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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended December 31, 2011

OR

For the transition period from                       to                       

Commission file number 1-34733

Niska Gas Storage Partners LLC

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(281) 404-1890

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

As of February 7, 2012, there were 34,492,245 Common Units and 33,804,745 Subordinated Units outstanding.

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Cautionary Statement Regarding Forward-Looking Information

This report contains information that may constitute “forward-looking statements.” Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future—including statements relating to general views about future operating results—are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include changes in general economic conditions, competitive conditions in our industry, actions taken by third-party operators, processors and transporters, changes in the availability and cost of capital, operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control, the effects of existing and future laws and governmental regulations, the effects of future litigation, and certain factors described in Part II, “Item 1A. Risk Factors” and elsewhere in this report and in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011, and those described from time to time in our future reports filed with the Securities and Exchange Commission.

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PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements (unaudited)

Niska Gas Storage Partners LLC

Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss)

(in thousands of U.S. dollars, except for per unit amounts)

(Unaudited)

(See Notes to Unaudited Consolidated Financial Statements)

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Niska Gas Storage Partners LLC

Consolidated Balance Sheets

(in thousands of U.S. dollars)

(Unaudited)

(See Notes to Unaudited Consolidated Financial Statements)

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Niska Gas Storage Partners LLC

Consolidated Statements of Cash Flows

(in thousands of U.S. dollars)

(Unaudited)

Supplemental cash flow disclosures (Note 16)

(See Notes to Unaudited Consolidated Financial Statements)

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Niska Gas Storage Partners LLC

Consolidated Statement of Changes in Members’ Equity

(in thousands of U.S. dollars)

(Unaudited)

(See Notes to Unaudited Consolidated Financial Statements)

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Niska Gas Storage Partners LLC

Notes to Unaudited Consolidated Financial Statements

(Tabular amounts expressed in thousands of U.S. dollars unless otherwise noted)

1. Organization and Basis of Presentation

Organization

Niska Gas Storage Partners LLC (“Niska Partners” or the “Company”) is a publicly traded Delaware limited liability company (NYSE:NKA) that was formed on January 27, 2010 to acquire certain assets of Niska GS Holdings I, LP and Niska GS Holdings II, LP (collectively, “Niska Predecessor”). On May 11, 2010, Niska Partners priced its initial public offering (the “IPO”) of 17,500,000 common units at an offering price of $20.50 per unit. Upon closing of the IPO on May 17, 2010, Niska Partners received net proceeds of $333.5 million, after deducting the underwriters’ discount, structuring fees and offering expenses. Upon closing the IPO, Niska Predecessor’s parent Niska Sponsor Holdings Coöperatief U.A. (“Sponsor Holdings” or “Holdco”), exchanged 100% of its equity interest in Niska Predecessor for a 2% Managing Member’s interest, 33,804,745 subordinated units, 13,679,745 common units of Niska Partners, and all of the Company’s Incentive Distribution Rights (“IDRs”). As a result of these transactions, Niska Partners became the owner of substantially all of the assets of Niska Predecessor. Prior to the closing, Niska Partners had no activity.

As partial consideration for the contribution of 100% of Niska Predecessor’s equity interest to Niska Partners, Sponsor Holdings held the right to receive any common units not purchased pursuant to the expiration of a 30-day option granted to the underwriters of the IPO to purchase up to an additional 2,625,000 common units. Upon the close of business on June 10, 2010, the 30-day option granted to the underwriters expired unexercised. Pursuant to the Contribution Agreement, 2,625,000 common units were issued to Sponsor Holdings on June 11, 2010.

At December 31, 2011, Niska Partners had 34,492,245 common units and 33,804,745 subordinated units outstanding. Of these amounts, 16,992,245 common units and all of the subordinated units are owned by Sponsor Holdings, along with a 1.98% Managing Member’s interest in the Company and all of the Company’s IDRs. Including all of the common and subordinated units owned by Sponsor Holdings, along with the 1.98% Managing Member’s interest, Sponsor Holdings has a 74.88% ownership interest in the Company, excluding the IDRs. The remaining 17,500,000 common units, representing a 25.12% ownership interest excluding the IDRs, are owned by the public.

