FELP - Foresight Energy

[BG2008]

Doesn't seem like any of the Foresight bonds are trade able via IB

[Picasso]

They're 144A.  I could be wrong on this, but based on the reporting codes these $60 handle trades are being done off some dealers inventory, not some asset manager holder that's selling into the market.  The last real seller was in the $76 area.  I attached the history going back to February.

 

Odin, do you know which dealer had them in inventory and is actually selling them down here?  I'm going to ask my trader but I thought I would see if you knew off hand.

 

Edit: Under the RPS tab "B's" are customers selling (or a dealer buying from a customer) and "S's" are dealers selling to a customer.

[odin]

Seeing a buyer of 5mm now at 65

[ragu]

 

[...] but I can see how the defaults are nerve wracking for investors not looking at the incentives for Cline.[...]

 

Picasso,

 

Your note about the Market not looking at the incentives for Cline caused me to dig deeper into this.

 

The fact that Cline elected to forego the the distribution on the common units in October (and waive any rights to receive them in arrears) made it likely that there would be a resolution with the bond holders and that remaining unit holders would be treated fairly in any such. So, I ended up buying.

 

It's not done yet (a Murray buy-out of the rest is a non-trivial possibility), but thanks for bringing this idea to the board!

 

Best,

Ragu

[odin]

Looks like the "street" (the dealer's dealers for those not familiar) could have owned these and sold to a dealer at 65, who then sold to customer at 65.5.  The counterparty column is relatively new, but i believe this is what is indicated by the "D" code on the 65 trade.  I also saw another dealer offering 500 bonds in the last few days, which means this dealer could have seen the 500 offer in the street as well.

[Picasso]

Correct, C denotes customer and D denotes dealer.  So someone bought at $61.50 the day before the Bloomberg settlement talks article and the buyer yesterday at $65.50.  And then last customer buy was at $76.375 on March 2nd.  I've always tracked it by looking at which gets a small mark up, but that CPT column breaks out the actual customer end transactions.

[FreeOption]

Can you point me to the document that indicates the $16 cash pay is pro-rata across all note holders?  My read of the term sheet is that the purchase at par is a secondary transaction from existing noteholders independent of the debt exchange.  Just want to make sure I fully understand because it changes the story quite a bit.

 

Thanks,

 

 

 

For every $101 owed, note holders are getting the following:

 

$16 of cash

$50 of 9% 2nd lien notes

$50 of 15% 2nd lien convertible PIK notes

 

 

[Picasso]

I did that as short hand but I can break it down into each part.

 

Cline Group owns $74MM of notes already, his tender for $106MM will only apply to the other $526MM of note holders.  Any cash tender will be pro rata.  So 20% of the $526MM will be tendered for cash.  Cline Group will then have $180MM of notes which will go into the PIK's.  That will leave $120MM of PIKS and $300MM of 9% 2nd liens for everyone else, plus their $106MM of cash (adds up to $526MM). 

 

If someone owns $1MM of notes at a price of $65, they're paying $650k (obviously but just want to spell out this example).

 

(These are all in face amounts)

They would get back $200k in cash.

They would also get the 1 year PIK, likely worth par, but only $120MM/$600MM allocated, so $200k there.  (Forgot there are 20% less bonds outstanding eligible for swap) So that goes down to $160M.

That leaves the value of the $640k of 9% 2nd liens. 

 

The cash and PIK is worth $360k so if you're paying $650k for 1MM face, you're only paying $290k for the 2nd liens but they have a face value of $640k.  290/640 = an implied price of around $45.

 

Edit: As far as the pro rata tender document, I don't think there is one? Not everyone will tender (that happens) but at a minimum you would get $106 million distributed to the notes that accept the tender, so it's a question of how many of the $526 million note holders accept.  I'd assume everyone but then it will just get allocated pro rata.

[Picasso]

Hmm, but now I've realized I made a mistake with my shorthand.  If the 9% notes trade at 90% of par that would give $936 thousand of value to $1MM face.  If they're at 80% of par, that's $872 thousand of value.  So it's looking like somewhere between $87-94 of par value?  But interest jumps up which adds $11 thousand over the next year, so $88-95 of par?

