Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PNG > SEC Filings for PNG > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for PAA NATURAL GAS STORAGE LP

Form 10-Q for PAA NATURAL GAS STORAGE LP


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to provide investors with an understanding of our financial condition and results of our operations and should be read in conjunction with our historical consolidated financial statements and accompanying notes and Management's Discussion and Analysis of Financial Condition and Results of Operations as presented in our 2011 Annual Report on Form 10-K. For more detailed information regarding the basis of presentation for the following financial information, see the condensed consolidated financial statements and related notes that are contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Overview of Operating Results, Capital Spending and Significant Activities

Adjusted EBITDA for the nine months ended September 30, 2012 was approximately $87.2 million, an 18% increase over Adjusted EBITDA of approximately $73.9 million for the nine months ended September 30, 2011. This increase was primarily the result of the completion of the Southern Pines Acquisition on February 9, 2011, incremental revenues attributable to capacity expansions (including additional working gas of approximately 17 Bcf and 9 Bcf in the aggregate at our Pine Prairie and Southern Pines facilities during 2012 and 2011, respectively) and results of PNG Marketing, LLC (our commercial optimization company). See "- Results of Operations" for further discussion and analysis of our operating results. Expansion capital expenditures for the nine months ended September 30, 2012 were approximately $47.4 million.

Results of Operations

The tables below summarize our results of operations for the periods indicated (in thousands, except working capacity and monthly operating metrics data):


Table of Contents

                                             Three Months Ended         Favorable/(Unfavorable)
                                               September 30,                  Variance (1)
                                             2012          2011              $                %
Revenues
Firm storage services                     $    36,364    $  35,536    $            828           2 %
Hub services and merchant storage (2)          28,176       42,548             (14,372 )       (34 )%
Other                                           1,587        1,250                 337          27 %
Total revenues                                 66,127       79,334             (13,207 )       (17 )%

Storage-related costs - Hub services
and merchant storage (3)                      (26,012 )    (41,507 )            15,495          37 %
Storage-related costs - Firm storage
services (4)                                   (3,172 )     (4,078 )               906          22 %
Field operating costs                          (2,974 )     (3,070 )                96           3 %
General and administrative expenses            (4,641 )     (4,368 )              (273 )        (6 )%
Other income/(expense), net                        (5 )         (7 )
Acquisition-related expense                         -            5
Insurance deductible related to
property damage                                     -            -
Equity compensation expense                     1,016          681
Mark-to-market of open derivative
positions                                        (628 )       (132 )
Adjusted EBITDA                           $    29,711    $  26,858    $          2,853          11 %

Reconciliation to net income
Adjusted EBITDA                           $    29,711    $  26,858    $          2,853          11 %
Depreciation, depletion and
amortization                                   (9,461 )     (9,193 )              (268 )        (3 )%
Interest expense, net of capitalized
interest                                       (1,973 )     (1,666 )              (307 )       (18 )%
Equity compensation expense                    (1,016 )       (681 )
Acquisition-related expenses                        -           (5 )
Mark-to-market of open derivative
positions                                         628          132
Net income                                $    17,889    $  15,445    $          2,444          16 %
Operating Data:
Net revenue margin(5)                          36,315       33,617               2,698           -
Field operating costs / G&A / Other            (6,604 )     (6,759 )               155           2 %
Adjusted EBITDA                           $    29,711    $  26,858    $          2,853          11 %

Average working storage capacity (Bcf)             89           75                  14          19 %

Monthly Operating Metrics ($/Mcf):
Net revenue margin (5)                    $      0.14    $    0.15    $          (0.01 )        (7 )%
Field operating costs / G&A / Other             (0.03 )      (0.03 )                 -           -
Adjusted EBITDA                           $      0.11    $    0.12    $          (0.01 )         -



(1) Certain variance amounts and/or percentages were intentionally omitted.

(2) Includes revenues associated with sales of natural gas through commercial marketing activities.

(3) Includes costs associated with natural gas sold through commercial marketing activities and storage-related costs (including fuel expense) attributable to hub services and merchant storage revenues.

