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Niska Gas Storage Partners LLC (NYSE:NKA)

F2Q13 Earnings Call

October 31, 2012 10:00 AM ET

Executives

Simon Dupéré – President and CEO

Jason Dubchak – VP, General Counsel and Corporate Secretary

Vance Powers – CFO

Analysts

Edward Rowe – Raymond James

Michael Blum – Wells Fargo

Tom Novak – Advent

Elvira Scotto – RBC Capital

David Fleischer – Chickasaw Capital Management

Operator

Good day ladies and gentlemen, and welcome to the Second Quarter 2013 Niska Gas Storage Partners LLC Earnings Conference Call. My name is Stephanie and I’ll be your coordinator today.

At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the presentation over to the host of today Mr. Simon Dupéré, President and CEO of Niska. Please proceed.

Simon Dupéré

Thank you, Stephanie. And thanks everyone for joining us. On our call today, I will discuss our results for the second quarter ended September 30, 2012 and provide an update on our operations and market outlook for fiscal 2013.

Speaking on the call with me will be Vance Powers, our CFO, who will provide financial details and unfortunately, Rick Staples; our Executive Vice President will not be able to join us today. 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’d 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, 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 www.niskapartners.com.

With that, I’ll hand things back to Simon.

Simon Dupéré

Thank you, Jason. We’re pleased to update you on our second quarter results for fiscal 2013. As you saw in our press release this morning, our adjusted EBITDA for the quarter ended September 30, 2012 was $36.3 million and cash available for distribution was $19.6 million, which are increases of 20% and 74% respectively over last year. On a year-to-date basis, adjusted EBITDA was $89.1 million and cash available for distribution was $56.9 million representing increases of 30% and 78% respectively over last year.

During the quarter, the combination of a warm summer and low natural gas prices triggered significant coal-to-gas switching, which in turns spiked near-term prices relative to the upcoming winter and narrowed the seasonal spread. However, we continue to believe that these increases in demand for natural gas has positive implication for natural gas storage.

We continue optimizing our capacity at all our facility throughout the quarter through both short-term firm and proprietary transactions. For a brief period, cash prices were actually trading above the prompt month creating opportunities for us to sell gas in the market and buyback a lot of period for profit. For a long term though, the market continue to encourage us to keep our inventory in the ground and roll our sell hedges further out on the curves. As a result, we continue to carry nearly 70 Bcf of proprietary inventory in storage through the end of the quarter as predicted.

On the contracting front, we began our normal LTF or long-term firm contracting season in early September. As you may recall, we contract in the fall and winter for storage services that begins in April of 2013.

So far this contracting season, we were able to contract the volume of storage that we had targeted for this quarter. Seasonal spreads for next year remain quite soft and this is reflected in our re-contracting rates. While we would like to see wider spreads, we’re pleased that the level and price of contracts that we’ve been able to achieve in this market, soft market at this moment.

Despite the narrowing of the seasonal spreads, we’ve locked in approximately 95% of the revenue required to meet the mid-range of our guidance for fiscal 2013. Our aggressive hedging and contracting strategy has succeeded in this environment and we reaffirm our guidance for fiscal 2013 adjusted EBITDA of $130 million to $140 million.

We are glad to report that modest improvements in our lending rates and revolver utilization have allowed us to revise our cash available for distribution expectation slightly from a range of $62 million to $72 million to a new range of $65 million to $75 million. Again these amounts exclude any benefits to adjusted EBITDA from the inventory write-downs we took in the fourth quarter of last year and the first quarter of fiscal 2013.

During the quarter, we placed in service an additional 4 Bcf of capacity at our AECO facility in Alberta. This was on the high hand of our 2 Bcf to 4 Bcf estimate. And this was completed with very little cost in the scope. In addition, we completed much of the remaining work with respect to our Wild Goose expansion with only the completion of our additional tie in to the PG&E mainline remaining. We expect this work to be completed in November.

Capital expenditures for the first six months of fiscal 2013 were $21.5 million of which $20.7 million represented expansion in capital expenditures. Almost all of the expansion capital was related to our Wild Goose capacity project. We estimate that the remaining expansion capital costs for the balance of fiscal 2013 will be approximately $3 million.

As part of our ongoing growth strategy, I’m pleased to announce that we have filed our request for an additional 25 Bcf expansion with the California Public Utility Commission, which if approved would increase our total capacity at Wild Goose to 75 Bcf.

