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| NKA > SEC Filings for NKA > Form 10-Q on 3-Aug-2012 | All Recent SEC Filings |
3-Aug-2012
Quarterly Report
The following information should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this report. The following information and such unaudited consolidated financial statements should also be read in conjunction with the consolidated financial statements and related notes, management's discussion and analysis of financial condition and results of operations and other information included our Annual Report on Form 10-K for the fiscal year ended March 31, 2012.
Overview of Critical Accounting Policies and Estimates
The process of preparing financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires estimates and judgments to be made regarding certain items and transactions. It is possible that materially different amounts could be recorded if these estimates and judgments change or if the actual results differ from these estimates and judgments. Our most critical accounting estimates, which involve the judgment of our management, were fully disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012 and remained unchanged as of June 30, 2012.
Overview of Our Business
We operate the Countess and Suffield gas storage facilities (collectively, the AECO HubTM) in Alberta, Canada, and the Wild Goose and Salt Plains gas storage facilities in California and Oklahoma, respectively. Niska Partners markets gas storage services of working gas capacity in addition to optimizing storage capacity with its own proprietary gas purchases at each of these facilities. We earn revenues by leasing storage on a long-term firm ("LTF") contract basis for which we receive monthly reservation fees for fixed amounts of storage, leasing storage on a short-term firm ("STF") contract basis, where customers inject and withdraw specified amounts of gas and pay fees on specific dates, and optimization, where we purchase and sell gas on an economically hedged basis in order to improve facility utilization at margins higher than those from third party contracts.
The Company has a total of 221.5 Bcf of working gas capacity among its facilities, including 8.5 Bcf leased from a third-party pipeline company.
We have aggregated all of our activities in one reportable operating segment for financial reporting purposes. Our consolidated financial statements are prepared in accordance with GAAP.
Factors that Impact Our Business
There have been no material changes in the disclosure made in our Annual Report on Form 10-K for the fiscal year ended March 31, 2012 regarding this matter.
Results of Operations
A summary of financial data for each of the three months ended June 30, 2012 and
2011 is as follows:
Three Months Ended
June 30,
2012 2011
(unaudited)
Consolidated Statement of Earnings (Loss) and
Comprehensive Income (Loss) Data:
Revenues
Long-term contract $ 27,661 $ 29,579
Short-term contract 9,400 5,566
Optimization, net (39,848 ) 10,619
(2,787 ) 45,764
Expenses (income)
Operating 8,091 10,828
General and administrative 9,839 7,143
Depreciation and amortization 11,824 10,000
Interest 16,508 18,653
Loss on extinguishment of debt 599 -
Foreign exchange gains (185 ) (7 )
Other income (176 ) (18 )
Loss before income taxes (49,287 ) (835 )
Income tax benefit (11,941 ) (5,460 )
Net earnings (loss) and comprehensive income
(loss) $ (37,346 ) $ 4,625
Reconciliation of Adjusted EBITDA and Cash
Available for Distribution to Net Earnings
(Loss)
Net earnings (loss) $ (37,346 ) $ 4,625
Add/(deduct):
Interest expense 16,508 18,653
Income tax benefit (11,941 ) (5,460 )
Depreciation and amortization 11,824 10,000
Unrealized risk management losses 51,148 10,820
Loss on extinguishment of debt 599 -
Foreign exchange gains (185 ) (7 )
Other income (176 ) (18 )
Write-down of inventory 22,281 -
Adjusted EBITDA 52,712 38,613
Less:
Cash interest expense, net 15,594 17,627
Income taxes (recovered) paid (7 ) 286
Maintenance capital expenditures - 3
Other income (176 ) (18 )
Cash Available for Distribution $ 37,301 $ 20,715
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Non-GAAP Financial Measures
Adjusted EBITDA and Cash Available for Distribution
We use the non-GAAP financial measures Adjusted EBITDA and Cash Available for Distribution in this report. A reconciliation of Adjusted EBITDA and Cash Available for Distribution to net earnings, the most directly comparable financial measure as calculated and presented in accordance with GAAP, is shown above.