(4) Includes storage-related costs (including fuel expense) attributable to firm storage services revenues.

(5) Net revenue margin equals total revenues less storage-related costs and excludes the impact, if any, of mark-to-market adjustments (unrealized gains and losses) on open derivative positions.


Table of Contents

                                            Nine Months Ended         Favorable/(Unfavorable)
                                              September 30,                Variance (1)
                                            2012         2011              $              %
Revenues
Firm storage services                     $ 105,646    $ 100,075    $         5,571           6 %
Hub services and merchant storage (2)       166,268       81,252             85,016         105 %
Other                                         3,076        2,791                285          10 %
Total revenues                              274,990      184,118             90,872          49 %

Storage-related costs - Hub services
and merchant storage (3)                   (157,564 )    (77,830 )          (79,734 )      (102 )%
Storage-related costs - Firm storage
services (4)                                 (9,985 )    (12,827 )            2,842          22 %
Field operating costs                        (9,030 )     (9,072 )               42           -
General and administrative expenses         (14,304 )    (18,193 )            3,889          21 %
Other income/(expense), net                      12           10
Acquisition-related expense                       -        4,055
Insurance deductible related to
property damage                                   -          500
Equity compensation expense                   3,148        3,339
Mark-to-market of open derivative
positions                                       (72 )       (235 )
Adjusted EBITDA                           $  87,195    $  73,865    $        13,330          18 %

Reconciliation to net income
Adjusted EBITDA                           $  87,195    $  73,865    $        13,330          18 %
Depreciation, depletion and
amortization                                (27,855 )    (24,602 )           (3,253 )       (13 )%
Interest expense, net of capitalized
interest                                     (5,350 )     (3,945 )           (1,405 )       (36 )%
Equity compensation expense                  (3,148 )     (3,339 )
Acquisition-related expenses                      -       (4,055 )
Mark-to-market of open derivative
positions                                        72          235
Insurance deductible related to
property damage                                   -         (500 )
Net income                                $  50,914    $  37,659    $        13,255          35 %
Operating Data:
Net revenue margin(5)                     $ 107,369    $  93,226    $        14,143          15 %
Field operating costs / G&A / Other         (20,174 )    (19,361 )             (813 )         4 %
Adjusted EBITDA                           $  87,195    $  73,865    $        13,330          18 %

Average working storage capacity (Bcf)           82           69                 13          18 %

Monthly Operating Metrics ($/Mcf):
Net revenue margin (5)                    $    0.15    $    0.15    $             -           -
Field operating costs / G&A / Other           (0.03 )      (0.03 )                -           -
Adjusted EBITDA                           $    0.12    $    0.12    $             -           -



(1) Certain variance amounts and/or percentages were intentionally omitted.

(2) Includes revenues associated with sales of natural gas through commercial marketing activities.

(3) Includes costs associated with natural gas sold through commercial marketing activities and storage-related costs (including fuel expense) attributable to hub services and merchant storage revenues.

(4) Includes storage-related costs (including fuel expense) attributable to firm storage services revenues.

(5) Net revenue margin equals total revenues less storage-related costs and excludes the impact, if any, of mark-to-market adjustments (unrealized gains and losses) on open derivative positions.

Non-GAAP and Segment Financial Measures

To supplement our financial information presented in accordance with GAAP, management uses Adjusted EBITDA and distributable cash flow in its evaluation of past performance and prospects for the future. Management believes that the presentation of such additional financial measures provides useful information to investors regarding our financial condition and results of operations because these measures, when used in conjunction with related GAAP financial measures,
(i) provide additional information about our core operations and ability to generate and distribute cash flow, (ii) provide investors with the financial analytical framework upon


Table of Contents

which management bases financial, operational, compensation and planning decisions and (iii) present measurements that investors, rating agencies and debt holders have indicated are useful in assessing us and our results of operations. Adjusted EBITDA and/or distributable cash flow may exclude, for example, the impact of unique and infrequent items, items outside of management's control and/or items that are not indicative of our core operating results and business outlook, which we have defined hereinafter as "selected items impacting comparability." These additional financial measures are reconciled to net income, the most directly comparable measures as reported in accordance with GAAP, in the following table and should be viewed in addition to, and not in lieu of, our consolidated financial statements and footnotes.