In addition, the Alberta Energy Resources Conservation Board has approved our Sundance project, a 70 Bcf storage joint venture project in Central Alberta. While the Sundance project depends on an improvement in market conditions, we’re pleased to be making progress on the regulatory front with respect to our organic growth opportunities. As you saw in our press release, we also declared our quarterly distribution of $0.35 per common unit to unit holders of record November 13, 2012. The distribution is unchanged from the previous quarter and we have maintained a suspension of distributions on our subordinated units.

With that, I’ll now turn the call over to Vance to discuss our financial results.

Vance Powers

Thank you, Simon, and good morning, everyone. As Simon mentioned, our adjusted EBITDA for the quarter was $36.3 million, compared to $30.2 million last year. Cash available for distribution was $19.6 million, compared to $11.2 million last year.

Year-to-date, adjusted EBITDA was $89.1 million versus $68.8 million while cash available for distribution year-to-date was $56.9 million, compared to $32 million last year. Adjusted EBITDA and cash available for distribution include benefits of $5.1 million in the three months ended September 30, 2012 related to the inventory write-downs we recorded in the fourth quarter of fiscal 2012 and the first quarter of fiscal 2013. Year-to-date these benefits totaled $6.4 million.

Niska’s net loss was $15.4 million for the quarter and $52.7 million year-to-date. Last year, net earnings were $27.6 million and $32.2 million for the same periods respectively. Loss per common and subordinated unit was $0.22 for the quarter, compared to earnings of $0.40 per unit last year. Our quarterly net loss was primarily attributable to unrealized risk management losses. These unrealized losses related to changing natural gas prices, which began to rise late in our first fiscal quarter and continued through September 30, 2012.

The increases in natural gas prices reduced the value of our associated hedges, resulting in the unrealized losses for the quarter and year-to-date. However, as substantially all of our inventory is economically hedged, any unrealized risk management gains and losses will be offset by future gains and losses associated with the sale of our proprietary inventory.

In addition, the year-to-date loss reflected the first quarter write-down of inventory of $22.3 million. Long-term firm or LTF revenues were $28.1 million for our fiscal second quarter compared to $29.4 million last year. For the first six months LTF revenues were $55.8 million compared to $59 million last year.

Lower average recontracting rates coupled with a weaker Canadian dollar associated with Canadian denominated revenues were responsible for the revenue decrease, although the lower average LTF rates were partially offset by increased overall capacity that we allocated to our LTF strategy.

Short-term firm or STF revenues were $12.9 million compared to $5.7 million last year. Year-to-date STF revenues were $22.3 million compared to $11.3 million last year. The increases on a quarterly and year-to-date basis reflect the increased capacity that we allocated to the strategy in the current year compared to last year.

Realized optimization revenues this quarter were $12.2 million compared to $16.6 million last year. Year-to-date optimization revenues were $45.9 million compared to $38.1 million last year. The change in optimization revenues principally reflects the timing of recognition of realized gains and losses, which can vary among quarters depending on prevailing market conditions.

As Simon mentioned, in the first six months of fiscal 2013, we have been incented to delay physical delivery of proprietary inventory into later periods principally this winter withdrawal season. As a result, we recognized financial gains on hedges, which had increased in value since they were put in place and had been positioned in the first half of this fiscal year. As we mentioned, we’ve locked in approximately 95% of the revenues required to meet the midrange of our guidance for adjusted EBITDA of $130 million to $140 million for fiscal 2013.

Operating expenses for the quarter were $8.8 million compared to $14.4 million last year. Year-to-date these operating expenses were $16.9 million compared to $25.2 million last year. Operating expenses were lower than last year due to lower storage and equipment lease costs as well as lower fuel and electricity costs. The reduced power costs resulted principally from lower natural gas cycling at our facilities, which in turn resulted from the consistently higher quantities of natural gas stored in our facilities this fiscal year.

General and administrative expenses this quarter and year-to-date were $8.1 million and $17.9 million respectively compared to $7.3 million and $14.5 million last year. Increases on a quarterly and year-to-date basis are generally due to higher incentive compensation accruals.

Interest expense was $16.7 million in the three months ended September 30, 2012 compared to $19.4 million in the same period last year and was $33.2 million for the first six months of fiscal 2013 compared to $38 million in the same period last year. These decreases were the result of the significant repurchases of our 8 7/8% senior notes during fiscal 2012.

We did not repurchase any senior notes during the second quarter of this year. Potential additional purchases of senior notes will depend principally on the timing and amount of proprietary inventory liquidations. Revolver drawings as of September 30 were $165 million, compared to $150 million at the beginning of the year.

In addition, we had $18 million of letters of credit outstanding, giving us availability of $217 million at September 30, 2012. Today, we have $165 million outstanding under our revolver with $8 million of letters of credit outstanding.