Niska Partners operates the Countess and Suffield gas storage facilities (collectively, the AECO Hub™) in Alberta, Canada, and the Wild Goose and Salt Plains gas storage facilities in California and Oklahoma, respectively. Each of these facilities markets gas storage services in addition to optimizing storage capacity with its own proprietary gas purchases.

Basis of Presentation

The accounting policies applied in these unaudited interim financial statements are consistent with the policies applied in the consolidated financial statements of Niska Partners and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

In the opinion of management, the accompanying consolidated financial statements of Niska Partners, which are unaudited except that the balance sheet at March 31, 2011 is derived from audited financial statements, include all adjustments necessary to present fairly Niska Partners’ financial position as of December 31, 2011, along with the results of Niska Partners’ operations and its cash flows for the three and nine months ended December 31, 2011 and 2010. The results of operations for the three and nine months ended December 31, 2011 are not necessarily representative of the results to be expected for the full fiscal year ending March 31, 2012.  The optimization of proprietary gas purchases is seasonal with the majority of the revenues and cost associated with the physical sale of proprietary gas occurring during the third and fourth fiscal quarters, when demand for natural gas is typically the strongest.

As the closing of the Company’s IPO occurred on May 17, 2010, the earnings for the nine months ended December 31, 2010 have been pro-rated to reflect earnings on a pre- and post-IPO basis. As part of the process of allocating revenues and expenses to both periods, the Company assessed the fair value of its risk management assets and liabilities as of the closing date, resulting in an unrealized gain for the pre-IPO period and an unrealized loss for the post-IPO period. The net unrealized loss for the period from May 17, 2010 to December 31, 2010 is reflected in the per-unit information presented in the consolidated statement of earnings (loss) and comprehensive income (loss).

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Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), the unaudited consolidated financial statements do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements should be read in conjunction with the consolidated financial statements of Niska Partners and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2011.

Recent Accounting Pronouncements

Accounting Standards Update 2011-04

In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that updates the previous reporting requirement under Accounting Standards Codification (“ASC”) 820.  This update, which will become effective for interim and annual periods beginning after December 15, 2011, requires additional disclosures about the transfers between Level 1 and Level 2 of the fair value hierarchy, the sensitivity of unobservable inputs to the fair value measurements within Level 3 of the fair value hierarchy, and disclosure of the categorization by level of the fair value hierarchy for items for which fair value disclosure is required but that are not measured at fair value in the statement of financial position.

In September 2011, the FASB issued guidance that updates the requirements for testing for goodwill impairment. This update, which will become effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011, permits entities testing for goodwill impairment the option of performing a qualitative assessment before calculating the fair value of the reporting unit. If it is determined that the fair value of the reporting unit is more likely than not less than the carrying amount on the basis of qualitative factors, the two step impairment test is required. The update does not change how goodwill is calculated or assigned to reporting units and did not affect the impairment of goodwill described in note 3.

In December 2011, the FASB issued amended guidance to enhance disclosures that will enable users of the financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either offset in accordance with current U.S. GAAP or subject to an enforceable master netting agreement. This guidance is effective for annual periods beginning on or after January 1, 2013. Adoption of these amendments is expected to result in an increase in disclosures regarding financial instruments which are subject to offsetting as described in this amendment.

2. Commitments and Contingencies

Contingencies

Niska Partners and its subsidiaries are subject to various legal proceedings and actions arising in the normal course of business. While the outcome of such legal proceedings and actions cannot be predicted with certainty, it is the view of management that the resolution of such proceedings and actions will not have a material impact on Niska Partners’ unaudited consolidated financial position or results of operations.

3. Goodwill

Niska Partners is required to perform an annual impairment test with respect to the valuation of its goodwill, a test which is performed at the Company’s fiscal year end of March 31.  However, Niska Partners is also required to evaluate on an interim basis whether there are factors which indicate that economic and/or business conditions have deteriorated such that the value of its goodwill has declined since its most recent annual test.  During the three months ended December 31, 2011, the Company concluded that a number of factors, including the continued narrow difference between summer and winter prices in the natural gas futures market, sometimes referred to as the seasonal spread, along with a significant reduction in natural gas price volatility were impairment indicators.  The Company made this determination because these factors had a material negative effect on its current financial performance and its expected performance for the balance of the fiscal year ending March 31, 2012.  Management is unable to predict whether these factors will reverse in periods beyond the current fiscal year.  Therefore, management performed an interim goodwill impairment test.