We define Adjusted EBITDA as earnings before interest expense, taxes, depreciation, depletion and amortization, equity compensation plan charges, unrealized gains and losses from derivative activities and applicable "selected items impacting comparability."

Distributable cash flow, as determined by our general partner, is defined as:
(i) net income; plus or minus, as applicable, (ii) any amounts necessary to offset the impact of any items included in net income that do not impact the amount of available cash; plus (iii) any acquisition-related expenses deducted from net income and associated with (a) successful acquisitions or (b) any other potential acquisitions that have not been abandoned; minus (iv) any acquisition related expenses covered by clause (iii)(b) immediately preceding that relate to
(a) potential acquisitions that have since been abandoned or (b) potential acquisitions that have not been consummated within one year following the date such expense was incurred (except that if the potential acquisition is the subject of a pending purchase and sale agreement as of such one-year date, such one-year period of time shall be extended until the first to occur of the termination of such purchase and sale agreement or the first day following the closing of the acquisition contemplated by such purchase and sale agreement); and minus (v) maintenance capital expenditures. The types of items covered by clause (ii) above include (a) depreciation, depletion and amortization expense,
(b) any gain or loss from the sale of assets not in the ordinary course of business, (c) any gain or loss as a result of a change in accounting principle,
(d) any non-cash gains or items of income and any non-cash losses or expenses, including asset impairments, amortization of debt discounts, premiums or issue costs, mark-to-market activity associated with hedging and with non-cash revaluation and/or fair valuation of assets or liabilities and (e) earnings or losses from unconsolidated subsidiaries except to the extent of actual cash distributions received. Distributable cash flow does not reflect actual cash on hand that is available for distribution to our unitholders.

The following table reconciles Non-GAAP and segment financial measures to the most directly comparable measures as reported in accordance with GAAP (in thousands):

                                            Three Months Ended          Nine Months Ended
                                              September 30,               September 30,
                                            2012          2011          2012         2011
Adjusted EBITDA reconciliation
Net income                               $    17,889    $  15,445    $   50,914    $  37,659
Interest expense, net of capitalized
interest                                       1,973        1,666         5,350        3,945
Depreciation, depletion and
amortization                                   9,461        9,193        27,855       24,602
Selected items impacting Adjusted
EBITDA
Equity compensation expense                    1,016          681         3,148        3,339
Acquisition-related expenses                       -            5             -        4,055
Mark-to-market of open derivative
positions                                       (628 )       (132 )         (72 )       (235 )
Insurance deductible related to
property damage                                    -            -             -          500
Adjusted EBITDA                          $    29,711    $  26,858    $   87,195    $  73,865

Distributable cash flow
reconciliation
Net income                               $    17,889    $  15,445    $   50,914    $  37,659
Depreciation, depletion and
amortization                                   9,461        9,193        27,855       24,602
Acquisition-related expense                        -            5             -        4,055
Maintenance capital expenditures                 (84 )        (51 )        (457 )       (266 )
Other non cash items:
Equity compensation expense, net of
cash payments                                  1,141          683         2,595        2,722
Mark-to-market of open derivative
positions                                       (628 )       (132 )         (72 )       (235 )
Distributable cash flow                  $    27,779    $  25,143    $   80,835    $  68,537


Table of Contents

Three Months Ended September 30, 2012 as Compared to the Three Months Ended September 30, 2011

Revenues, Volumes and Related Costs. As noted in the table above, our total revenues net of storage-related costs increased during the three months ended September 30, 2012 (the "2012 period") when compared to the three months ended September 30, 2011 (the "2011 period"). The primary reasons for such increase are the results of PNG Marketing, LLC (our commercial optimization company) and incremental revenues attributable to the expansion of our working gas capacity at our Pine Prairie and Southern Pines facilities. These and other significant variances related to these periods are discussed in more detail below:

Firm storage services - Firm storage services revenues did not change significantly in the 2012 period as compared to the 2011 period. Incremental revenues attributable to the expansion of our working gas capacity at our Pine Prairie and Southern Pines facilities were offset by decreased storage rates on contracts executed to replace expiring contracts on existing capacity and lower fuel in kind revenues, both of which resulted from lower natural gas prices throughout 2011 and into 2012. Also, additional working storage capacity was retained for use by our commercial optimization company in the 2012 period as compared to the 2011 period. Revenues generated through the use of storage capacity by our commercial optimization company are reflected as merchant storage revenues when natural gas we own is withdrawn from storage and sold.