 

Still a lot more than $65 but I wonder if they can get 67% to say yes to $88-95. 

[Picasso]

Here's a simplified version and probably more correct version:

 

There are only $526 million of notes that will be eligible for tender.  That brings you down to $420 million that will get swapped into $120 million of PIK's and $300 million of 9% 2nd liens. 

 

$106/526 = 20% cash

$120/526 = 23% PIK's

$300/526 = 57% 9% 2nd liens

 

So on a million face it's really $430k in cash and PIK's with the other $570k in 9% 2nd liens.  Which means 39% of face?  (Using $65 trades or $650k-430k = $220k... $220k/$570k = 39?)

 

Alright I'm going to go have a drink this is melting my brain.  Cline owning notes and only $524 million getting tendered and swapped with less PIK's made me mess up a couple figures.

[FreeOption]

Ha.  Glad I'm not the only one.  That matches my new understanding.  Thanks for the help.

[Picasso]

Couple updates here.

 

The forbearance was extended out to May 6th, which is the same deadline as the proposed support agreement.  That's probably a big day to put on the calendar.  Hopefully it doesn't go down to the final hour.

 

Second, JPM put out a coal report showing ILB production is down from 30 to 24 million tons from 4Q 2015 to 1Q 2016.  Despite that, FELP production is up 10% over the past quarter even with Hillsboro offline.  So I think you can get a sense for what the downside production/free cash flow looks like.

[sampr01]

Couple updates here.

 

The forbearance was extended out to May 6th, which is the same deadline as the proposed support agreement.  That's probably a big day to put on the calendar.  Hopefully it doesn't go down to the final hour.

 

Second, JPM put out a coal report showing ILB production is down from 30 to 24 million tons from 4Q 2015 to 1Q 2016.  Despite that, FELP production is up 10% over the past quarter even with Hillsboro offline.  So I think you can get a sense for what the downside production/free cash flow looks like.

 

Thanks for the update. Do you have any additional thoughts on bond pricing?. Please can you share with us the JPM report if possible.

 

 

[Picasso]

Sure I'm on mobile right now but basically Foresight is approaching the note holders to get the 67% support, Cline is obviously giving his 12% support with the 74 million he owns. So they need 55% support. There is no corporate action item on the notes yet (I checked) so I don't think investors are too aware of the proposal or willing to risk going long ahead of it.  I'd expect once you get an agreement from the note holders, we'll see a corporate action event for a tender and then swap. Until then I can see how the market doesn't seem to care and there's still the opportunity to buy the notes at $65. And I'd guess that any potential counter proposal from the note holders would only be better than what is already proposed. Unless it's so far apart that the whole deal falls apart.

 

If someone wants the JPM report, just send me a message since it has a watermark.

[sampr01]

If someone wants the JPM report, just send me a message since it has a watermark.

 

Thanks. I sent a PM

[Green King]

yes, please send me the report.

TIA

[Picasso]

And here was the link to 1Q production at FELP.

 

https://www.snl.com/Interactivex/article.aspx?CdId=A-36226571-11570

 

And to more than just FELP from earlier in the month.

 

https://www.snl.com/InteractiveX/Article.aspx?cdid=A-36049767-11560

[Green King]

"ILB coal also has advantages given its relatively low carbon emissions."

 

Thanks for the report.

[Picasso]

This is an excerpt from the JPM report:

 

Foresight’s efforts to douse the combustion within the longwall at Hillsboro’s low

cost Deer Run Mine haven’t been successful and the company plans to temporarily

seal the mine. On a positive note, FELP strengthened its sales book this quarter

contracting 3Mt of coal for a price range of $38.95/t- $42.35/t to Louisville Gas and

Electric Co. and Kentucky Utilities Co. through 2019.

 

I'm not sure where they got that 3Mt contract through 2019?  I haven't seen it mentioned in any filings.