The goodwill impairment test is performed at a reporting unit level.  Reporting units are identified and distinguished based on how the associated business is managed, taking into consideration the nature of services offered, the types of customer contracts entered into and the nature of the economic and regulatory environment.  Niska Partners has four reporting units (its AECO HubTM facility in Alberta, its Wild Goose facility in California, its Salt Plains facility in Oklahoma

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and its contractual capacity on the Natural Gas Pipeline of America (“NGPL”) system).  These reporting units are aggregated into one operating segment for financial reporting purposes.  Prior to the impairment test, Niska Partners’ total goodwill of $495.6 million was recorded at the AECO HubTM facility ($455.0 million) and the NGPL capacity ($40.6 million).  There is no goodwill recorded at the Wild Goose or Salt Plains facilities.

The performance of the impairment test involves a two step process.  The first step determines whether an impairment exists by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying amount, no impairment is necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step measures the amount of impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. An entity assigns the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.

The Company determined the fair value of the AECO HubTM and NGPL reporting units using a combination of the present value of future cash flows method and the comparable transactions method. The present value of future cash flows was estimated using (i) discrete financial forecasts, which rely on management’s estimates of revenue, expenses and volumes, (ii) long-term natural gas volatility and seasonal spreads (iii) long-term average exchange rate between the United States Dollar and the Canadian Dollar and (iv) appropriate discount rates. The comparable transactions method analyzed other purchases of similar assets and considered (i) the anticipated cash flows of the Company determined above, (ii) recent transaction multiples based on anticipated cash flows and (iii) the similarity of comparable transactions to the Company’s facilities.  Specifically, the Company used experience and budgeted amounts to estimate cycling volumes and expenses, the future summer to winter spreads which reflects its longer term outlook, and extrinsic values consistent with those achieved in the business to estimate future revenue.  These values used to estimate future revenues are lower than the seasonal storage spread and extrinsic values used in the Company’s most recent annual test.  The Company also used a comparable transaction multiple consistent with recent transactions for depleted reservoir storage facility acquisitions (the type of facilities comparable to the Company’s AECO HubTM facility).  Both the AECO HubTM facility and the NGPL leased capacity failed step one of the goodwill impairment test; therefore, the second step of impairment test was performed.

In step two, the Company compared the implied fair value of the reporting units’ goodwill with the carrying amounts of that goodwill. Under step two of the impairment test, significant assumptions in measuring the fair value of the assets and liabilities include (1) the replacement cost, depreciation and obsolescence and useful lives of property, plant and equipment and (2) the present value of incremental cash flows attributable to certain intangible assets. Based on the step two analysis, the Company determined that an impairment charge of $250 million was required.

The allocation of goodwill balances and related impairment charges by reporting unit consists of the following:

The Company also considered the goodwill impairment an indicator of impairment related to the long-lived assets associated with the AECO HubTM facility and the NGPL leased capacity. Accordingly, these assets were evaluated for impairment prior to completing the goodwill valuation and management concluded that no impairment of other long-lived asset had occurred.

4. Accrued Cushion Gas Purchases

During the nine months ended December 31, 2011 and 2010, the Company entered into a series of transactions to sell cushion gas which, is recorded as a component of property, plant and equipment in the accompanying financial statements. The Company entered into firm commitments to re-acquire this cushion gas in the fourth quarter of the fiscal year ending March 31, 2012 and 2011, respectively.  The repurchase price is accrued as a liability. The difference between the proceeds received and the repurchase price, along with the proceeds of short-term firm transactions designed to replace the cushion gas during the intervening period, is being recorded as an expense over the period of the arrangement.

