Niska Gas Storage Partners' CEO Discusses F1Q2014 (Qtr End 6/30/13) Results - Earnings Call Transcript

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 |  About: Niska Gas Storage Partners LLC (NKA)
by: SA Transcripts

Operator

Good day, ladies and gentlemen, and welcome to the Q1, 2014 Niska Gas Storage Partners LLC Earnings Conference Call. My name is Grant and I’ll 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’d now like to turn the call over to Mr. Simon Dupéré, President and CEO. Please proceed sir.

Simon Dupéré

Thank you, Grant, and thanks everyone for joining us this morning. On our call today, we will discuss our result for the first quarter ended June 30, 2013 and provide an update on our operations and our market outlook. Speaking in the call with me will be Rick Staples; our Executive Vice President, who 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 the 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 filed in June and the Form 10-Q, which we will file shortly with the SEC. Additionally, 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. As you saw in our press release this morning, our adjusted EBITDA for the quarter was $15.3 million and cash available for distribution was negative $0.5 million. These results were in line with our expectations and contemplate a more traditional pattern of earnings for fiscal 2014 with significantly more realized revenue expected in the second half of our fiscal year.

Last year, due to the nearly full storage condition entering this storage cycle, we recognized substantially more EBITDA early in the year. While market challenges persist in our U.S. storage markets, we have recently been able to capitalize on some positive opportunities in our Canadian-based AECO market region. Accordingly, we are reaffirming our previous guidance of adjusted EBITDA in the range of $125 million to $135 million and cash available for distribution in the range of $60 million to $70 million.

Through the first quarter, we have maintained a strong balance sheet and have very little drawn on our revolving credit agreement. We believe that we are well positioned to pursue high value opportunities including organic growth investment and potentially acquisitions.

We declared our quarterly distribution of $0.35 per unit to unitholders of record on August 12, 2013. The distribution is unchanged from previous quarter and will be payable on August 15, 2013. I'm also pleased to announce that the board of directors has approved the implementation of the Distribution Reinvestment Plan or DRIP. We have completed our regulatory filings with the Securities and Exchange Commission and the program became effective immediately. Accordingly investors who wish to participate can do so with this quarterly distribution.

We are also pleased to announce that Carlyle/Riverstone Equity and Power Fund I and Carlyle/Riverstone Equity and Power Fund II together the Carlyle/Riverstone Funds, which collectively own about 48% of our outstanding common units. As indicated that the intent to reinvest all of the proceeds from this quarter common unit distribution in the DRIP program. Proceeds to the company will be about $6 million from the Carlyle/Riverstone Funds participation. Instruction on how to participate are included in a separate press release that we issued this morning as well.

Niska has had an active first quarter. As you know, we completed our equity restructuring at the beginning of the quarter. We've also received approval from the California Public Utility Commission for an expansion of 25 billion cubic feet at our Wild Goose facility. We expect this capacity to be full in service by December, 2013 bringing the total working capacity across all our facilities approximately 251 Bcf.

We continue to make good progress in the evaluation of our Starks project in Louisiana as a liquids storage facility. We intend to file regulatory permit in the coming months and believe Starks represent an excellent opportunity to further grow and diversify our asset base. Finally, as I just mentioned, we implemented the DRIP program.

I’ll now turn the call over to Rick to discuss our commercial environment.

Rick Staples

Thank you, Simon, and good morning everyone. As you may remember from our last call, North America experienced severely cold weather late in March and April. The increased demand for natural gas meant that North American storage entered the injection season with 800 Bcf less inventory in the ground than last year. Natural gas prices for summer delivery responded by escalating initially and the effect of this was to decompress the seasonal spread for this year. The spike in natural gas prices early in the quarter coupled with flat coal prices slow the year-over-year burn rate of natural gas for power generation leaving ample supply of storage injections.

