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Niska Gas Storage Partners LLC (NYSE:NKA)

Nat’l Assoc. of Publicly Traded Partnerships MLP Investor Conference

May 22, 2013 08:00 am ET

Executives

Simon Dupéré – President & Chief Executive Officer

Rick Staples – Executive Vice President

Vance Powers – Chief Financial Officer

Analysts

Host

Okay, good morning everyone. In an effort to start things on time we’ll go ahead and get rolling. In this section of the presentation room I’m very pleased to introduce this morning to you Niska Gas Storage Partners. We’ve got the Executive Management Team is going to share the presenting role, and for those of you who aren’t familiar they are one of the largest gas storage operators.

They’ve obviously got a dominant position at the AECO Hub. They’ve also got some very low-cost, visible organic expansion at their Wild Goose facility on the West Coast and also the opportunity for additional hydrocarbon storage in and around the Gulf Coast. It’s a pretty dynamic story. Certainly the structure has changed quite significantly over the past 12 to 18 months, and with that I’ll turn it over to Simon Dupéré to tell us a little bit more about it.

Simon Dupéré

Good morning everyone, and thank you for joining us today. With me presenting will be Rick Staples, our Executive Vice President, who will give you a little bit of detail of the markup environment of the gas storage business; and Vance Powers, our Chief Financial Officer will provide more details on the financial results for F2013.

This is the forward-looking statement – I think you can read it at your leisure. Basically let me start with a brief overview of Niska. Basically Niska was purchased from our predecessor back in 2006, from Carlyle Riverstone Funds in 2006. Carlyle Riverstone Funds are our private equity sponsor.

We became public in May of 2010 and as you can see from the ownership breakdown, about 50% of the company is owned publicly through common units; another 48% is owned by our sponsor through common units as well, and there is about a 1.98% owned by the sponsor in the form of the managing members’ interest. Previously we had 34 million subordinated units that have all been canceled due to our equity restructuring on April 2, 2013, and as Vance will point out during the presentation this has been very beneficial to the common unit holders.

Next I would like to briefly touch on the basics of the natural gas storage business and how Niska’s business fits into that. Basically when you look at storage it is a vital energy infrastructure that serves to balance supply and demand. As you can see in the graph below, the yellow line represents the supply and basically supply is relatively constant on a yearly basis; while the blue line represents the demand and you can see that during the winter it’s going to peak and during the summer it’s going to hit lows.

Because of the difference between supply and demand the storage is key to absorb all those imbalances. For example, during the summertime when there’s lots of supply, not a lot of demand, therefore all excess gas will be injected into storages. And it’s the opposite during the winter peak season when there’s a lot of demand but not enough supply, then we’re going to withdraw gas from our storage assets.

Niska’s business model has been around to catalyze on these market imbalances. We do provide flexible (inaudible) base services both in terms of long-term and short-term contracts. And we provide as well a diversified portfolio of customers. And we further optimized the remaining capacity by purchasing, storing and selling our own gas for our own account as well.

F2013 was a year of significant accomplishment at Niska and we’re quite proud of that. First we’ve achieved adjusted EBITDA of about $139 million in the highest end of our range of $130 million to $140 million. And we also were able to achieve cash available for distribution of $74 million, again hitting the high end range of our guidance of $65 million to $75 million.

Second, we monetized our $50 million remaining of the inventory during the year which frees up cash flow which will be available for us for higher opportunities such as buying back more debt or growing our organic inventory, or using it for a potential acquisition as well. Third, we did restructure our equity back in April, eliminating all our subordinated units and providing a clearer path for growth for our common unit holders.

Fourth, we ended the year with a very strong balance sheet. Right now we have $40 million of cash or cash equivalents; we have zero dollars drawn on our $400 million revolver and we also have $100 million of excess working capital. We’re in a good position to be in at this point in time.

Fifth, we continued to grow organically. We did add up 4 Bcf at AECO this winter and therefore this spring our total capacity at Niska is 225 Bcf of working gas capacity. Sixth, we’ve applied to the California Public Utilities Commission to add another 25 Bcf of working gas capacity at Wild Goose and we expect an approval sometime this summer. And last but not least we’ve made solid progress in our potential project called Starks to start liquid storage at this location in Louisiana.

Turning now to Slide #7, this slide provides a nice snapshot of our locations and the facilities we operate. Basically we do operate the AECO Hub in Alberta with 154 Bcf of working gas capacity. On the West Coast we have Wild Goose with 50 Bcf of capacity and also Salt Plains in Oklahoma, we have 13 Bcf. Speaking of Oklahoma I would like to note that our thoughts and prayers are with those that have been impacted with the tornadoes earlier this week.

Moving on we also have 8.5 Bcf of contract on the NGPL system and also our total facility is 226 Bcf therefore it’s a lot of gas, but what is very strong as well is that we can move in winter or in summer 4 Bcf of gas a day from our facility. As [Juren] mentioned earlier we’re the largest independent gas storage operator in North America. We play a critical role in the energy infrastructure and especially our flagship AECO where on a cold winter night we can move 30% of all the gas that moves in Alberta, which is 12 Bcf.

Overall with the location and all the pipelines that can reach our location we’re able to reach seven out of the nine major market areas in North America. A very important component of our operation has been the low-cost organic growth which is a hallmark for Niska’s success. Since F2008 we’ve grown our facility by 81 Bcf. The last two years we’ve added 21 Bcf.

Our low-cost expansion has been extremely competitive in terms of price and this allowed us to grow even in a very challenging market environment for gas storage. We feel that our ability to continue expanding at low cost is a key competitive advantage for Niska and pending regulatory approval in California we should add another 25 Bcf sometime this year which will bring our total of Bcf to 250 Bcf.

Another exciting growth opportunity for us resides in Starks. Starks is in Louisiana, about 20 miles west of Lake Charles. What’s interesting about Starks, it’s located between two major zones – one is the petrochemical zone in Beaumont and the other is the industrial zone in Lake Charles. And this corridor in the Gulf Coast region is home to 44% of the crude oil refining and 82% of the US ethylene production, and as you know there is a multiple of expansion as we speak right now in the next few years in terms of pipelines and any other facilities.

So when we look at Starks there are several pipelines very close to our facility where crude oil is moving, where NGLs, high-grade propane, butane and ethane are moving very close to Starks. Therefore we do believe that the Starks project can add storage solutions in terms of NGLs or maybe crude oil in this growing area.

In addition to Starks’ proximity to all those pipelines and the commercial and industrial players, the caverns at Starks are fully brined. Right now it’s full of water, the caverns are already brined. What this means is that it can shave months and even years in the timeframe, the timeline for development. Therefore we believe this is a competitive advantage. We’re ready to be able to put those in production with the market demand, with the customer demand.

We’ve made good progress with this project on many fronts. We’re meeting with lots of potential key customers and on the regulatory front as well we will be filing for the conversion of the first cavern within the next three months.

Turning now to Slide #12 and shifting our focus back to gas storage, we do continue to develop the Sundance project in central Alberta. This is a partner as a 50/50 joint venture with a partner; it’s a major international producer. The Sundance project has received all regulatory approval, though the development is highly dependent on improved market conditions. Therefore we’ll have to be patient a little bit on this one.

It is key to know that Sundance is not only well suited and well-located to serve the growing market in Alberta but also support the six announced LNG projects on the Canadian West Coast as well and the growing oil (inaudible) demand. The project is linked directly with AECO therefore it does provide good synergy and it could provide as well excellent opportunity for Niska in the right market environment.

And with that I’ll turn it over to Rick who will cover the market environment and the gas storage industry.

Rick Staples

Thanks, Simon, and good morning. The United States set two natural gas storage records over the course of this past year in addition to a few other records in the natural gas industry overall. Early last year during the injection season the United States entered that season with 2.5 trillion cubic feet of gas still in storage following an extremely warm winter, and despite an extremely warm summer – in fact, a record-setting warm summer where we saw record switching from coal- to natural gas-fired power – we still managed to reach 3.93 trillion cubic feet of gas in the ground by the end of this last injection season.

This past winter we saw fluctuations in temperature. We had a warmer-than-normal period, then we had some colder-than-normal periods. Overall we had basically heating degree days on par with the ten-year average in North America. And despite this the US withdrew 2.3 trillion cubic feet of gas out of the ground – that’s the third strongest withdrawal from storage in what is basically thirteen years, in what is basically a normal winter.

We’re seeing the natural gas production and natural gas demand within the United States is becoming more and more weather sensitive, and storage is being called upon more and more in order to balance the market imbalances. While the natural gas market continues to expand in response to shale gas supply we’re not seeing an equivalent build out in the storage sector and we believe that as we see the market expand over the course of the next two to three years, this sets the market up for capacity constraints in storage within several years’ time.

And I have to apologize, I didn’t show you the slides – alright, here we go. According to [Ventech] over the course of this past year production in the US increased by 1 Bcf per day. The EIA is forecasting that for the balance of this year production is going to remain relatively stable. The real shift that we’re seeing though this year is on the demand side. As you recall last year we saw record coal to gas switching in the power sector.

This year with gas prices hovering in the $4.00 to $4.20 range and with coal prices relatively soft we’re not expecting to see that same level of switching. As a matter of fact, analysts are forecasting that there should be a reduction in the switching of coal- to gas-fired power on the order of 5 Bcf per day or more. And if you take a 5 Bcf a day reduction in demand and you translate that over 200 days of injection, that translates to 1 trillion cubic feet of extra gas that’s going to be floating around in the US markets. Natural gas storage is going to be called upon to deal with this excess supply.

Now we do expect a looser supply/demand balance for the remainder of this summer; however we don’t expect this to persist for the outer years. In fact, we see tightening supply/demand fundamentals in the longer term and we’re already seeing evidence of increasing industrial demand, increasing res com; and just over the horizon we’re seeing very large demand side infrastructure projects being built out. And as a result of these we expect the supply/demand fundamentals to tighten considerably over the next two to three years and again, natural gas storage will be called upon to balance these imbalances.

Over the past couple of quarters we’ve been talking about and providing some perspective on the Western Canadian markets and this is really because we’re strongly positioned with our AECO facility in the province of Alberta. Canada’s two western-most provinces are Alberta and British Columbia. Together these two provinces produce between 12 Bcf and 13 Bcf per day of natural gas.

Now, almost half of this gas is consumed domestically in those two provinces and the remainder of that gas has traditionally been sent out to or exported to major markets in the United States. These markets include California, the Midwest and the US Northeast, and of course even the eastern provinces in Canada.

With the advent of the shale gas particularly in the US Northeast some of this production’s been pushed back into Alberta and today Alberta, with its 12 Bcf to 15 Bcf a day is somewhat lower in production than it was several years ago before the shale gas revolution. Western Canada however still continues to serve western California, the West Coast, and we also continue to serve the Midwest markets.

What’s much more exciting about Alberta is what’s going on on the West Coast of Canada, and there we’re seeing the build out of LNG facilities. As many as six LNG projects have been announced off the west coast of British Columbia; two of these have actually been approved, received regulatory approval, and one of these is scheduled to come online within the course of two years. And so as this gas starts to be exported off the Western Coast of Canada we expect that we’ll start to see Alberta-based storage being called upon to balance the markets much, much more so than it has in the past.

What’s more compelling about this story is that the Asians have positioned themselves very strongly and very strategically in Western Canada, both in terms of owning production and reserves as well as participating in the announced LNG projects. The countries that we’re talking about include South Korea, Japan, Malaysia and China. They’re well positioned and we expect that they’re going to be using this production to take gas off the West Coast of Canada and serve Asian markets.

This basically is going to become another strong market for western Canadian producers and we’re going to be called upon to balance a lot of volatility in the market as we’re serving North American markets as well as Asia. AECO of course is well positioned to serve these markets with our strong position in Alberta.

So how do we at Niska respond to this particular situation? We basically continue with our portfolio strategy that we’ve talked about in the past. In F2013 we allocated 72% of our capacity to fixed fee-based service arrangements. In F2014, the year that we’re just starting, we’re allocating 80% of our capacity to fixed fee-based arrangements. Of this, 60% of our capacity has already been locked in under those fixed fee-based arrangements for the coming year and we intend to round out the remaining 20% over the coming months.

So this leaves 20% for our optimization strategy. This has been a very strategic, very high value add strategy for us. We’ve dialed it back a little bit from where we were last year but we still intend to maintain a good solid component of optimization in our portfolio so that we can continue to deliver strong, steady results for our investors.

We continue to face some pretty challenging headwinds in the storage market. That’s something that we deal with on a daily basis, but we’re very encouraged by the signs we’re seeing in the markets and we feel that we’re very well positioned with our suite of assets as well as our revenue-generating strategies to basically deal with some of the near-term challenges we’re seeing in the markets but take full advantage of the great opportunities we see just over the horizon.

And with that I’m going to turn it over to Vance Powers.

Vance Powers

Thank you. Good morning, everyone, and thank you. I wanted to take a couple of minutes to give us an update on the financial operations for Niska. The most important one that we’ve done recently is the equity restructuring that we completed in April, 2013.

The equity restructuring, what it did was to eliminate the subordinated units that we had in our capital structure completely and the previous incentive distribution rights that we had, and in exchange for the elimination of those subordinated units we created a new class of incentive distribution rights. And the new distribution rights share 48% of any increases in distributions over the minimum quarterly distribution of $0.35 per unit.

So it didn’t make any changes to the existing common units, half of which are owned by the public and half of which are owned by the Carlyle Riverstone Funds, but it allowed for a sharing of increases in distributions between the public common unit holders and Carlyle Riverstone. And this is very important and we’ll have a chart in a couple of minutes that will show why that’s so important.

It did create things called nominal subordinated notional units, and the purpose of the notional units is only to preserve Carlyle Riverstone’s voting rights with respect to removal of the general partner and that exists for five years. They have no economic purpose and they do not participate in any distributions.

So that’s very nice and you might say so what’s in that for me? It does a couple of things. It better positions the common units for growth in that they now share 50/50 with Carlyle Riverstone in any distribution increases above the minimum quarterly distribution.

It simplifies the capital structure because there was a lot of uncertainty around how these subordinated units work. In fact, last year at this conference I got into quite a discussion with an investor who really just didn’t understand how they worked and we discussed it back and forth. Now it really doesn’t matter because those subordinated units don’t exist and it’s simply common units.

It demonstrates continued support from our private equity sponsor Carlyle Riverstone and they have in fact been a very supportive sponsor since the beginning; and it improves our access to capital markets because the $50 million of distribution overhang from these subordinated units now doesn’t exist. And so we have much better access to pursue potential opportunities.

This is a very complicated chart but I can boil it down very quickly. If you look at the top half of the chart, all of the boxes remain the same before and after – so everything is in the same position. The only thing that’s happened is the elimination of those subordinated units that were owned by Carlyle Riverstone Funds. So their ownership interests excluding the IDRs goes from 75% to 50%.

The bottom part of the chart simply shows you that the waterfall of incentive distribution rates is substantially simplified so that you had like four or five different tiers there, now there’s only two. You’re either at the MQD in one split or you go into the higher splits above $0.35 per common unit.

And this chart shows you the difference. We’re distributing today about $50 million of cash per year to our common unit holders, and as we increase our distributions we would have to get from $50 million to almost $100 million of distribution payouts for the common unit holders to get an additional $0.10; and then you would start sloping up and receive additional distributions.

Under the restructure plan, when we start paying out any distribution increases you start sharing in those distribution increases. And so the path to distribution growth is much more prominent for the common unit holders compared to the previous structure.

Recent financial results and highlights: as Simon pointed out we achieved financial results for the current year at the high end of our guidance range, $138.6 million of adjusted EBITDA and $74.0 million of distributable cash flow.

We’ve made a big deal of we have a strong balance sheet. During the year as we enter F2014 we have $40 million of cash and no revolver borrowings existing today, so we’ve paid off all of them. So we’ve improved our balance sheet by liquidating the $50 million that Simon alluded to and repaying our revolver.

We had strong distribution coverage of 1.5x and at our current guidance of $125 million to $135 million we anticipate 1.2x to 1.4x. Our fixed charge coverage ratio has been and we anticipate it to be above 1.75x in all periods.

Our capitalization, I just wanted to point out as we reduced our revolving credit borrowings from $150 million down to $65 million at the end of the year and we have none outstanding today. And in addition to the $15 million of cash we’ve posted up some voluntary margin deposits so we actually have $40 million available to us for higher value opportunities.

And with that I’ll turn it to Simon to wrap up.

Simon Dupéré

Thank you, Vance. As we wrap up the presentation this morning I want to reiterate that F2013 for us was a significant year of completion. We’ve delivered on several initiatives to preserve and grow unit holder value. We’re positioned to grow organically with Wild Goose, with the potential 25 Bcf expansion and we do have a diversification that starts with the potential liquid storage.

Our recent equity restructuring has given us financial flexibility and thus provides us access to capital markets if required. We enter F2014 with a strong balance sheet - $40 million of cash and equivalents, zero drawn on our revolver and also $100 million of excess working capital.

Though we continue to see market challenges in the gas storage business I believe F2014 will be a year of significant growth and opportunity for our business, and we’re certainly excited about what lies ahead for Niska employees and the unit holders as well.

In closing I would like to thank you for joining us this morning and we look forward to your feedback or any questions you may have in the breakout session. And I believe the breakout session will follow in the other room. Thank you very much.

Question-and-Answer Session

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Source: Niska Gas Storage Partners' CEO Presents at Nat'l Assoc of Publicly Traded Partnerships MLP Investor Conference (Transcript)

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