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5. Financing Liabilities

During the quarter December 31, 2011, Niska Partners entered into a sales leaseback transaction whereby it sold certain equipment under construction to be used at the Wild Goose Facility for proceeds equal to its carrying value at the time of $11.4 million.  The Company has agreed to lease the equipment back under a nine year lease arrangement for estimated future minimum lease payments of approximately $13.2 million.  There was no gain or loss resulting from this transaction. Under the terms of the arrangement, the lessor will incur the remaining construction costs, up to a maximum of $20 million, and Niska Partners will lease the completed assets under the same arrangement.  Niska Partners may purchase the assets after eight years for an agreed portion of the acquisition cost.  The present value of the minimum future lease payments is based on the total costs incurred by the lessor through December 31, 2011 and have been reflected in the in the balance sheet as current and non-current financing liabilities of $1.2 million and $10.1 million, respectively.

6. Debt

Niska Partners’ debt obligations consist of the following:

Senior Notes

On March 5, 2010, Niska Partners, through its subsidiaries Niska Gas Storage US, LLC (“Niska US”) and Niska Gas Storage Canada ULC (“Niska Canada”), completed a non-public offering of 800,000 units, each unit consisting of $218.75 principal amount of 8.875% senior notes due 2018 of Niska US and $781.25 principal amount of 8.875% senior notes of Niska Canada (the “Senior Notes”). The Senior Notes were sold for par value of $800.0 million in an offering exempt from registration under the Securities Act.

On February 4, 2011, the SEC declared effective Niska Partners’ exchange offer whereby holders of the Senior Notes were permitted to exchange such Senior Notes for new freely transferable Senior Notes.  The terms of the new units are identical to the units described above, except that the new units have been registered under the Securities Act and do generally not contain restrictions on transfer.  The exchange offer was completed on March 2, 2011 and all of the previously outstanding Senior Notes were exchanged.

During the quarter ended December 31, 2011, Niska Partners paid $93.9 million, excluding accrued interest, to repurchase Senior Notes with a principal amount of $90.5 million. During the nine months ended December 31, 2011, the Company paid $124.8 million, excluding accrued interest, to repurchase Senior Notes with a principal amount of $121.2 million. For the three and nine months ended December 31, 2011, the Company recognized losses of $5.1 million and $6.0 million, respectively, on these repurchases, which were recorded as losses on extinguishment of debt. The losses on the repurchases were measured based on the carrying value of the repurchased portion of the Senior Notes, which included a portion of the unamortized debt issue costs on the dates of repurchase. The related accrued interest costs were recorded in interest expense.

Interest on the Senior Notes is payable semi-annually on March 15 and September 15 at a rate of 8.875% per annum, commencing September 15, 2010. The Senior Notes will mature on March 15, 2018. As at December 31, 2011, the estimated fair value of the Senior Notes was $666.9 million.

The indenture governing the Senior Notes limits Niska Partners’ ability to incur new debt or to pay distributions in respect of, repurchase or pay dividends on its membership interests (or other capital stock) or make other restricted payments. The limitations will apply differently depending on a fixed charge coverage ratio, which is defined as the ratio of cash flow (which is defined in the indenture in a manner substantially consistent with consolidated earnings before interest, taxes,

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depreciation and amortization (“EBITDA”) to fixed charges, each as defined in the indenture governing the Senior Notes, and measured for the preceding four fiscal quarters.

Under this limitation the indenture would have permitted the Company to distribute approximately $29.4 million as at December 31, 2011.

If the fixed charge coverage ratio is not less than 2.0 to 1.0 (after giving pro forma effect to the incurrence of the additional debt obligations), Niska Partners is generally permitted to incur additional debt obligations beyond the Senior Notes and its $400 million Credit Agreement (discussed below).

If the fixed charge coverage ratio is not less than 1.75 to 1.0, Niska Partners is permitted to make restricted payments if the aggregate restricted payments since the date of the closing of its IPO, excluding certain types or amounts of permitted payments, are less than the sum (which the Company refers to as the restricted payment basket) of a number of items including, most importantly:

·                  operating surplus (defined similarly to the definition in the Company’s operating agreement) calculated as of the end of its preceding fiscal quarter; and

·                  the aggregate net cash proceeds received as a capital contribution or from the issuance of equity interests, including the approximately $336 million of net cash proceeds from the IPO, reduced by the approximately $271.4 million Niska Partners distributed to Holdings Canada (as defined below) shortly before the IPO.