Niska’s fixed charge coverage ratio calculated on a trailing 12-month basis was 2.2 to 1 as of September 30, and we do not expect the ratio to fall below 1.75 times for any quarter in the fiscal year ending March 31, 2013, which is the threshold below which distributions become subject to restrictions.

As Simon mentioned earlier, this year capital expenditures have been about $21.5 million with the bulk about $20.7 million related to the Wild Goose expansion. Looking forward, we expect approximately $3 million of expansion CapEx through the rest of the year and we continue to expect maintenance capital expenditures to range from like $1 million to $2 million.

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

Simon Dupéré

Thank you, Vance. Although Q2 has proven to be challenging from a commercial and market perspectives, our effort to lock-in have been very successful. We’ve locked-in 95% of the revenue required to meet the midpoint of our guidance. And we are on track to deliver our fiscal 2013 adjusted EBITDA guidance range of $130 million to $140 million.

We extended our platform of low-cost organic growth at AECO with a 4 Bcf expansion and we have taken steps to ensure that Niska is well positioned for growth in the future, with our ongoing effort at Wild Goose in California and Sundance in Alberta.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Please standby for your first question. Your first question comes from the line of Edward Rowe with Raymond James. Please proceed.

Edward Rowe – Raymond James

Hi, good morning.

Simon Dupéré

Good morning.

Edward Rowe – Raymond James

Simon, can you run through the contract mix as it relates to long-term fix versus short term and optimization for 2013. I am just trying to get a feel for the capacity that’s going to roll off and that you might be exposed of spot market for the rest of the year?

Simon Dupéré

Okay. Currently for fiscal year 2013, we have about 60% in long-term firm or LTF and the remaining 40% is split between optimization and short term firm.

Edward Rowe – Raymond James

Okay, very good. And can you quantify in terms of, I guess the sensitivity around the softness in pricing upon maybe possible re-contracting capacity?

Simon Dupéré

At this moment, as I mentioned the recontracting season for next year started in September for us and will last until March of this fiscal year. Therefore we’re really, we’re one month into it. We’re in the midst of it and therefore it’s a bit difficult at this point in time to give you any sense because we’re in discussion with customers. Therefore, we’ll not answer directly this question.

Edward Rowe – Raymond James

Okay, that’s fair enough.

Simon Dupéré

Yeah.

Edward Rowe – Raymond James

Couple of more is, just the longer term strategic picture. In terms of – there is some Canadian exports to the U.S. is seen to be declining and with the TransCanada’s Canadian mainline and then when you look at further out with the amount of capacity opening up in the Marcellus, how in terms of storage is that going to effect the AECO storage in your mind?

Simon Dupéré

Okay. When you look at AECO in terms of its location, it’s very well located. You’ve mentioned the TCPL pipeline, the re-contracting. It’s not done yet. Therefore, we’ll see how it does shape up.

The Marcellus that is moving gas up a little bit as well. One piece that you may have missed is the LNG as well that will probably come into the picture in 2000 – late 2015, 2016. As you know, there is four or five different projects. I’m not saying all of them will come to fruition, but some of them will and this at the end of the day for a storage operator when you look at AECO, the demand in Alberta is very strong. And due to the oil sand, the demand will be strong due to the LNG exportation. Therefore, this for us as a long-term view is good for storage because more gas will move in and out.

Operator

Your next question comes from the line of Mr. Michael Blum with Wells Fargo. Please proceed.

Michael Blum – Wells Fargo

Thanks. Good morning everybody.

Simon Dupéré

Good morning.

Vance Powers

Good morning, Michael.

Michael Blum – Wells Fargo

I just want to make sure I am understanding this correctly. If I look at your guidance, which you didn’t change for EBITDA for the year and your first half performance. It basically implies that the second half of the year will be lower than the comparable period last fiscal year. So if I’m looking at that correctly, just curious for why that would be and how much conservatism is in your EBITDA guidance?

Vance Powers

Well, I think we try not to overpromise, Michael, but I don’t think we kitchen sink the thing either. If you go all the way back to early in calendar 2012, we told you that fiscal 2013 would look a lot like fiscal 2012. And so yes, you are arithmetically correct as we’ve also always said that the timing of the quarters is very difficult to predict because the realized optimization kind of depends on where the hedges get placed.

And so, it happens that in fiscal 2013, the hedges have been placed and realized earlier in the period than you might otherwise expect. So, you are arithmetically correct is that the back half will be weaker than last year assuming we come in on the same number and we didn’t bag anything there.

Michael Blum – Wells Fargo

Okay. Thank you very much guys.