We experienced a much stronger weekly injections in the storage during the first half of the summer than last year and as a result the year-over-year storage inventory deficit in the United States has been cut in half. Despite the recent softening of summer prices for natural gas, we've seen only modest improvements in the NYMEX spread for this year, which has remained in the mid $0.20 range for most of the first half and only just recently widening to $0.30.

While this has kept a ceiling on spreads at our U.S. based asset as Simon mentioned earlier, we have encountered much better market conditions in our AECO facilities in Western Canada, which are the largest assets in our portfolio. Over the past month the seasonal spread at AECO has improved significantly while spreads in the cash markets have provided additional value. This underscores one of the key advantages of Niska’s diverse geographic footprint.

Looking forward, we expect that storage injections for the remainder of this year will continue to exceed last year’s pace and that this will reduce the year-over-year storage deficit. There is further potential for gas prices to soften and for fiscal 2014 spreads to widen as storage becomes more full towards the end of the season. We are well-positioned to respond when we see opportunities like those at AECO arise, but we also have the flexibility and portfolio strength to be patient when markets are weak. Overall, we are on track with our expectations for the quarter.

I’ll now turn the call over to Vance for our financial overview.

Vance Powers

Thank you, Rick, and good morning everyone. I would like to start by giving a brief overview of our financial results for the quarter. As Simon mentioned, our adjusted EBITDA for the quarter was $15.3 million compared to $52.7 million last year and cash available for distribution was negative $0.5 million compared to $37.3 million last year. While substantially less than last year, these results were in line with our expectations for the first quarter.

You will remember that we ended last fiscal year with abnormally full storage conditions in North America and almost 70 Bcf of Niska’s proprietary inventory. The hedges associated with this inventory were positioned for delivery in the first quarter of last year and had substantially appreciated in value. We realized the value of those hedges in the first quarter but repositioned the inventory deliveries until later in the year. As a result, we recognized substantial revenues and adjusted EBITDA in the first two quarters of last year.

As Simon also mentioned, this year we are expecting a more traditional pattern of earnings with proprietary inventory builds in the first half of the year with relatively less realized optimization revenue recognition and we are expecting higher inventory deliveries with higher realized revenue and adjusted EBITDA in the second half of the fiscal year. We are maintaining our guidance for the full fiscal year ending March 31, 2014 of $125 million to $135 million of adjusted EBITDA and $60 million to $70 million of cash available for distribution.

Net earnings were $8.0 million in the three months ended June 30, 2013 compared to a net loss of $37.3 million in the same period last year. The net loss in the prior period included a non-cash inventory write-down of $22.3 million. Earnings per common unit were $0.23 for the quarter ended June 30, 2013 compared to a loss of $0.54 per common and subordinated unit last year. I’ll mention that ETU in this year’s first quarter includes $34.5 million common units, whereas last years amount included $68.3 million common and subordinated units.

Fixed fee revenues was $31.5 million compared to $37.1 million last year. The decrease was due to lower rates obtained in firm contracting partially offset by increased customer demand for short-term service.

Net optimization revenues were $25.7 million during the period compared to a loss of $39.8 million during the same period last year. The year-over-year change reflects unrealized gains resulting from increases in the net value of our hedges in the current period compared to last year, which had significant unrealized losses, as well as the inventory write-down of $22.3 million. The hedge nature of virtually all of our inventory causes us to focus on realized revenues.

Realized optimization revenues were $5.6 million this quarter compared to $33.6 million in the first quarter of last year. As I mentioned a minute ago, the timing of our realized optimization revenues is expected to be weighted towards the second half of the year compared to last year which had much more realized revenues recognized in the first two quarters.

Looking now to expenses for the period, operating expenses were $10.4 million compared to $8.1 million in Q1 of fiscal 2013. This quarter’s increase was primarily driven by fuel and electricity costs which were due to elevated cycle volumes and higher power prices.

General and administrative expenses were a $11.3 million compared to $9.8 million last year. This uptick was primarily driven by increased long-term incentive compensation approvals which were tied to increases in total unitholder return.