 

Also they have some super lower EBITDA of $204 million in 2018.  That's a bit confusing to me in terms of how they bridge to those levels of $10 margins per ton (since they estimate 20 million tons of production).  I'd think that if they got down to $10/ton of margin they would simply be taking a lot of additional volume as they take market share.  There's too much contracted volume rolling off into 2018 for it to be flat production plus falling margins.  Especially when you look at how badly production has fallen in the 1Q.  Maybe I'm missing something here.

[Picasso]

And to expand on the contracts rolling off into 2018, they made a comment about it last year but I'm hesitant to fully believe the comments about pricing without understanding why they don't have to cut into margins.

 

Pavan Hoskote, Analyst

So in the past you've talked about potential for some plants to switch from PRB to IB. I wanted to dig a little deeper into this. At a high level, how many plants do you see the opportunity for switching from PRB to IB and what are the volumes associated with these plants? And if you can also discuss what are the costs that the plant needs to incur to switch from PRB to IB?

 

Robert Dean Moore, President and Chief Executive Officer

So we continue to look at all of our opportunities with respect to taking PRB market share. We have already started to take market share, if you look at the regions that we're shipping into today. In particular, in the Southeast region and even in what I'll call the Eastern region, we started to displace PRB coal.  Now looking at Illinois specifically, we think there's about 60 million tons of PRB market. Realistically, I think that we could probably capitalize on somewhere between 8 million to 15 million of those tons. Certain of the plants have some limitations in terms of sulfur, that would keep us out of certain plants, just based on consent orders that utilities have signed in the past, what I'll call legacy consent orders, where they've struck arrangements with US EPA or Illinois EPA.  So there are just some targets we're not going to be able to enter into.  Then on the last part of your question, I don't think I picked it all up in terms of the pricing, Pavan. I didn't catch that back half of your question.

 

Pavan Hoskote, Analyst

I'm really looking for what are the costs that the plant needs to incur to switch from PRB to IB, in terms of capitalcosts?

 

Robert Dean Moore, President and Chief Executive Officer

I think you've got to look plant by plant at that. The one thing I will say is that the plants here in Illinois were designed to burn the Illinois Basin coal. So, the retrofitting on those plants would not be as significant as others. So it's really --it's a plant by plant issue and the capital is going to vary across those plants.

 

Pavan Hoskote, Analyst

Got it. And then to understand the economics of this a little better, if you take the cost of coal, as well as the transportation costs into account, can you walk us through, at least at a high level, the cost of generation when using PRB and then compare that with the cost of generation when using IB coal for these plants that you're targeting? Really what I'm trying to get is a sense if you can capture this incremental demand without cutting pricing.

 

Robert Dean Moore, President and Chief Executive Officer

I will answer the question as follows; we can deliver in on a cents per million BTU basis, much cheaper than PRB. The only thing, in my opinion, that prevents us from penetrating into those markets are those plants that for compliance reasons, are not able to take the Illinois Basin coal. And we are working diligently with those plants to try to demonstrate to them how they can accept the coals and still comply with any consent orders or any permit constraints that they may have. We will deliver on a cents per million BTU basis cheaper than PRB, every day of the week of ourlow-cost operations in the Illinois Basin.

 

Pavan Hoskote, Analyst

Got it. And would that be at your current price realizations or does that assume some lower pricing where you're still profitable but you cut prices from current levels?

 

Robert Dean Moore, President and Chief Executive Officer

We would not have to cut from current levels in order to do that.

[sampr01]

JPM report indicating that steep decline in future DCF for FELP compared to other miners. What was the basis for their conclusions on FELP? >:(

[Picasso]

Not sure, I don't pay too much attention to sell-side models unless I'm trying to figure out what they might be missing or how they'll change their views going forward.  In the case of this report they have some helpful industry wide data.

 

What's funny is looking at their November estimates, which I attached.  I don't think the business has changed that quickly from November of 2015 when they were expecting $393 million of EBITDA and $203 million of DCF.

[Picasso]

A lot of volume on the notes today at $69.

[Elah_Cix]

Is that inter-dealer or real money?

[Picasso]

Real money, denoted C under CPT column.