Hub services and merchant storage - Hub services and merchant storage revenues (which include revenues from sales of natural gas by our commercial optimization company) decreased in the 2012 period as compared to the 2011 period. The primary reason for the decrease in 2012 as compared to 2011 is due to a decrease in volumes of natural gas sold by our commercial optimization company, in addition to a decline in natural gas prices in the 2012 period as compared to the 2011 period. The volume and timing of natural gas sales by our commercial optimization company are largely driven by market opportunities.

Other - Other revenues did not have a significant impact on the comparability of our operating results between the 2012 and the 2011 periods.

Storage-related costs - Hub services and merchant storage - Hub services and merchant storage-related costs (which includes costs associated with natural gas sold by our commercial optimization company) decreased in the 2012 period as compared to the 2011 period. The primary reason for the decrease in the 2012 period as compared to the 2011 period is due to the decrease in volumes of natural gas sold by our commercial optimization company.

Storage-related costs - Firm storage services - Firm storage services related costs decreased in the 2012 period as compared to the 2011 period. The decrease in the 2012 period as compared to the 2011 period is primarily due to a reduction in storage and transportation capacity leased from third parties along with lower fuel costs resulting from a decline in natural gas prices.

Other Costs and Expenses. The significant variances are discussed further below:

Field operating costs - Field operating costs did not change significantly in the 2012 period when compared to the 2011 period.

General and administrative expenses - General and administrative expenses did not change significantly in the 2012 period as compared to the 2011 period. Additionally, we recognized approximately $0.2 million and $0.5 million of equity compensation expense associated with transaction awards granted by PAA during the 2012 and 2011 periods, respectively. Although we will not bear the economic burden of these awards, we benefit from the services underlying these awards.

Depreciation, depletion and amortization - Depreciation, depletion and amortization expense increased in the 2012 period as compared to the 2011 period. The increase resulted primarily from an increased amount of depreciable assets resulting from capacity expansions at our Pine Prairie and Southern Pines facilities.

Interest expense, net of capitalized interest - Interest expense, net of capitalized interest, increased in the 2012 period when compared to the 2011 period. Interest expense, on a gross basis, decreased to approximately $3.5 million in the 2012 period as compared to approximately $4.4 million in the 2011 period due to lower average interest rates in the 2012 period as compared to the 2011 period and was partially offset by higher average debt balances in the 2012 period as compared to the 2011 period. Capitalized interest deceased from approximately $2.7 million in the 2011 period to approximately $1.6 million in the 2012 period. The decrease was primarily the result of lower average interest rates and an increase in working gas capacity in-service.


Table of Contents

Nine Months Ended September 30, 2012 as Compared to the Nine Months Ended September 30, 2011

Revenues, Volumes and Related Costs. As noted in the table above, our total revenues and storage-related costs increased during the nine months ended September 30, 2012 (the "2012 period") when compared to the nine months ended September 30, 2011 (the "2011 period"). The primary reasons for such increase are the completion of the Southern Pines Acquisition on February 9, 2011, results of PNG Marketing, LLC, and incremental revenues attributable to the expansion of our working gas capacity at our Pine Prairie and Southern Pines facilities. These and other significant variances related to these periods are discussed in more detail below:

Firm storage services - Firm storage services revenues increased in the 2012 period as compared to the 2011 period primarily due to the completion of the Southern Pines Acquisition and incremental revenues attributable to the expansion of our working gas capacity at our Pine Prairie and Southern Pines facilities. These increases were partially offset by decreased storage rates on contracts executed to replace expiring contracts on existing capacity and lower fuel in kind revenues, both of which resulted from lower natural gas prices throughout 2011 and into 2012. Also, additional working storage capacity was retained for use by our commercial optimization company in the 2012 period as compared to the 2011 period. Revenues generated through the use of storage capacity by our commercial optimization company are reflected as merchant storage revenues when natural gas we own is withdrawn from storage and sold.