We define Adjusted EBITDA as net earnings before interest, income taxes, depreciation and amortization, unrealized risk management gains and losses, loss on extinguishment of debt, foreign exchange gains and losses, inventory impairment write downs, gains and losses on asset dispositions, asset impairments and other income. We believe the adjustments for other income are similar in nature to the traditional adjustments to net earnings used to calculate EBITDA and adjustment for these items results in an appropriate representation of this financial measure. Cash Available for Distribution is defined as Adjusted EBITDA reduced by interest expense (excluding amortization of deferred financing costs and the effects of unrealized gains or losses on interest rate swaps), income taxes paid, maintenance capital expenditures and other income. Adjusted EBITDA and Cash Available for Distribution are used as supplemental financial measures by our management and by external users of our financial statements, such as commercial banks and ratings agencies, to assess:
† the financial performance of our assets, operations and return on capital without regard to financing methods, capital structure or historical cost basis;
† the ability of our assets to generate cash sufficient to pay interest on our indebtedness and make distributions to our equity holders;
† repeatable operating performance that is not distorted by non-recurring items or market volatility; and
† the viability of acquisitions and capital expenditure projects.
The non-GAAP financial measures of Adjusted EBITDA and Cash Available for Distribution should not be considered as alternatives to net earnings. Adjusted EBITDA and Cash Available for Distribution are not presentations made in accordance with GAAP and have important limitations as analytical tools. Neither Adjusted EBITDA nor Cash Available for Distribution should be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Because Adjusted EBITDA and Cash Available for Distribution exclude some, but not all, items that affect net earnings and are defined differently by different companies, our definition of Adjusted EBITDA and Cash Available for Distribution may not be comparable to similarly titled measures of other companies.
We recognize that the usefulness of Adjusted EBITDA as an evaluative tool may have certain limitations, including:
† Adjusted EBITDA does not include interest expense. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and impacts our ability to generate profits and cash flows. Therefore, any measure that excludes interest expense may have material limitations;
† Adjusted EBITDA does not include depreciation and amortization expense. Because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate profits. Therefore, any measure that excludes depreciation and amortization expense may have material limitations;
† Adjusted EBITDA does not include provision for income taxes. Because the payment of income taxes is a necessary element of our costs, any measure that excludes income tax expense may have material limitations;
† Adjusted EBITDA does not reflect cash expenditures or future requirements for capital expenditures or contractual commitments;
† Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and
† Adjusted EBITDA does not allow us to analyze the effect of certain recurring and non-recurring items that materially affect our net earnings or loss.
Similarly, Cash Available for Distribution has certain limitations because it accounts for some, but not all, of the above limitations.
Revenues
Revenues for the three months ended June 30, 2012 and 2011, respectively,
consisted of the following:
Three Months Ended
June 30,
2012 2011
(unaudited)
Long-term contract revenue $ 27,661 $ 29,579
Short-term contract revenue 9,400 5,566
Realized optimization, net 33,621 21,439
Unrealized risk management losses (51,188 ) (10,820 )
Write-down of inventory (22,281 ) -
Total revenue $ (2,787 ) $ 45,764
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Changes in revenue in the quarter were primarily attributable to the following:
LTF Revenues. LTF revenues for the three months ended June 30, 2012 declined by $1.9 million (6%) compared to the three months ended June 30, 2011. Approximately $0.6 million of this decrease related to lower variable fuel and cycling charges which resulted from our customers having higher opening inventories and lower net injections into storage during the quarter ended June 30, 2012 compared to the prior year. This reduction in revenue was offset by a reduction in related fuel and cycling costs in operating expenses. In addition, fluctuations in foreign exchange rates between the Canadian and U.S. dollar reduced revenues from our Canadian operations by $0.8 million. The remainder of the difference resulted from lower average rates for LTF contracts in the three months ended June 30, 2012 compared to the three months ended June 30, 2011, largely offset by an additional 18 Bcf of capacity which we allocated to our LTF strategy in the current fiscal quarter.
STF Revenues. STF revenues for the three months ended June 30, 2012 increased by $3.8 million (69%) compared to the three months ended June 30, 2011. The increase resulted from more capacity being utilized for this strategy than in the same period in the prior year.
Optimization Revenues. Net optimization revenue, including realized and unrealized gains and losses, along with write downs of proprietary optimization inventories, for the three months ended June 30, 2012 decreased to a loss of $39.8 million from net optimization revenue of $10.6 million for the three months ended June 30, 2011. When evaluating the performance of our optimization business, we focus on our realized optimization margins, excluding the impact of unrealized economic hedging gains and losses and inventory write downs. For financial reporting purposes, our net optimization revenues include the impact of unrealized economic hedging gains and losses and inventory write downs, which cause our reported revenues to fluctuate from period to period. However, because substantially all inventory is economically hedged, any inventory write downs will be offset by hedging gains and any unrealized hedging losses are offset by realized gains from the future sale of physical inventory. The components of optimization revenues are as follows:
† Realized Optimization Revenue, net. Realized optimization revenue for the three months ended June 30, 2012 increased to $33.6 million from $21.4 million for the three months ended June 30, 2011. During the three months ended June 30, 2012, gains on financial hedges were realized as a result of a decrease in near-term natural gas prices. Gains in the prior period were realized as a result of a strong spot market for natural gas.
