and financially and have a number of organic growth opportunities. We further believe that our equity restructuring creates potential benefits for our unitholders and significantly improves our potential access to capital markets, if required.

I’ll now turn the call over to Rick, to discuss the commercial environment that we are currently in.

Rick Staples

Thank you Simon and good morning everyone looking back at the commercial environment during fiscal ‘13. We can certainly say that the year was characterized by extreme events. We entered last year’s injection season with a record inventory overhang of 2.5 trillion cubic feet in the U.S. following an extremely warm winter.

Natural gas prices had declined to around the $2 mark, as a result of this overhang. Storage spreads responded to soft prices at the front of the curve and we watch spreads widen to approximately $0.80. As the season progressed, we experienced intense summer heat and in an unprecedented switch from coal to gas fire power generation.

This significant shift in natural gas demand eroded the year-over-year storage inventory surplus sparked the natural gas price rally and dampen storage spreads through the remainder of the year. Despite, the record setting coal-to-gas switching, supply remained relatively steady and as we entered the wintered months, storage was filled to a record inventory level of more than 3.9 trillion cubic feet.

This year’s winter started our warmer than normal, and many analyst predicted another large overhang at the end of this past season. However, winter ended with the coldest March in 20 years, 75% colder than normal. Natural gas prices responded by rallying more than $1 per Mcf and the spread narrowed as a result. With the onset of warm spring weather, the supply-demand balance has loosened, gas prices has softened, and the seasonal spread for fiscal ‘14 has started to recover over the past two weeks.

We were proactive in contracting our capacity prior to the cold weather in March, in accordance, with our portfolio strategy. As a result, we were able to lock-in significant fee-based revenues before seasonal spread were compressed. And keeping with our stated strategy, more than 60% of our capacity is contracted under fixed fee contracts for fiscal ‘14. We are not immune to the current low spread environment and this is reflected in slightly lower guidance for fiscal ‘14 compared to last year.

However, we have locked in just under two-thirds of our revenue required to meet the midpoint of our guidance range, and we are well positioned as in years passed to our optimization and fee-based strategies to take advantage of market volatility and any improvements in the market environment over the remainder of the year. I think it’s important to note, that the March cold snap lead to a significant drawn down in inventory during the last month of our fiscal year.

However, the winter heating season as a whole was essentially normal or maybe more significant is the fact that 2.3 trillion cubic feet of gas needed to withdrawn from storage across the U.S. this winter, in order to supply what was on average on normal winter? In colder than normal winter, the drawn down could have been much more significant. The trends that we are starting to see in storage inventories such as extreme inventory builds and significant drawn downs under essentially normal conditions reinforce our beliefs that the natural gas market is becoming more sensitive to weather events and much more reliant on storage.

Seasonal events can be very unpredictable and the growing use of storage year-over-year indicates just how vital storage infrastructure remains to balancing natural gas markets, in any environment. We continue to face challenging headwinds in fiscal 2014. However, we have locked in nearly two-thirds of the gross margin required to meet the midpoint of our guidance range.

We expect continued volatility at the natural gas market adjust to shifting fundamentals and we are well positioned to take advantage of such opportunities. We will continue to update you, regarding the commercial environment throughout the coming year. With that, I’ll turn the call over to Vance for our financial overview.

Vance Powers

Thank you Rick and good morning everyone. Niska’s adjusted EBITDA was $181.7 million for the fiscal year ended March 31st, 2013 compared to $136.2 million for the year ended March 31st, 2012. Adjusted EBITDA for the quarter was almost $78 million compared to $55 million in the same period last year. Cash Available for Distribution was $117 million and $62 million for the current fiscal quarter compared to $63.7 million and $38.7 million in the respective periods last year.

Adjusted EBITDA and Cash Available for Distribution in the current year and quarter include benefits of $43 million and $25 million respectively related to inventory write-downs recorded in the quarters ended March 31st, 2012 and June 30th, 2012. Excluding the benefits of the inventory write-downs, adjusted EBITDA as Simon indicated was $138.6 million and $52.4 million for the fiscal year and fourth quarter ended March 31st.

Cash Available for Distribution excluding the inventory write-down benefits was $74 million for the year and $36.5 million for the quarter. For the full year, we had a 1.5, 4 times coverage ratio on common unit distributions and our fixed charge coverage ratio, using reported adjusted EBITDA was 2.6 times. Net losses for the year end quarter ended March 31st, 2013 were $43.6 million and $1.3 million respectively compared to a net loss of $165.8 million and earnings of $15.6 million in the same periods last year.