Hub services and merchant storage - Hub services and merchant storage revenues (which include revenues from sales of natural gas by our commercial optimization company) increased in the 2012 period as compared to the 2011 period. The primary reason for the increase in 2012 as compared to 2011 is due to an increase in volumes of natural gas sold by our commercial optimization company, partially offset by a decline in natural gas prices in the 2012 period as compared to the 2011 period. The volume and timing of natural gas sales by our commercial optimization company are largely driven by market opportunities.

Other - Other revenues did not have a significant impact on the comparability of our operating results between the 2012 and the 2011 periods.

Storage-related costs - Hub services and merchant storage - Hub services and merchant storage-related costs (which includes costs associated with natural gas sold by our commercial optimization company) increased in the 2012 period as compared to the 2011 period. The primary reason for the increase in the 2012 period as compared to the 2011 period is due to the increase in volumes of natural gas sold by our commercial optimization company.

Storage-related costs - Firm storage services - Firm storage services related costs decreased in the 2012 period as compared to the 2011 period. The decrease in the 2012 period as compared to the 2011 period is primarily due to a reduction in storage and transportation capacity leased from third parties along with lower fuel costs resulting from a decline in natural gas prices.

Other Costs and Expenses. The significant variances are discussed further below:

Field operating costs - Field operating costs did not change significantly in the 2012 period when compared to the 2011 period. Increases in operating expenses during the 2012 period associated with the Southern Pines Acquisition and facility expansions were approximately offset by $0.5 million of expense recognized during the 2011 period for the property insurance deductible related to the January 2011 operational incident and fire at our Bluewater facility.

General and administrative expenses - General and administrative expenses decreased in the 2012 period as compared to the 2011 period. The 2011 period includes approximately $4.1 million of acquisition-related costs associated with the Southern Pines Acquisition. Additionally, we recognized approximately $1.0 million and $2.4 million of equity compensation expense associated with transaction awards granted by PAA during the 2012 and 2011 periods, respectively. Although we will not bear the economic burden of these awards, we benefit from the services underlying these awards.

Depreciation, depletion and amortization - Depreciation, depletion and amortization expense increased in the 2012 period as compared to the 2011 period. The increase resulted primarily from an increased amount of depreciable assets resulting from the Southern Pines acquisition and our internal capital expansion projects at our Pine Prairie and Southern Pines facilities. Additionally, amortization of intangible assets acquired in conjunction with the Southern Pines Acquisition was approximately $12.3 million and $10.6 million during the 2012 and 2011 periods, respectively.


Table of Contents

Interest expense, net of capitalized interest - Interest expense, net of capitalized interest, increased in the 2012 period when compared to the 2011 period. Interest expense, on a gross basis, decreased to approximately $11.4 million in the 2012 period as compared to approximately $12.4 million in the 2011 period due to lower average interest and was partially offset by higher average debt balances in the 2012 period as compared to the 2011 period. Capitalized interest deceased from approximately $8.4 million in the 2011 period to approximately $6.1 million in the 2012 period. The decrease was primarily the result of lower average interest rates and an increase in working gas capacity in-service.

Outlook

Overall market conditions during the three months ended September 30, 2012 for both hub services and firm storage services were comparable to those from the three months ended September 30, 2011. During the three months ended September 30, 2012, seasonal spreads (October to January) for 2012-2013, which are a proxy for the current intrinsic value of storage, ranged from $0.38 to $0.68, compared to $0.37 to $0.59 for the three months ended September 30, 2011. Over the past ten years, seasonal spreads ranged from $0.19-$4.74. Seasonal spreads for 2013-2014 and 2014-2015, which influence the rates at which we will be able to contract firm storage capacity in future years, have ranged from $0.35 to $0.47. Volatility levels, which impact the value we are able to realize on a short-term . . .

  Add PNG to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PNG - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.