Operator

(Operator Instructions) Your next question comes from the line of Tom Novak with Advent. Please proceed.

Tom Novak – Advent

Hi, good morning.

Simon Dupéré

Good morning.

Vance Powers

Good morning, Tom.

Tom Novak – Advent

Just getting back to a prior question. I mean your response to the long-term changes in storage value due to changing flows of North American natural gas was a bit surficial. I mean, can you give us a little more depth here. I mean, you are saying oil sands and LNG are good, but should the US ultimately stop importing gas from Canada in 2015 or 2016?

Can you give us a little more information about whether or not you think your facility is placed in the right spot geographically to benefit from LNG? And just a little more in depth thought, I mean, when you can’t just say oil sands and LNG, give us a little more context and color for what you’re thinking strategically. Thanks.

Vance Powers

Well, I think that we believe that the AECO facility is strategically placed. It is right along the TransCanada mainline. I think that the changing market dynamics do affect the flows of gas in the area. But, we also think that the Alberta and Western Canadian market is linked to overall demand, okay, so that when you have overall increases in demand, that balances overall supply with overall demand.

So even though the AECO facility isn’t located right along the pipeline to Kitimat, it is still strategically located to balance the supply and demand activities in Alberta and in Western Canada. Also I do think that the demise of Western Canadian gas, that’s pretty speculative. And so, continued exports to either to the east or to western markets are available.

Tom Novak – Advent

Do you think gas is still going to be shipped on the Canadian mainline east in five years?

Vance Powers

Five years is a long time.

Tom Novak – Advent

Yeah, but you must be thinking about it, right?

Simon Dupéré

There is going to be gas shipped in the east probably not as strong as it is today, but it’s still five years on road, Tom.

Tom Novak – Advent

Okay. Thanks.

Operator

Your next question comes from the line of Elvira Scotto with RBC Capital. Please proceed. Your line may be on mute. Check your mute features.

Elvira Scotto – RBC Capital

Hi, good morning.

Simon Dupéré

Good morning.

Elvira Scotto – RBC Capital

Can you talk a little bit more about the proposed Sundance project. I guess number one what it will take to move this forward? What you need to see in the market? And number two, are you looking at this to be contracted in a similar fashion as your overall business in terms of percent LTF and STF in optimization?

Simon Dupéré

Okay, multiple questions there. Basically the Sundance is a 70 Bcf gas storage project. And basically right now what we did back in May, early May of this year, we’ve made an implication to the Alberta regulatory body in order to have an approval to that 70 Bcf. We just got the approval a month ago.

And therefore this provide us an option, when spreads do improve. And your question is how much spread needs to improve to go ahead with this project? At this point in time, it’s a bit early. We need a good improvement in the spreads and in terms of contracting, this would be – become part of the portfolio and again it probably be a similar split 60% long-term and 40% short-term optimization.

Elvira Scotto – RBC Capital

Okay. My next question is, and I don’t know if you’ll be able to answer this. But the suspension of the distribution on the subordinated units, what will it take to lift that suspension?

Vance Powers

Well, as we’ve consistently said the quarterly distribution decision is at the pleasure of the board of directors. Clearly, the range of EBITDA that we’re seeing now is it supports the common distribution and the board has determined, it doesn’t support the subordinated distribution sort of predicting at what range you are going to reinstitute some or all of the subordinated distributions I think is like way ahead of where we would be right now.

Elvira Scotto – RBC Capital

Okay. Thank you.

Simon Dupéré

Thank you.

Operator

Your next question comes from the line of David Fleischer with Chickasaw Capital Management. Please proceed.

David Fleischer – Chickasaw Capital Management

Good morning, gentleman. Could you just tell me how much profit you made from selling cash this summer and buying back for prompt?

Vance Powers

Specifically is like – yeah, this is the gain or loss. I don’t think we actually track it exactly that way. I think that we’ve been successful in our optimization strategies and we’ve locked in 95% of our revenue, sort of like, well, this trade made this amount of money. I am not sure that we have it broken down that way and I am not sure that we would say.

David Fleischer – Chickasaw Capital Management

Okay. Thank you.

Operator

We have no further question in queue. I will turn the call over back to Mr. Simon Dupéré for closing remarks. Please proceed.

Simon Dupéré

Thank you, Stephanie, and thank you for joining us today. We understand that some of you on the call may have been affected by the Sandy storm and we hope you and your family are safe and sound at this moment. We look forward to updating you next quarter and we’ll keep working very hard to continue our nice business. Thank you very much.

Operator

Thank you for your participation in today’s conference. This conclude the presentation. You may now disconnect and have a great day.

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