If the fixed charge coverage ratio is less than 1.75 to 1.0, Niska Partners is permitted to make restricted payments if the aggregate restricted payments constituting distributions in respect of Niska Partners’ capital stock since the date of the closing of its IPO, excluding certain types or amounts of permitted payments, are less than the sum (which the Company refers to as the restricted payment basket) of a number of items including, most importantly:

·                  $75.0 million; and

·                  the aggregate net cash proceeds received as a capital contribution or from the issuance of equity interests, again including the net cash proceeds from the IPO, reduced by the amount distributed before the IPO.

The limitations are applied without regard to whether the restricted payments that are compared to the restricted payment basket were made when the fixed charge coverage ratio was or was not less than 1.75 to 1.0, meaning that if the fixed charge coverage ratio becomes less than 1.75 to 1.0 and Niska Partners has previously made restricted payments in excess of the restricted payment basket, Niska Partners will be prohibited from making restricted payments other than the permitted payments referred to above.

The permitted payments, which are applicable regardless of the fixed charge ratio, include a general basket of $75.0 million.

At December 31, 2011, the fixed charge coverage ratio was 1.99 to 1.0 and Niska Partners was permitted to pay the distribution described in Note 18. When the ratio declines below 2.0 to 1.0 the Company is restricted in its ability to issue new debt.

$400 Million Credit Agreement

In March 2010, Niska Partners, through its subsidiaries, Niska Gas Storage US, LLC and AECO Gas Storage Partnership, entered into new senior secured asset-based revolving credit facilities, consisting of a U.S. revolving credit facility and a Canadian revolving credit facility (the “Credit Facilities” or the “$400 million Credit Agreement”). The $400 million Credit Agreement provides for revolving loans and letters of credit in an aggregate principal amount of up to $200 million for each of the U.S. revolving credit facility and the Canadian revolving credit facility. Subject to certain conditions, each of the revolving credit facilities may be expanded up to a maximum of $100.0 million in additional commitments, and the commitments in each facility may be reallocated on terms and according to procedures to be determined. Loans under the U.S. revolving facility will be denominated in U.S. dollars and loans under the Canadian revolving facility may be denominated, at the Company’s option, in either U.S. or Canadian dollars. Each revolving credit facility matures on March 5, 2014.

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Niska Partners had $84.0 million in drawings outstanding under the $400 million Credit Agreement at December 31, 2011 (March 31, 2011 - $ nil). Amounts committed in support of letters of credit totaled $52.8 million at December 31, 2011 (March 31, 2011—$3.1 million). Any borrowings under the $400 million Credit Agreement are classified as current.

Borrowings under the Credit Facilities are limited to a borrowing base calculated as the sum of specified percentages of eligible cash and cash equivalents, eligible accounts receivable, the net liquidating value of hedge positions in broker accounts, eligible inventory, issued but unused letters of credit, and certain fixed assets minus the amount of any reserves and other priority claims. Borrowings will bear interest at a floating rate, which (1) in the case of U.S. dollar loans can be either LIBOR plus an applicable margin or, at the Company’s option, a base rate plus an applicable margin, and (2) in the case of Canadian dollar loans can be either the bankers’ acceptance rate plus an applicable margin or, at the Company’s option, a prime rate plus an applicable margin. The credit agreement provides that Niska Partners may borrow only up to the lesser of the level of the then current borrowing base or the committed maximum borrowing capacity, which is currently $400.0 million. As of December 31, 2011, the borrowing base collateral totaled $509.4 million.

The $400 million Credit Agreement contains limitations on Niska Partners’ ability to incur additional debt or to pay distributions in respect of, repurchase or pay dividends on its membership interests (or other capital stock) or make other restricted payments. These limitations are similar to those contained in the indenture governing the Senior Notes, but contain certain substantive differences.  As a result of these differences, the limitations on restricted payments contained in the Credit Agreement should be less restrictive than the limitations contained in the indenture.

As of December 31, 2011, Niska Partners was in compliance with all covenant requirements under the Senior Notes and the $400 million Credit Agreement.