You will remember that we recorded a goodwill impairment of $250 million in the third quarter of last fiscal year. Fiscal 2013 fee-based revenues increased by $17 million to $163 million compared to $146 million last year. Lower contract rates were more than offset by the additional capacity allocated in the fee-based strategies. Realized optimization revenues were $89 million up about $26 million, when compared to $63 million last year.

When inventory write-down benefits are excluded optimization revenues were $46 million compared to that $63 million last year. The decrease in optimization revenues reflected the lower allocation of capacity to our optimization strategy and are focused on fee-based revenues. Operating expenses for the year were $32.5 million compared to $44 million in fiscal ‘12.

The higher levels of inventory that we carried through most of fiscal 2013, resulted in significantly lower cycling of all our facilities, which in turn substantially lower fuel and power cost, as well as to some extent other operating cost. General and administrative expenses were $38.6 million compared to $28.6 million in fiscal 2012. The increase in G&A mostly related to increased incentive compensation accruals.

Other G&A items were generally flat or down compared to last year. During the year, we also sold approximately 5 Bcf of cushion gas at two of our facilities, receiving proceeds of about $18 million and recognizing a loss of $15 million. Interest expense was $67 million, down $7.6 million when compared to $74.6 million in fiscal 2012. The decrease resulted from the full year benefits of our fiscal 2012 repurchases of our 8.875% percent senior notes.

While significantly larger proprietary inventory balances cost us to have higher average revolver balance in fiscal 2013. The benefits of lower rates from our amended and extended credit facility cost interest on our revolver to be about flat with last year. Now, I want to spend a couple of minutes talking about our balance sheet and liquidity.

At this time last year, we told you that we intended to complete the remaining $50 million of our total planned reduction of $200 million of excess working capital. We also said that the liquidation might not occur until the fourth quarter because the contango natural gas markets continued to provide incentives to carry inventories to future periods and realize incremental value.

As Simon indicated, we are pleased to tell you that we completed that liquidation in the fourth quarter. Most of these natural gas sales occurred in March and accordingly, we did not receive proceeds until about two weeks ago. However, we were still able to reduce our borrowings under our revolver to $65 million at March 31st, 2013 from $124 million at December 31st, a reduction of $59 million.

Even better, with the collection of the March gas sales in April, as of today, we have no balances outstanding under our revolver and we have about $40 million of cash available on our balance sheet. As Simon mentioned, we intend to use this available liquidity to fund additional purchases of senior notes, organic growth projects or potentially acquisitions. Capital expenditures in fiscal 2013 were about $25 million mostly related to the completion of compression installation and pipeline tie-ins at Wild Goose.

We anticipated modest capital expenditures less than $10 million in fiscal 2014, including maintenance capital expenditures, which should continue to range between $1 million and $2 million per year. Finally, I would like to quickly review our equity restructuring which we completed and announced in early April. The equity restructuring permanently eliminated Niska’s subordinated units and previous incentive distribution rates for IDRs and created new IDRs.

By cancelling the subordinated units, Niska eliminated the requirement to distribute, an additional $12 million per quarter, prior to the common units receiving any additional distributions above and beyond the $0.35 minimum quarterly distribution. As a result, common unitholders now participate immediately in any distribution increases above the MQD. Post restructuring Niska has $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. In the event of a distribution increase, the common units would receive 50% of any incremental distributions over the MQD. As we said in April, the restructuring not only provides a path to increase distributions to common unitholders. It demonstrates continued support from our private equity sponsor and more clearly aligns the interest of the Carlyle/Riverstone Funds and those of our public common unitholders.

In addition, it enhances our potential access to equity capital markets, if required and with that. I’ll turn the call back to Simon.

Simon Dupéré

Thank you Vance. As you can see this has been a year of accomplishment for Niska. We’ve delivered and several initiative to preserve and grow unitholders value. We are positioned to grow organically at our Wild Goose facility with an additional 25 Bcf and we have a diversification opportunity in liquid storage at Starks. Our recent restructuring has given us, financial flexibility in excess to capital, if required.

Which position us very well for growth? Though, we continue to see market challenges. I believe, we are entering a year with significant growth and opportunities for our business and I’m certainly excited about the upcoming year. I’ll now turn the call over to Lisa for questions.

Question-and-Answer Session

Operator

Certainly, thank you. So ladies and gentlemen, we will now conduct the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question is from the line of Edward Rowe of Raymond James. Please go ahead.