Interest expense was $16.2 million compared to $16.5 million last year as a result of lower revolver utilization partially offset by the absence of the interest capitalization in the current year.

I’d like to briefly comment on our balance sheet. At June 30, 2013, we had almost $28 million in cash on hand and only $11 million drawn on our revolver. We also have approximately $100 million of working capital available. As of today, we have about $22 million outstanding under the revolver and about $36 million of letters of credit with availability of about $341 million. Our fixed charge coverage ratio, which is calculated on a 12-month trailing basis was 2.1 to 1. We are pleased with our liquidity position and believe we have the financial capability and to pursue organic growth opportunities and potentially acquisitions.

Finally, I’d like to address the recent implementation of the DRIP. The DRIP was formally approved by our board of directors on July 31st and we immediately filed the required SEC documents so the plan became effective immediately. The plan is now open for enrollment to owners of Niska’s common units and provide a simple and convenient means for eligible holders to invest in additional common units. The price for new common units purchased with reinvested distributions will be the average of the high and low trading prices of the common units on the New York Stock Exchange composite transaction for the five trading days immediately preceding the investment take.

Niska has appointed American Stock Transfer and Trust company to administer the plan. For further information please refer to the separate press release we issued this morning as well as the documents filed with the SEC. Additional information can also be obtained through the Niska website at www.niskapartners.com or at our administrator’s website at www.amstock.com.

We are extremely pleased that the Carlyle/Riverstone Funds plan to fully reinvest all of their common unit distributions this quarter. The investment will provide approximately $6 million; it continues to strengthen our balance sheet and demonstrates continued support from our private equity sponsor.

And with that, I’ll turn it back to Simon.

Simon Dupéré

Thank you, Vance. Our first quarter has proven to be a solid start for fiscal 2014. We made great progress on our organic growth platform both at Wild Goose and at Starks. We have continued to strengthen and simplify our capital structure through our equity restructuring and the new distribution investment plan. This action position us well to pursue high value opportunity including organic growth and potential acquisition.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Edward Rowe from Raymond James. Please proceed.

Edward Rowe - Raymond James

In regards to the Wild Goose expansion, can you give us some color on where you guys are at in terms of contracts and capacity utilization potentially once it’s online December?

Rick Staples

Thanks, Edward. Couple of points on Wild Goose. First off, we anticipated that we would receive an approval for the expansion this summer as we were going through our re-contracting season this past winter. So, we incorporated that capacity into our contracting plans for the year and so we contracted that portion of Wild Goose that we had hope to have a contract coming into the year. So that piece is being taken care of.

With respect to introducing the capacity into the marketplace, we expect to introduce it progressively through the remainder of this calendar year and will be fully in service by the end of December.

Edward Rowe - Raymond James

All right. That’s helpful. And given the improved liquidity and are you guys seeing improvements in purchase multiples and for opportunities to acquire additional storage in the market right now?

Vance Powers

I would say that the marketplace both for storage, this is Vance, by the way, it remains very competitive. I think that there are opportunities in the storage market. I don’t know that anything, any assets in the Midstream Fairway come particularly cheap, but we continue to look to identify opportunities to grow our business.

Edward Rowe - Raymond James

All right. And couple of more questions. Is there any update in regards to the Starks NGL project?

Simon Dupéré

No, in terms of this Starks NGL project, as we've mentioned, we’re continuing on many fronts for Starks, still in discussion for potential customers for the Starks project in terms of volume and products. We’re intending to file very shortly our regulatory permit to convert the first cavern into liquid storage cavern.

Edward Rowe - Raymond James

Okay.

Simon Dupéré

And usually that process, it’s difficult to say how long does it take, but usually it could be six months to a full year.

Edward Rowe - Raymond James

Okay, all right. Thank you. And just a real kind of conceptual question. With the reversal of REX by Tallgrass and the strong supply out of the Marcellus, can you give us some insight on how this could possibly affect AECO that when the full reversal is in place?

Rick Staples

You’re right, it is hypothetical but not all that hypothetical. I think that the answer is that as the Marcellus moves and starts to serve the Midwest markets more fully, you can naturally expect to see some declines in the deliveries from AECO down into Midwest markets, but AECO does continue to hold a pretty significant market share there, and we’ve already seen some pushback in the AECO market as a result of market share losses in the Eastern markets. We also see that some of the pipelines that take gas out of AECO tend to be also weighted toward a liquids play. So, I don’t know that you’re going to see a material loss of market share for AECO but you could see some.

Operator

Thank you for you question there. Our next question comes from the line of David LaBonte from Kayne Anderson. Please proceed.

David LaBonte - Kayne Anderson

Vance, could you please review again fee-based revenues, I guess, fell year-over-year in relative to fiscal Q4 and how much of your overall capacity is now being sold under long-term and short-term firm?

Vance Powers

Sure, David. The reduction in revenue – a lot of it has to do with rates are weaker for long-term firm services this year compared to last year. We had modestly less capacity allocated to our long-term firm-based revenues during the period which also entered into it. We do maintain our overall mix that we've communicated before of 70% to 75% fee-based revenue compared to optimization.

However, the things that I was alluding to in the call we’re seeing a more traditional storage pattern where you’re having inventory build during the quarter and then we’re anticipating delivery later in the year. We had some increase in short-term firm but the capacity allocation in the first quarter was not the same as the capacity allocation that we had taken away from long-term firm. So, those two things some capacity during the quarter as well as some lower rates in long-term first cause the difference.

David LaBonte - Kayne Anderson

And Vance, I guess, just directionally, I mean, how much of a magnitude are longer term rates weaker year-over-year?

Rick Staples

It’s Rick here, David. It’s maybe in the order of 10% and that’s all baked into our forecast for the year.

David LaBonte - Kayne Anderson

Okay. Another question as you kind of think about the kind of the AECO spread right now when you talked about I guess how are you guys setup right now? How much of you’ve locked in for optimization at this point, and really what’s your outlook for AECO gas prices versus Henry Hub at this point? I guess more specifically how is that dictating, what you’re doing on the storage front?

Rick Staples

Couple of points there, David. I think that their first half on the amount that we’ve locked in we debated divulging that, we’re certainly pleased with where we are, but we feel that’s market sensitive information, so we’re actually -- we decided not to release that information at this point in the year.

With respect to AECO versus NYMEX based pricing, AECO continues to trade well back of Henry Hub and I think you can appreciate why certainly there is basis differential caused by the TransCanada Mainline, but that’s a negative basis differential has been there forever. So, I’d say right now it’s trading about 100 points or yeah, 100 points back of Henry Hub. In the longer term, we do expect AECO to continue to trade somewhat less than Henry.

Operator

Thank you for your question. Our next question is coming from the line of Elvira Scotto from RBC Capital Markets. Please proceed.

Elvira Scotto - RBC Capital Markets

Hi, good morning. Just a couple of follow-up questions. I guess number one that the potential starts conversion, have you been out there talking to customers and what has been the reception thus far? And then, how do you contemplate kind of building that out, meaning in terms of are you looking for a certain level of long-term committed contracts to move forward or are you going to look to do some optimization as well?

Simon Dupéré

This is Simon. Basically, in terms of customers, we’re talking with customers, it’s been positive reception so far. In terms of we’d like you before we really commit and build this facility, we’d like to add a good portion that it’s on long-term contract so that the risk of the project is minimized for Niska and it’s investor as well. That’s what we’re looking at.

In terms of timing, like I was saying, the regulatory process could take a year and building the for -- we’re still looking at 2015, late 2015 timeframe.

Elvira Scotto - RBC Capital Markets

Just remind me, have you provided any cost estimates around that?

Simon Dupéré

No, not at this time. I think we’ll provide the cost estimate when we’re going to go ahead with the project and announce it, but not before that.

Elvira Scotto - RBC Capital Markets

Okay, great. And then my last question is just around M&A. Are you -- what types of assets would you consider for M&A? I mean, are you looking to expand that side of gas storage?

Simon Dupéré

What kind of asset? Basically, we still like the storage business, but as Vance mentioned earlier in answering your question, storage assets are still demand high multiple at this point in time, but if there is something that fits our need or niche would be we’d like storage, we’d like to diversify our portfolio. As you know, we were 100% storage, therefore, a bit of diversification would help as well. Therefore, we’re expanding our Fairway when we look at potential acquisition in the Midstream business sector as well.

Operator

Thank you for your question. Our next question comes from the line of David Neuhauser from Livermore Partners. Please proceed.

David Neuhauser - Livermore Partners

So, I just want to follow-up on the previous question regarding obviously the TransCanada news on July 1st and the Mainline issues. I know that's obviously going to be a big boost to you guys going forward in this particular year, but what’s your views on looking out over the next year and beyond? Do you think that we’ll see some adjustment to that or we’ll see storage cycle dealt going forward?

Rick Staples

Good morning, David. It’s Rick here. With respect to the TransCanada, I mean, there are a number of market factors that come into play when we look at the pricing for natural gas in the AECO market and in any market for that matter. At AECO, we’ve seen the production rates a little stronger this year versus last year. We’ve seen some good storage inventories in the ground already.

And of course, the TransCanada Mainline changing their toll structure as of July 1st certainly does come into play. We really can’t comment on to what extent that’s had an impact on the market. What we do know is that we’ve seen some improvements in the spread market as of early July and we certainly taken advantage of that. I would say that in the longer-term, it’s too early for us to forecast to the market and what that might mean for our earnings in future years, and that’s probably where I would stop.

David Neuhauser - Livermore Partners

Okay. And then regarding some of the expansion plans, what effect will that eventually have in terms of your growth profile, and are you looking at that sort of being the factors for increased storage in years to come and increased distributions potentially, or are you looking at the potential for maybe a diversifier like was mentioned in terms of a different asset group and sort of that’s where you are seeing the growth for the future?

Simon Dupéré

David, in terms of growth, we have mentioned few times that what we’re looking at is either growth through organic growth or potentially acquisition as well, therefore, we’re moving ahead as you know in our -- not acquisition but on our organic growth with the Wild Goose. With the Starks, you may recall, we do have Sundance, but Sundance will require market improvement or stable market improvement at AECO, for instance. Therefore, this is all there for us on organic growth side of it.

In terms of acquisition, as I mentioned, this is something we’re serious about. And in the last few years, the last two years we’ve been working hard at trying to cleanup the balance sheet, paying bad debt. We exited this year with stronger balance sheet, good cash, good excess working capital. Therefore, we believe, we’re in better position that we’ve ever been to really look at potential acquisition and yet to diversify a little bit from storage as well.

David Neuhauser - Livermore Partners

Okay. And then lastly, I look at it mentioned I think based on what numbers are, if you look into the second half of the year that’s where you see probably a much more of your cash flow increase in cash build. What would you be looking to do with that excess cash? I mean, are you looking at cutting down debt at this point or are you looking at holding on to that, that you described for acquisition opportunities or at some point I know that won’t be enough maybe to increase the unitholders distribution, but is there any thoughts of either a special payout at some point?

Simon Dupéré

What we’re looking at is to with extra cash is to do everything we can that will bring higher value to the shareholders, to the unitholders. And right now we‘re mentioning, that pursing organic growth and pursuing potential acquisition is in the book for sure.

Operator

Thank you for your question. You have no further questions at this time. (Operator Instructions). You have no further questions at this time. I would now like to turn the call back over to Simon for closing remarks.

Simon Dupéré

Okay. Thank you, Grant, and thank you everyone for joining us this morning. We hope you enjoy the rest of the summer and we look forward to updating you in the fall. Thank you very much.

Operator

Thank you for your participation in today’s conference. This now concludes your presentation. You may now disconnect. Have a good day.

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