Niska Partners has no independent assets or operations other than its investments in its subsidiaries. Both the Senior Notes and the $400 million Credit Agreement have been jointly and severally guaranteed by Niska Partners and substantially all of its subsidiaries. Niska Partners’ subsidiaries have no significant restrictions on their ability to pay distributions or make loans to Niska Partners, which are prepared and measured on a consolidated basis, and have no restricted assets as of December 31, 2011.

7. Risk Management Activities and Financial Instruments

Risk Management Overview

Niska Partners has exposure to commodity price, foreign currency, counterparty credit, interest rate, and liquidity risk. Risk management activities are tailored to the risks they are designed to mitigate.

Commodity Price Risk

As a result of its natural gas inventory, Niska Partners is exposed to risks associated with changes in price when buying and selling natural gas across future time periods. To manage these risks and reduce variability of cash flows, the Company utilizes a combination of financial and physical derivative contracts, including forwards, futures, swaps and option contracts. The use of these contracts is subject to the Company’s risk management policies. These contracts have not been treated as hedges for financial reporting purposes and therefore changes in fair value are recorded directly in earnings.

Forward contracts and futures contracts are agreements to purchase or sell a specific financial instrument or quantity of natural gas at a specified price and date in the future. Niska Partners enters into forward contracts and futures contracts to mitigate the impact of changes in natural gas prices. In addition to cash settlement, exchange traded futures may also be settled by the physical delivery of natural gas.

Swap contracts are agreements between two parties to exchange streams of payments over time according to specified terms. Swap contracts require receipt of payment for the notional quantity of the commodity based on the difference between a fixed price and the market price on the settlement date. Niska Partners enters into commodity swaps to mitigate the impact of changes in natural gas prices.

Option contracts are contractual agreements to convey the right, but not the obligation, for the purchaser of the option to buy or sell a specific physical or notional amount of a commodity at a fixed price, either at a fixed date or at any time within a specified period. Niska Partners enters into option agreements to mitigate the impact of changes in natural gas prices.

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To limit its exposure to changes in commodity prices, Niska Partners enters into purchases and sales of natural gas inventory and concurrently matches the volumes in these transactions with offsetting forward contracts. To comply with its internal risk management policies, Niska Partners is required to limit its exposure of unmatched volumes of proprietary current natural gas inventory to an aggregate overall limit of 8.0 billion cubic feet (“Bcf”). At December 31, 2011, 69.1 Bcf of natural gas inventory was offset with forward contracts, representing 99.9% of total current inventory. Non-cycling working gas, which is included in long-term inventory, and fuel gas used for operating the facilities are excluded from the coverage requirement. Total volumes of long-term inventory and fuel gas at December 31, 2011 are 3.4 Bcf and 0.0 Bcf, respectively.

Counterparty Credit Risk

Niska Partners is exposed to counterparty credit risk on its trade and accrued accounts receivable and risk management assets. Counterparty credit risk is the risk of financial loss to the Company if a customer fails to perform its contractual obligations. Niska Partners engages in transactions for the purchase and sale of products and services with major companies in the energy industry and with industrial, commercial, residential and municipal energy consumers.  Credit risk associated with trade accounts receivable is mitigated by the high percentage of investment grade customers, collateral support of receivables and Niska Partners’ ability to take ownership of customer owned natural gas stored in its facilities in the event of non-payment.  For the nine months ended December 31, 2011, no trade receivables were deemed to be uncollectible. It is management’s opinion that no allowance for doubtful accounts is required at December 31, 2011 or March 31, 2011 on accrued and trade accounts receivable.

The Company analyzes the financial condition of counterparties prior to entering into an agreement. Credit limits are established and monitored on an ongoing basis. Management believes, based on its credit policies, that the Company’s financial position, results of operations and cash flows will not be materially affected as a result of non-performance by any single counterparty. Although the Company relies on a few counterparties for a significant portion of its revenues, one counterparty making up 42.0% of gross optimization revenue for the nine months ended December 31, 2011 is a physical natural gas clearing and settlement facility that requires counterparties to post margin deposits equal to 125% of their net position, which reduces the risk of default. Gross optimization revenue means realized optimization revenue prior to deducting cost of gas sold.