† Unrealized Risk Management Losses. Unrealized risk management losses for the three months ended June 30, 2012 were $51.2 million compared to $10.8 million in the three months ended June 30, 2011. As all inventory is economically hedged, any unrealized risk management losses (or gains) are offset by future gains (or losses) associated with the sale of proprietary inventory.
† Write-Down of Inventory. During the fourth quarter of fiscal 2012, near-term prices of natural gas fell dramatically. This reduction increased the value of our economic hedges and decreased the value of the proprietary optimization inventory underlying those hedges. Concurrently, the steepening of the forward curve at that time encouraged us to realize incremental revenues through the repositioning of inventory deliveries from the fourth quarter of 2012 into future periods in fiscal 2013 or beyond. These conditions persisted during the first quarter of fiscal 2013.
With the realization of hedges positioned in the first quarter of 2013 and positioning of new hedges, at lower values in future periods, the market value of our inventories became less than the carrying cost. Accordingly, we wrote down our proprietary inventories to the lower of cost or market value.
Operating Expenses
Operating expenses for the three months ended June 30, 2012 and 2011 consisted
of the following:
Three Months Ended
June 30,
2012 2011
(unaudited)
General operating costs, including insurance,
lease costs, safety and training costs $ 4,210 $ 5,777
Salaries and benefits 1,533 1,783
Fuel and electricity 1,866 2,649
Maintenance 482 619
Total operating expenses $ 8,091 $ 10,828
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Operating expenses for the quarter ended June 30, 2012 decreased by $2.7 million (25%) compared to the quarter ended June 30, 2011. Lower lease costs, which are included in general operating expenses, resulted from the cancellation and re-negotiation of certain third-party lease agreements. High inventories reduced volume cycled at our facilities by 64% in the current period compared to the prior period, which lowered fuel and electricity costs.
General and Administrative Expenses
General and administrative expenses for the three months ended June 30, 2012 and
2011 consisted of the following:
Three Months Ended
June 30,
2012 2011
(unaudited)
Compensation costs $ 5,920 $ 4,308
General costs, including office and
information technology costs 1,339 429
Legal, audit and regulatory costs 2,580 2,406
Total general and administrative expenses $ 9,839 $ 7,143
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General and administrative costs increased by $2.7 million (38%), compared to the same period last year. Compensation costs increased principally as a result of an increase in incentive compensation accruals ($1.5 million) in the current period.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended June 30, 2012 increased by $1.8 million (18%) compared the three months ended June 30, 2011. The increase was primarily attributable to a provision for cushion gas migration at one of our facilities which is recorded in depreciation and amortization expense. The provision for cushion gas migration amounted to $2.4 million and nil during the three months ended June 30, 2012 and 2011, respectively.
Interest Expense
Three Months Ended
June 30,
2012 2011
(unaudited)
Interest on senior notes $ 14,284 $ 17,721
Interest on revolving credit facility 2,561 751
Amortization of deferred charges 908 1,026
Other interest 377 (7 )
18,130 19,491
Less: Capitalized interest 1,622 838
Total interest expenses $ 16,508 $ 18,653
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Interest expense for the three months ended June 30, 2012 decreased by $2.1 million (11%) compared to the three months ended June 30, 2011. The repurchase of $156.2 million in Senior Notes during the prior fiscal year reduced interest costs compared to the first quarter of the prior year. This decrease was partially offset by higher interest costs incurred due to increased use of our $400.0 million revolving credit facility to finance our optimization strategy.
Loss on Extinguishment of Debt
We amended and restated our $400.0 million Credit agreement on June 29, 2012. The write off of a portion of associated deferred financing costs resulted in a loss on debt extinguishment of $0.6 million.
Income Taxes
Income tax benefit was $11.9 million for the three months ended June 30, 2012 compared to $5.5 million for the same period of the prior year. The income tax benefit in the current three month period is due mainly to the recognition of losses in certain Canadian entities.
The effective tax rate for the three months ended June 30, 2012 differs from the U.S. statutory federal rate of 35% primarily due to the recognition of losses in taxable entities which have a lower statutory rate.
Liquidity and Capital Resources
Sources and Uses of Liquidity
Our primary short-term liquidity needs are to pay interest and principal payments under our $400.0 million credit agreement and interest payments on our 8.875% Senior Notes due 2018 (the "Senior Notes"), to fund our operating expenses and maintenance capital expenditures, to pay for the acquisition of proprietary optimization inventory along with associated margin requirements and to pay quarterly distributions, to the extent declared by our board of directors. We fund these expenditures through a combination of cash on hand, cash from operations and borrowings under our $400.0 million credit agreement.
Our medium-term and long-term liquidity needs primarily relate to potential debt repurchases, organic expansion opportunities and asset acquisitions. We expect to finance the cost of any expansion projects and acquisitions from borrowings under our existing and possible future credit facilities or a mix of borrowings and additional equity offerings as well as cash on hand and cash from operations. As of June 30, 2012, we do not anticipate any expansion projects or acquisitions that would require additional debt or equity financing.
Our principal debt covenant is our fixed charge coverage ratio ("FCCR"), which is included in both our $400.0 million credit agreement and the indenture on our Senior Notes. When our FCCR, which is calculated on a trailing-twelve
months basis by dividing Adjusted EBITDA (defined substantially the same as presented herein) by fixed charges, which are measured as interest expense plus the amount of interest capitalized, but giving pro forma credit for the all of the previous twelve months for certain debt purchases and acquisitions, is less than 2.0 to 1.0, we are restricted in our ability to issue new debt. However, this restriction does not impact our ability to access our existing $400.0 million credit facility, or to amend, extend or replace that facility. When our FCCR is below 1.75 to 1.0, we are restricted in our ability to pay distributions. At June 30, 2012, our FCCR was 2.09 to 1.0. If our fixed charge coverage ratio were to be below 1.75 to 1.0, we would be permitted thereafter to pay $75 million of distributions. This $75 million amount is cumulative for all periods that our FCCR is below 1.75 to 1.0. The appropriateness and amount of distributions are determined by our board of directors on a quarterly basis.
In order to enhance our financial flexibility, during the three months ended June 30, 2012, we amended and restated our $400.0 million credit agreement. The new agreement is substantially the same as the prior agreement, except that the maturity has been extended by over two years from March 5, 2014 to June 29, 2016, and pricing has been improved due to a more favorable pricing grid based on leverage levels and the elimination of a floor of 150 basis points on LIBOR-based borrowings.
We believe that our existing sources of liquidity described above will be sufficient to fund our short-term liquidity needs through the year ending March 31, 2013. Funding of material acquisitions and longer-term liquidity needs will depend on the availability and cost of capital in the debt and equity markets, as well as compliance with our debt covenants. Accordingly, the availability of any such potential funding on economic terms is uncertain.
Management does not believe that the operation of its existing business is impacted by the availability of capital for expansion projects or acquisitions.
Cash Flows from Operations and Investing Activities
The following table summarizes our sources and uses of cash for the three months
ended June 30, 2012 and 2011, respectively:
Three Months Ended
June 30,
2012 2011
(unaudited)
Operating Activities:
Net earnings (loss) $ (37,346 ) $ 4,625
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating
activities:
Unrealized foreign exchange gains (83 ) (71 )
Deferred income tax benefit (11,934 ) (5,460 )
Unrealized risk management losses 51,148 10,820
Depreciation and amortization 11,824 10,000
Deferred charges amortization 908 1,026
Loss on extinguishment of debt 599 -
Write-down of inventory 22,281 -
Changes in non-cash working capital 5,553 (90,430 )
Net cash provided by (used in) operating
activities 42,950 (69,490 )
Net cash used in investing activities (10,238 ) (10,922 )
Net cash used in financing activities (31,547 ) (17,744 )
Effect of translation of foreign currency on cash
and cash equivalents (149 ) (65 )
Net Increase (Decrease) in Cash and Cash
Equivalents $ 1,016 $ (98,221 )
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The variability in net cash provided by operating activities is primarily due to fluctuating market conditions that exist in any particular fiscal period, which impacts the margins and fees under each of our LTF, STF and optimization activities and impacts our decision to either sell significant volumes of inventory or hold them over a fiscal period end and sell them in the future if there is an economic incentive to do so.
During the three months ended June 30, 2012, we realized a significant increase in cash from operations compared to a large use of cash in operations in the three months ended June 30, 2011. This variance resulted from the increase in Adjusted EBITDA recognized in the current fiscal quarter compared to last year, as well as the large variances in non-cash working capital discussed below.
Changes in non-cash working capital consisted of the following:
Three Months Ended
June 30,
2012 2011
(unaudited)
Changes in non-cash working capital:
Margin deposits $ (22,321 ) $ 33,443
Trade receivables 2,110 (2,023 )
Accrued receivables 22,920 (16,891 )
Natural gas inventory 7,216 (75,499 )
Prepaid expenses (954 ) (1,203 )
Other assets - (1,705 )
. . .
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