Edward Rowe – Raymond James

Given the tighter seasonal spreads along the forward curve couple weeks ago and (inaudible) but it’s improved substantially. How do you balance re-contracting capacity, could be tighter fees versus leaving capacity on contracted. I know you guys still want to have that 60% contracted, how do you guys think about that going forward?

Rick Staples

Good morning, Ed. It’s Rick Staples. Thanks for the question. One of the things that we know is that we can’t say for sure, where natural gas storage spreads are going to go, but what we do know is that. We’ve had a lot of success with our proven strategy of contracting to be at 55% to 60% level and optimizing and using short-term firm contracts with the remainder of our capacity that strategy certainly worked well for us this past year, coming into this year. And because of our proven track record, we intend to hold on to that strategy.

Edward Rowe – Raymond James

Okay, fair enough. Next question is around the Starks conversion. Do you guys have any initial cost estimates on how much the expansion would the CapEx around that project?

Simon Dupéré

This is Simon. At this point in time, I would not point out to any numbers. We are progressing very well on the Starks as I mentioned, we are going to rig actually to get permit to convert an existing cavern to liquid storage. Therefore, we will be progressing this year technically those caverns or refillable [ph] to have a liquids in it. Therefore, throughout the year as we progress in the project. We may provide a little bit more information, but it’s at this point it’s a bit too early.

Edward Rowe – Raymond James

Thank you and how big are those caverns right now?

Simon Dupéré

We are having multiple cavern; the first conversion could be between few million barrels, 3 million barrels in that neighborhood.

Edward Rowe – Raymond James

Okay.

Simon Dupéré

Of storage capacity.

Edward Rowe – Raymond James

Okay and couple other questions. How do you balance, how much you want to reduce leverage versus organic growth projects and it kind of lends to the coverage retaining cash flows and potentially grow into cash distributions going forward?

Vance Powers

That’s a very good question and what we are trying to do is, is to strike a balance among all of the competing interest. I think that, depending on the size of the Starks project. You would want to use a balance of internal financing and external financing, which could consider a combination of both debt and equity under certain conditions, but because we are relatively early in the project, we don’t want to presuppose anything like that.

In addition, we have been prudent in our debt management practices and we still want to be prudent across all of our capital structure. So we are striking a balance in considering all interest.

Edward Rowe – Raymond James

All right, that’s all I had, thank you.

Simon Dupéré

Thank you.

Operator

Thank you for your question. Our next question is from the line of Tom Novak – Advent Capital. Please go ahead.

Tom Novak – Advent Capital

Hi, good morning.

Simon Dupéré

Good morning.

Vance Powers

Good morning Tom.

Tom Novak – Advent Capital

Just regarding your high yield bonds, your callable in the year at 104 and I do appreciate your comments about making additional repurchases of the bonds, but just it seems given where the high yield markets are today, that you’ve got a real opportunity here to access the market and materially reduce your interest burden, so can you share your thoughts on doing a global refi [ph] of these bonds, instead of one off purchases particularly given the strength of the high yield market?

Vance Powers

That’s also a great question and if you run the numbers. The economics of waiting until March 2014, which is the first call date at 104.4 compared to high yield prices today. The economics are relatively thin, but we do continue to – as we continue to – as we evaluate the various strategies available to us in total. We would want to evaluate specific strategies, but the economics of buying them back today compared to a global refi [ph], they’re relatively thin at this point and we are very mindful of that.

Tom Novak – Advent Capital

Well thin maybe, but then you take the risk of where the high yield market is a year from now.

Vance Powers

Absolutely.

Tom Novak – Advent Capital

I don’t know if that’s factored into, I guess what I’m saying is – why not may call them today and access the high yield market. I mean it seems that you should be doing that.

Vance Powers

We’re considering all of those opportunities including, what you can do today.

Tom Novak – Advent Capital

Okay, great. Thanks.

Operator

Thanks for your question. Ladies and gentlemen. (OPERATOR INSTRUCTIONS) Okay there are no further questions and I would like to turn the conference back to Mr. Simon Dupéré for closing remarks. Thank you.

Simon Dupéré

Thank you Lisa and thank you everyone for joining us today. Have a great summer and we look forward to updating you in August for the First Q1 quarter. Thank you.

Operator

Thank you very much for joining ladies and gentlemen. That concludes today’s conference; you may now disconnect your line. Have a good day.

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Niska Gas (NKA): Q1 EPS of -$0.02 misses by $0.18. Revenue of $45.1M misses by $12.76M. (PR)