Exchange traded futures and options comprise approximately 67.9% of Niska Partners’ commodity risk management assets at December 31, 2011. These exchange traded contracts have minimal credit exposure as the exchanges guarantee that every contract will be margined on a daily basis. In the event of any default, Niska Partners’ account on the exchange would be absorbed by other clearing members. Because every member posts an initial margin, the exchange can protect the exchange members if or when a clearing member defaults.

Niska Partners further manages credit exposure by entering into master netting agreements for the majority of non-retail contracts. These master netting agreements provide the Company, in the event of default, the right to offset the counterparty’s rights and obligations.

Interest Rate Risk

Niska Partners assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows. At December 31, 2011, Niska Partners was only exposed to interest rate risk resulting from the variable rates associated with its $400 million Credit Agreement of which $84.0 million was drawn at December 31, 2011.

Liquidity Risk

Niska Partners continues to manage its liquidity risk by ensuring sufficient cash and credit facilities are available to meet its operating and capital expenditure obligations when due, under both normal and stressed conditions.

Foreign Currency Risk

Foreign currency risk is created by fluctuations in foreign exchange rates. As Niska Partners conducts a portion of its activities in Canadian dollars, earnings and cash flows are subject to currency fluctuations. The performance of the Canadian dollar relative to the US dollar could positively or negatively affect earnings. Niska Partners is exposed to cash flow risk to the extent that Canadian currency outflows do not match inflows. The Company enters into currency swaps to mitigate the impact of changes in foreign exchange rates. The notional value of currency swaps at December 31, 2011 was

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$126.4 million (March 31, 2011—$142.8 million). These contracts expire on various dates between January 1, 2012 and August 1, 2014. Niska Partners has not elected hedge accounting treatment for financial reporting purposes and, therefore, changes in fair value are recorded directly in earnings.

The following tables show the fair values of Niska Partners’ risk management assets and liabilities at December 31, 2011 and March 31, 2011:

The Company expects to recognize risk management assets and liabilities outstanding at December 31, 2011 into net earnings and comprehensive income in the fiscal periods as follows:

Realized (losses)/gains from the settlement of risk management contracts are summarized as follows:

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8. Fair Value Measurements

The carrying amount of cash and cash equivalents, margin deposits, trade receivables, accrued receivables, trade payables, accrued liabilities, and accrued cushion gas purchases reported on the unaudited consolidated balance sheet approximate fair value. The fair value of debt is the estimated amount the Company would have to pay to transfer its debt, including any premium or discount attributable to the difference between the stated interest rate and market rate of interest at the balance sheet date. Fair values are based on valuations of similar debt at the balance sheet date and supported by observable market transactions when available. See Note 6 for disclosures regarding the fair value of debt.

Fair values have been determined as follows for Niska Partners financial assets and liabilities that were accounted for at fair value on a recurring basis:

There were no transfers out of level 2 during the three and nine month periods ended December 31, 2011 and 2010.

Fair values have been determined as follows for Niska Partners non-financial assets and liabilities that were accounted for at fair value on a non-recurring basis:

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During the quarter ended December 31, 2011, the goodwill of two of Niska Partners’ reporting units was written down to its implied fair value.  The goodwill at the AECO HubTM facility with a carrying amount of $455.0 million was written down to its implied fair value of $228.0 million and the NGPL capacity which had recorded goodwill with a carrying amount of $40.6 million recorded a write down to its implied fair value of $17.6 million. The resulting impairment charges of $250 million were included in impairment of goodwill and net loss (gains) and comprehensive income for the three and nine months ended December 31, 2011 (three and nine months ended December 31, 2010 - $ nil). There were no transfers out of level 3 during the three and nine month periods ended December 31, 2011 and 2010. See Note 3 for a description of the information used to develop inputs and valuation techniques.

9. Members’ Equity

Acquisition of Assets from Parent

On December 20, 2011 Niska Partners purchased certain assets from companies that are all effectively owned by the same parent company as Niska Partners. As the transaction was completed between entities under common control the assets have been recorded at the parent’s carrying value and the residual value of net assets acquired has been recognized in equity. See Note 14.

