Niska Gas Storage Partners' CEO Discusses F3Q12 Results - Earnings Call Transcript

| About: Niska Gas (NKA)

Niska Gas Storage Partners LLC (NYSE:NKA)

F3Q12 Earnings Call

August 03, 2012 10:00 am ET


Simon Dupéré - President & CEO

Jason Dubchak - VP, General Counsel and Corporate Secretary

Rick Staples - EVP

Vance Powers - CFO


Darren Horowitz - Raymond James

Michael Blum - Wells Fargo


Good day ladies and gentlemen and welcome to the first quarter 2013 Niska Gas Storage Partners LLC earnings conference call. My name is Jasmine and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call to Mr. Simon Dupéré, President and CEO. You may proceed, sir.

Simon Dupere

Thank you, Jasmine and thank you everyone for joining us. On our call today we will discuss our results for the quarter ended June 30, 2012 and provide an update on our operations and market outlook for fiscal 2013. Speaking on the call with me will Rich Staples, our Executive Vice President who will provide a market update and Vance Powers our CFO who will provide financial details. Following our prepared remarks we will open the call to questions. But first Jason Dubchak, our Vice President, General Counsel and Corporate Secretary will read the customary cautionary statements.

Jason Dubchak

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

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

Simon Dupéré

Thank you, Jason. As you saw in our press release this morning our adjusted EBITDA for the first quarter ended June 30, 2012 was $52.7 million and cash available for distribution was $37.3 million. These results included a benefit of approximately $1.3 million from an inventory write-down recorded in fourth quarter of fiscal 2012.

We are satisfied with our results which came a bit above our expectation, but we expect the overall results for 2013 to be within our guidance. Though we entered the quarter with wider seasonal spreads, we've seen this narrow as a result of moderating growth of natural gas supplies coupled with near-term weather related demand and significant coal to gas switching by electric utilities.

Beyond these near-term weather effects we believe demand for natural gas as a whole will continue to increase and that the uptick in summer prices will be followed at some point by increase in future prices for winter and beyond. Rick will provide more details on the market environment later in the call.

While market challenges persist, we have already locked in approximately 85% of our estimated revenue for the year while retaining the ability to capture additional market opportunities should they occur. Accordingly we are maintaining our previous guidance for fiscal year ending March 31 2013 of adjustment EBITDA of $130 million to $140 million and cash available for distribution of $62 million to $72 million. You may recall last quarter that we had substantially completed and placed into service an additional 15 Bcf of capacity at our Wild Goose facility.

During this quarter we completed most of the remaining work at our Wild Goose facility and continued commissioning and start up activity. The cost realized in the quarter was simply a carryover from last year’s capital expenditure projection of $65 million to $75 million. As of the end of last fiscal year, total expansion capital expenditure for Wild Goose were $51 million. We spent an additional $15.3 million on the project over the past quarter and expect to spend a further $5 million to complete the program.

This will put our capital program for the Wild Goose expansion project at $70 million right in the mid range of our projections. We also declared our quarterly distribution of $0.35 per common unit to unit holders of record at the close of business of Monday August 13, 2012. The distribution is unchanged from previous year. In addition we continued the expansion of distributions on our subordinated units.

As part of our successful quarter we also engaged our lending syndicate in the renewal and extension of our $400 million credit facility. The new four year agreement expiring June 2016 improves our borrowing costs through a better pricing grid and the elimination of a LIBOR floor. The new extended facility provides ample liquidity for our optimization and growth activities.

Vance will cover this transaction and other financial information in greater detail in this call. With that I will turn the call over to Rich to discuss our commercial outlook.

Rich Staples

Thank you Simon and good morning everyone. I want to take a few moments to review some of the events that played out in the energy markets over the past quarter and also provide some perspective on our outlook for the remainder of fiscal 2013.

In many respects, the market this past quarter played much like the same quarter last year with stronger year-over-year natural gas supply, intense summer heat and high levels of cold-to-gas switching. However, there were a few market differences. On the supply side, US reduction in the lower 48 average 64.5 Bcf per day over the past quarter, 6.5% higher than the same period last year.

However, we have seen a moderation in the relentless growth in production that we've become accustomed to. In fact production showed a slight decline from January’s levels as producers cut back on the gas directed drilling and shifted their focus to oils and liquids-rich plays instead.

And as a result going forward, we don’t expect to achieve the same strong rate of production growth that we’ve experienced over the past few years. On the other hand, we experienced extremely strong demand for natural gas over the past quarter, driven largely by extreme heat and coal-to-gas switching and power generation, and to a lesser extent, continued strength in industrial demand.

You may recall that last summer was the second hottest summer on record. During this year’s first quarter, temperatures were even hotter than last year. In addition to the heat, structurally low natural gas prices encouraged power generators to switch from coal to natural gas. This combination of hot weather and low natural gas prices contributed to unprecedented levels of gas-fired power generation in United States.

North America entered this injection season with record inventories of natural gas already in storage. This was the result of a normally warm winter coupled with robust supply. With so much gas in storage, the market essentially had a three month head start on the storage injections versus a normal injection season. With four months of summer already behind us, natural gas storage levels remained well ahead of last year’s pace.

Although, the head start has eroded due to the strong demand experience so far this summer. We continue to believe that a moderation in demand to the balance of this injection season could result in North America storage, testing the upper range of capacity, thereby placing pressure on gas prices and improving short-term storage spreads toward the end of this injection season.

(inaudible) prices for product delivery, rally nearly 50% over the quarter from the low of a $1.90 in mid-April to more than $2.80 by the end of June. With this strong reality in summer gas prices, seasonal spreads from summer to winter, narrowed 35% from $0.84 at the beginning of April to $0.54 by the end of June.

We began fiscal 2013 with a solid portfolio of long-term firm, short-term firm and optimization revenues and we continue to add to this base load of revenues throughout our first quarter with additional optimization and short-term firm transactions.

Accordingly, we locked in approximately 85% of the revenues required to meet the mid-range of our fiscal 2013 guidance. We’ve also maintained some flexibility in our portfolio to capitalize on any market improvements to the remainder of this fiscal year.

As a result, we remain well positioned to deliver EBITDA for fiscal 2013, within our projected guidance range of $130 million to $140 million. With that, I will turn it over to Vance to discuss our financial results.

Vance Powers

Thank you, Rick and good morning everyone. I want to give a brief overview of the financial results this quarter. As Simon mentioned, our adjusted EBITDA for the quarter was $52.7 million compared to $38.6 million last year. Cash available for distribution was $37.3 million compared to $20.7 million last year. Both adjusted EBITDA and cash available for distribution included a $1.3 million benefit from the inventory write down reported in the last quarter of fiscal 2012.

This benefit represents the difference of proprietary optimization sales at the current weighted average cost of natural gas or WACOG compared to what WACOG would have been if no Q4 fiscal 2012 write down had been reported. Niska’s net loss was $37.6 million in the three months ended June 30, 2012 compared to net earnings of $4.6 million in the same period last year.

Loss per common and subordinated unit was $0.54 for the quarter compared to earnings of $0.07 per unit last year. The net loss in the current period included a non-cash inventory write down of $22.3 million which I will talk about in a minute. LTF revenues were $27.7 million compared to $29.6 million last year.

Approximately $600,000 of the reduction is due to lower cycling revenues in this quarter compared to last year which was substantially offset in operating costs. In addition, approximately $800,000 of the reduction reflected unfavorable changes in exchange rate in our Canadian denominated revenues.

The remainder reflected lower average LTF rates in the current year which did not completely offset the additional capacity we allocated to our LTF strategy. Short-term firm revenues in the quarter were $9.4 million compared to $5.6 million last year, principally because of increased capacity allocated to this revenue strategy.

Optimization revenues were negative $39.8 million in the first quarter of fiscal 2013 compared to positive $10.6 million in the prior quarter. As you can see from our press release tables, the current year amount consisted of realized optimization revenues of $33.6 million, unrealized risk management losses of $51.2 million and the inventory write down of $22.3 million.

Realized optimization revenues of $33.6 million were up $12.2 million over $21.4 million reported last year. This substantial increase was due to the realization of significant financial hedges on our proprietary inventory that had been positioned in Q1 of fiscal 2013.

The inventory write down of $22.3 million resulted from the same factors which existed at our fiscal 2012 at year end and they persisted in Q1 of fiscal 2013. Relatively low natural gas prices coupled with the contango natural gas forward curve incented us to reposition hedges expiring in the first quarter into future periods.

Accordingly, while the new hedges again provided incremental economic value, these new hedges were at lower prices which required write down to fair value for GAAP purposes. This Q1 fiscal 2013 non-cash write down did not impact adjusted EBITDA of $52.7 million.

Although as I said, revenues, adjusted EBITDA and cash available for distribution did benefit by $1.3 million from the write down reported in the fourth quarter of fiscal 2012. The estimates of full year adjusted EBITDA of $130 million to $140 million do not include any benefit of these inventory write downs and we will continue to provide you with the write down impact on revenues, adjusted EBITDA and cash available for distribution as it occurs.

The large negative amount of unrealized risk management losses represented largely the realization in Q1 of previously unrealized hedge gains which existed at March 31, 2012. in addition, these realizations were coupled with a significant increase in the price of natural gas towards the end of the quarter which reduced the unrealized value of future hedges.

Operating expenses for the quarter were $8.1 million compared to $10.8 million last year. This decrease was due principally to the absence of [cycling] costs in the current year as I mentioned in the revenue commentary as a result of the higher inventories carried over from year end.

In addition, lease costs were lower as the result of renegotiation of two lease agreements. G&A was higher, coming at $9.8 million compared to $7.1 million last year of which $1.7 million is the result of higher incentive compensation accruals in the quarter. As the result of our repurchase of the portion of our senior notes in fiscal 2012, interest expense decreased to $16.5 million in this quarter compared to $18.7 million last year.

I will mention that we did not repurchase any additional senior notes during the first quarter of fiscal 2013. Borrowings under our credit facility were $133 million at the end of the quarter compared to $150 million at March 31, 2012. as of today, borrowings are $140 million with an additional $16 million of letters of credit outstanding, giving us revolver availability of $220 million.

The fixed charge coverage ratio for Niska was 2.09 to 1.0 at the end of the quarter and we do not expect the fixed charge coverage ratio to fall below 1.75 times for any quarter in the fiscal year ending March 31, 2013.

As you know 1.75 times is the threshold below which our distributions would become restricted. Expansion capital expenditures totaled $15.3 million in the quarter related to additional work performed at Wild Goose. We anticipate spending about $20 million of expansion capital in fiscal 2013 and maintenance capital will continue between $1 million and $2 million.

As Simon mentioned, we completed the amendment and restatement of our $400 million credit facility on June 29, the new facility extends the term to June 2016 and provides for better interest rates through a more flexible pricing grid as well as the elimination of a LIBOR floor of a 150 basis points. The amendment and restatement was oversubscribed compared to the $400 million that we requested and we appreciate the support of our bank syndicate. This agreement provides us with a solid capital base for our optimization and growth opportunities. With that I will turn it back over to Simon.

Simon Dupéré

Thank you, Vance. Our first quarter has proven to be a solid start to fiscal 2013. We have lot in approximately 85% of our revenue required to meet the mid range of our guidance while maintaining the upper (inaudible) to capitalize on any market improvements. We substantially completed the expansion activities at Wild Goose and we successfully extended our revolving credit facility.

The substantial completion of our injection and withdrawal enhancements at Wild Goose were on budget and coincide well with summer injection demands. Our facilities continue to maintain operational excellence despite record inventory carryover from last winter and I am proud of our operational and safety track record. I will now turn the call over to Jasmine for questions.

Question-and-Answer Session

Thank you. (Operator Instructions) And your first question comes from Darren Horowitz with Raymond James. You may proceed.

Darren Horowitz - Raymond James

Simon, can you just run through the contract mix, as it relates to long-term fixed versus short-term fix and optimization for fiscal 2013. I am just trying to get a feel for the capacity that’s going to be rolling off contract or that you might have exposed to the spot market for the rest of the fiscal year as it relates to – you potentially capitalizing on either of those ex-transit opportunities that you alluded to?

Simon Dupéré

Yeah, I'll let Rick answer that.

Rick Staples

We have in the sort of high 50% to 60% range contracted under long-term firm capacity. The balance of our capacity is allocated to short-term firm and optimization transactions. I am really not at liberty to say how much of that we’ve actually hedged at this point, because that is market sensitive information Darren, but what I can tell you is that we certainly do have some exposure for the balance of this year. We intentionally kept some of our book open so we can capture any market improvements over the remainder of this year and we've also locked in 85% of the gross margin and at the midpoint of our guidance range.

Darren Horowitz - Raymond James

Rick, maybe asking the question slightly differently; if I am just assuming that roughly 20% of your working gas capacity is on short-term firm contracts, can you give me a sense for the average contract duration of what STF is?

Rick Staples

I think the first point I would make here Darren is that right now coming into this year, we’re carrying significantly more of our capacity into optimization than we are short term for us. As you may recall, at the end of last year we did say that we were carrying additional high amounts of proprietary inventory as we came into the year and that this would moderate through the course of this year and by the end of this year, we would target to get ourselves back to the 20-20 split of STF and optimization. The average contract duration for the short-term firm contracts Darren can range anywhere from say one month to on average six months.


And your next question comes from the line of Michael Blum with Wells Fargo. You may proceed.

Michael Blum - Wells Fargo

Just I guess I will ask that question again in a slightly different way, just to confirm that the targets that you provided in the past in terms of what you were targeting in terms of revenue mix between long-term firm short-term firm and optimization that basically has not changed, is that correct?

Rick Staples

That's correct. We've kept the same target.

Michael Blum - Wells Fargo

And then, just so I am also clear, just you obviously generated some fair amount of excess cash flow this quarter above distribution payments, and it looks like you used that effectively to pay down the revolver, is that right and if so you can you just talk about the thought process of not buying back additional bonds?

Vance Powers

Sure Michael, this is Vance. We said in our year-end call that buying back additional bonds remains an opportunity for us and one that we are interested in pursuing along with the potential of organic growth and even acquisitions.

But what we try and do is go on a pay as you go basis here and during the quarter we really didn't liquidate that much gas; I would say that the change in the revolver is we've been very careful about managing our cash and at the timing of our expenditure, so the reduction in the revolver is more due to operational effects that we had during the period and sort of careful monitoring of the amount rather than generate -- so much the generation of excess cash and any application, I will point out that we had some substantial capital expenditures during the quarter as well. So arguably, I simply cash flow for that purpose as well.

So we are still on target; what I think is more likely to happen is that we are committed to reducing our optimization of inventory balances and as we redeploy those major amounts of working capital then we are going to find appropriate uses for which could include repurchase of units.


Your next question comes from the line of [Ralph Lippebar] with Nomura. Please proceed.

Unidentified Analyst

I guess my question is little bit around the realized optimization gain for this quarter; I was just trying to see if you could may be provide some context on it; it seems like a little counter seasonal and with regards to also your last comment, if the EBITDA guidance isn’t changing, how should we think about the spreads that are hedged in for the second half of they year?

Rick Staples

Good morning, it’s Rick Staples; I will take the first cut; I will take the kind of the first half of the question and then Vance will take it from there. On the optimization revenues, when we optimize our assets, we buy gas at the front part of the curve and then we are selling the back of the curve and so as we purchased gas or as we hedged our gas from last winter into this summer, because we are in a contango market, we basically had sold this quarter’s financially and what happened was gas prices continue to fall through sort of the latter part of winter.

So that when we actually got into this quarter, we were repositioning those hedges further out on the curve and in so doing we were buying back our existing hedges in this quarter. That crystallized optimization gains or financial gains in the hedges that we had originally entered into within this quarter.

So what that appears to be is a fairly significant gain simply on the realization of those hedges in this quarter, but then we have now hedged that gas into forward market and the forward market has continued to rise and it’s those particular hedges that are going to show you negative mark to markets and that’s why you are seeing the lower to negative realized gains or unrealized losses on those forward hedges.

Vance Powers

And this is Vance Powers, I’ll add to that, to say that I think this is the residual of the unique market conditions that we had really at the end of the storage season. You are right, it seems counterintuitive because typically you exit the storage season in March empty of gas and so in the first quarter you are mostly injecting gas for the next storage season, so typically you don’t realize too much in optimization revenues in a normal storage environment.

But we had, the entire industry was carrying over so much gas at the end of last storage season and we said, we told you that we were carrying over 70 Bcf of gas at March 31st, so you were really in a much different situation than you are normally in as we were full of gas, both our customers and our own. So what was happening was the gas that we had, we had hedges positioned in the first quarter and we realized those gains as we repositioned the hedges in the future periods.

Unidentified Analyst

If I can just kind of elaborate quickly on that, from a cash conversion point of view, the cash conversion will still be more back-ended because what we're seeing is essentially the EBITDA is from the financial mark-to-market. The cash realization is still going to be when you actually work off that inventory?

Vance Powers

That’s correct.


And at this time, we have no further questions. I would like to turn the call over to Mr. Simon Dupéré for closing remarks.

Simon Dupéré

Thank you Jasmine and thank you everyone for joining us on the call today. I wish all of you an excellent end of summer and we look forward to updating you in our next quarter. Thank you very much.


Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a wonderful day.

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