Unit Issuance and Sale of Common Units

On August 24, 2011, the Company completed the issuance and sale 687,500 common units at a price of $16.00 per unit to Sponsor Holdings. Total proceeds of $11.0 million were used to reduce amounts owing under the Senior Notes. See Notes 6 and 14.

Acquisition of Interest in Parent

Sponsor Holdings is wholly-owned, directly and indirectly, by Niska GS Holdings Canada, L.P (“Niska Holdings Canada”).  Niska Holdings Canada’s equity consists of Class A, Class B and Class C units.  Niska Holdings Canada’s Class A Units are owned principally by Carlyle/Riverstone Global Energy and Power Fund III, L.P. and Carlyle/Riverstone Global Energy and Power Fund II, L.P. and affiliated entities (together, the “Carlyle/Riverstone Funds”) and certain current and former members of Niska Partners’ management.  The Class B and Class C units, which have identical rights and obligations in Niska Holdings Canada, are owned by certain current and former members of Niska Partners’ management and non-executive employees.  The Class B and Class C units were originally issued by Niska Predecessor in conjunction with a long-term incentive plan and were subject to service and performance conditions, all of which were satisfied in May 2009.  The Class B and Class C units were, therefore, fully vested.  Niska Predecessor had previously recorded compensation expense with respect to the Class B and Class C units throughout the vesting period. Upon vesting and the holders of the units being exposed to the risks and rewards of ownership for a reasonable period of time, the compensation arrangement became equity classified.

On June 24, 2011, certain Class B units of Niska Holdings Canada held by non-executive employees were purchased by Niska Partners at fair value. The aggregate purchase price of $2.2 million was recorded as a reduction of equity in the accompanying financial statements, with no gain or loss recognized.

The Class B units represent profit interests in Niska Holdings Canada, and entitle the holders to share in distributions made by Niska Holdings Canada once the Class A units have received distributions equal to their contributed capital plus an 8% cumulative rate of return. The Class B units held by Niska Partners do not currently participate in the earnings of or distributions paid by Niska Partners.

Earnings per unit:

Niska Partners uses the two-class method for allocating earnings per unit. The two-class method requires the determination of net income allocated to member interests as shown below.

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10. Optimization Revenue

Optimization, net consists of the following:

11. Stock-Based Compensation

Effective April 1, 2011, the Company implemented The Niska Gas Storage Partners LLC Phantom Unit Performance Plan (the “PUPP”), which is designed to further align the interests of participants in the PUPP, including the Company’s executive officers, employees, directors and certain service providers, with the interests of the Company’s unit holders by providing these individuals with a phantom unit award.  A “Phantom Unit” is a notional unit granted under the PUPP that represents the right to receive a cash payment equal to the fair market value of a unit of the Company’s common units, following the satisfaction of certain time periods and/or certain performance criteria. The PUPP is primarily administered by the Compensation Committee of the Board (the “Committee”) which grants Phantom Units to eligible participants at such times as the Committee may determine to be appropriate.

Phantom Units are generally unvested at the date of grant and subject to both time and performance conditions.  The default period over which the Phantom Units vest is three years from the date of grant.  For Phantom Units which are subject to a performance measure which is based on a combination of distributed cash flow (“DCF”) and total unitholder return (“TUR”) metrics, compared to such metrics at a select group of Niska Partners’ peer companies. The DCF and TUR metrics are calculated based on the Company’s percentile ranking during the applicable performance period compared to the peer group.  Vesting in the phantom units is also subject to the Company satisfying at least its minimum quarterly distributions for the underlying common units.

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Effective April 1, 2011, the Company issued 518,425 of the 3,380,474 Phantom Units authorized under the PUPP. During the nine months ended December 31, 2011, Niska Partners did not issue any additional Phantom Units and 161,579 Phantom Units were forfeited.

At December 31, 2011 and for the three and nine months then ended, Niska Partners recorded no liability for the units under the PUPP plan which are subject to performance measures and did not record any compensation expense, because the DCF and TUR performance measures were below the minimum threshold for accrual.

At December 31, 2011 and for the three and nine months then ended, Niska Partners recorded a liability of $0.3 million and compensation expense of $0.1 million and $0.3 million, respectively for the units under the PUPP plan which are subject to time conditions.

12. Interest Expense

Interest expense consists of the following: