FELP - Foresight Energy

[hswoon]

Anyone have an opinion on the revenue miss? The 10Q named the usual suspects (nat gas prices and mild weather). They did say international sales were down.. anyone know roughly how much they sell internationally? 

 

19 million contracted for 2016 and only 3,737 sold this quarter. Could the 19 million number go materially lower because of customer renegotiations?

 

Did the recent 10Q and continued rough performance affect what's going on behind the scenes with regards to the debt restructuring?

 

Thanks! I joined the board just for the FELP discussion.

 

In 2014 10-k they had 20.2 contracted (18.2 priced and 2.0 unpriced) with total sales that year being 21.9. I would presume these contracts are locked in, as Foresight would need to purchase coal if they under produce, so perhaps it works the other way if they some how they end up needing less coal.

 

From 10k:

Certain of our customers may seek to defer contracted shipments of coal which could affect our results of operations and liquidity.

From time to time, certain customers have sought and others may seek to delay shipments or request deferrals under existing agreements.

There is no assurance that we will be able to resolve existing and potential deferrals on favorable terms, or at all. Any such deferrals may have an

adverse effect on our business, results of operations and financial condition, as well as our ability to meet our debt obligations and resume payment

of distributions to our unitholders.

 

I couldn't find anything on renegotations to lower volumes.

 

 

[Picasso]

In my opinion there is no revenue miss, especially since analyst coverage is basically gone. Quarter to quarter production tons sold will depend on what's going on with a warmer winter or stockpiles and delivery timing, but it's contracted in 2016 regardless. What happens is that it ends up being back end loaded when you tally up the contracted volumes for 2016. If you look at any previous quarters, it's going to be all over the place and not too predictable other than knowing what they produce from EIA figures, but produced tons sold is unknowable over a particular quarter. I think I had a post on this before. Try looking at various quarters in 2014 and 2015 and comparing to total volume

over the entire years. It's just choppy but it adds up to contracted volumes.

 

If anything you can extrapolate margins in 2016 by looking at what it cost them to produce very low volumes in the 1Q.  A base case of $13 margins on 19.5 million tons minus capex and interest expense is a fairly easy calculation.  I'd be worried if costs were staying at those 4Q levels.

 

Not sure how the 10Q affects noteholder consent. I don't think noteholders are in a great position to demand much more than has already been proposed. They'll get far less in bankruptcy and a few percent more at max. It would be silly not to come to terms with the senior lender support agreement.

[Picasso]

http://www.bloomberg.com/gadfly/articles/2016-05-10/coal-s-stranded-assets

 

A few interesting things there.  1) FELP is able to cover interest expense so not sure why they have it as grouped into the others.  2) SXC isn't a coal company.... 3) Alliance also covers their interest expense. 

 

It does cite the Moody's report that talks about the ILB.

 

Coal ``has undergone a long-term structural decline, with little prospect for near-term recovery,'' Moody's analysts led by Anna Zubets-Anderson wrote in a note last week. Of the four major U.S. coal regions, only the Illinois basin has good long-term prospects, they said. Central Appalachia will ``cease to be a major coal producing region,'' while the Northern Appalachian and Powder River basins will decline too because of competition from gas.

[heth247]

Picasso,  thanks for this interesting idea! You mentioned that (if they survive) there will be rights offering in the near future. But given the current environment and outlook for coal, do you think there will be buyers for the rights?

[Picasso]

85% of the equity injection would come from Murray and Cline.  Most of that would be Murray going into more of FEGP.  So you really only have 15% of the injection coming from non-affiliates of the GP.  I wonder if Accipiter would be willing to inject more capital in through a rights offering?  Maybe not.  So I could see there being some undersubscription which would be a cool thing for the common unit holders who oversubscribe.

 

Say $300 million gets split into $150 million subordinated and $150 million of new common.  Only $45 million of that would come from the public unit holders.  My guess is that Cline would pick up any units that the rest of the market didn't want. 

[Picasso]

Maybe someone could poke a hole in this idea.

 

So Hillsboro obviously has some issues with the fire.  Here's the description:

 

Hillsboro Energy’s mining complex, located in Montgomery County, in central Illinois, is designed to support up to 3 separate longwall mines producing up to 24 million tons per year. We currently operate one longwall mine called Deer Run Mine. Because its average coal seam is over 7 feet thick, Deer Run has been one of our most productive mines since we began operating the longwall in August of 2012.

 

Deer Run Mine

Operated by Patton Mining LLC

MSHA ID: 1103182

 

One longwall mine

Two continuous miner units

2,000 tons per hour preparation plant

Productive Capacity: 9 million tons per year

Coal Production: 5.6 million tons in 2014

Coal Reserves: 870.6 million tons (total for the complex)

Heat Content: 10,800 Btu/lb

Transportation: Rail (Norfolk Southern and Union Pacific), barge on the Ohio River and Mississippi River (via truck or railroad)

 

Just some finger in the air estimates here... This isn't producing anything at the moment so selling it wouldn't hurt their EBITDA since they already have 23 million tons of capacity on their other mines.  Say 6 million tons x $15 margins = $90 million EBITDA x 5 = $450 million.  The btu is a bit low on Deer Run but they have a lot of reserves so why couldn't they sell it to maybe ARLP for $450 million?  Yeah Deer Run is on fire, but it will probably be fixed up soon and there is room to add more longwalls and close up Deer Run.  Is there a reason why ARLP wouldn't want to buy this asset for around $450 million?

 

Because it seems like, if things were just still super crappy and Murray couldn't come up with cash by the one year mark (or didn't want to dilute), they could sell Hillsboro (better to sell a crown jewel than get taken into bankruptcy?), repay the PIK's and pay down the senior lenders, easily have over $100 million of DCF and quickly begin to rebuild value for the subordinated units.  It would suck to sell an asset but wouldn't that be the logical trump card that unit holders such as Cline or Murray would prefer versus taking this into bankruptcy or massive diluting?  Or the Cline Group could buy it off Foresight themselves?

 

Anyway, curious on others thoughts on this possibility.  I haven't given it too much thought but it came to mind since this is a non-EBITDA producing asset so it's not like they're selling off cash flows to delever.  There's plenty of capacity on their other assets.  Hillsboro should still be a very valuable asset that can be sold without impacting earnings.  From the perspective of Cline or Murray, it seems like it would be much better to sell off the assets themselves than let it be taken into bankruptcy, should that become the last option.  That seems like an option they would want to retain?

[gadfly]

Interesting thought on a sale. It seems like FELP will never get credit for their reserves (over 3 billion tons) because the narrative in the market is, "coal is dead and the market is oversupplied so who cares if you have 100 years of max production in reserves". So why not sell and get some cash upfront in order to get back to distributions. That's what Murray wants and that's what target MLP investors want.

 

I know you've posted a few articles about how gritty Murray and Cline are and I wonder if a bottom of the market sale of a crown jewel asset goes against their "last man standing" ethos of Cline and Murray.

 

Have there been any recent ILB sales?

 

Thanks for the post.

[Picasso]

Every coal article keeps sounding worse.

 

Perhaps if gas makes some kind of recovery, coal will rebound off cycle bottom.

 

Maybe one political candidate would help coal as well.

 

Lots of ifs. We really need the debt issue resolved so we can then discuss the survivability of of FELP.

 

The 17th can't come soon enough.

 

Of course maybe they'll extend again and continue to torture us

 

The coal outlook for FELP doesn't look bad. 

 

I've started doing this thing where I ask people what percentage of U.S. electricity comes from coal.  I know, I'm real fun at parties.  No one says 30%.  Or ask people about solar as a percentage of U.S. electricity production.  Most people seem to think it's like 20% solar and 10% coal or something.  It's still more like 28% coal and 1% solar.  You just can't run coal down to zero that quickly, and even as it declines ILB coal is in the best position to benefit from that.  What is uneconomical for PRB coal has to be economical for ILB coal, up to a certain extent (ignoring debt for a minute).  Obviously weak nat gas and warm winters isn't great short-term, but you can't expect utilities to act like airlines and "unhedge" when nat gas is cheap to take on all the future volatility.  How many massive spikes has nat gas seen over the past ten years?  For utility diversification purposes alone it doesn't seem like the long-term picture for ILB coal is terrible. 

 

There was this funny article on Seeking Alpha not too long ago:  http://seekingalpha.com/article/3968182-coal-industrys-catastrophic-collapse-continues

 

Despite the fact that coal still accounts for approximately one-third of the United States' electricity consumption, US coal companies are now being valued at far less than even US solar companies. To put some perspective on this, solar accounts for approximately 1% of the United States' electricity consumption.

 

His/her conclusion is that coal is bad and solar is good.  Maybe I'm just a value investing weirdo, but when something generates 30% of electricity and it's valued at less than something which only generates 1%, I think there might be some mispricing.  That's just me...

 

FELP had three really unlucky things happen all that once.  A mine fire, the change of control default, and nat gas falling under $3.  But contracted volumes are only down 11% in 2016 versus 2015.  And 2015 was the same as 2014.  I'm no super miner expert, but it seems like a coal fire isn't a game killer for these guys given remaining capacity.  The senior lenders probably have the most incentives to accelerate (they look super well protected in bankruptcy and why not get coal stuff off the books) but they already supported a reasonable restructuring to solve the change of control default, so that's not a game killer either.  Nat gas is a question of when, not if, it spikes again.  Traders don't call nat gas the widow maker for nothing.... Maybe we just need a super cold winter or something, who knows.  But they have 23 million tons of capacity at less than $24 costs per ton and they should be able to place almost all of that without spending additional capex.  When you compare that to ILB coal demand over the next several years, you don't *need* higher nat gas.  But any extra tailwind would be cool at this point. 

 

And if they can't place more than 20 million tons of capacity, then they *should* sell one of their assets to bring down leverage.  It's not like ZINC or these other single trick ponies that 1) need higher commodity prices, or 2) need to risk new capex in a crappy environment, or 3) is morphing into some new low cost structure like a BXE with no free cash flow.  Now if management was crappy it would be a different story, but Chris Cline is still in the picture and he's obviously trying to protect his investment. 

 

But it does seem like these coal articles are getting worse and worse.  It just makes me feel better and better about getting this asset at super depressed levels.  I think the common units are valued at about $100 million here?  You don't need to run crazy scenarios to see DCF over $100 million to those common units in the very near future.  Or I might be out of my mind.... That's a possibility.  :)

[Picasso]

Interesting thought on a sale. It seems like FELP will never get credit for their reserves (over 3 billion tons) because the narrative in the market is, "coal is dead and the market is oversupplied so who cares if you have 100 years of max production in reserves". So why not sell and get some cash upfront in order to get back to distributions. That's what Murray wants and that's what target MLP investors want.

 

I know you've posted a few articles about how gritty Murray and Cline are and I wonder if a bottom of the market sale of a crown jewel asset goes against their "last man standing" ethos of Cline and Murray.

 

Have there been any recent ILB sales?

 

Thanks for the post.

 

There was this comment on the last ARLP call:

 

<Q - Matt Niblack>: Got it. And in terms of opportunities for acquiring companies or properties, given your relative

strength, given that after this move that your relative strength is only going to improve, do you see an opportunity or

perhaps more opportunities than there were earlier in the cycle to go out and acquire some assets, expand the footprint?

<A - Joseph W. Craft>: There are opportunities, as we mentioned on the last call, there was some discussion about

that. We continue to look at that. I think financing a transaction for acquisitions is a little bit more challenging than

financing – just extending our current debt level. So the actual opportunities to add to our footprint in a material way

would require the current debt holders with the existing sellers to participate and try to be flexible and come up with

some creative solutions to support the transaction.

 

Also interesting was their comment about positioning...

 

<A - Joseph W. Craft>: I think to answer your first part, as to why the level? I think the level was established really

driven off of what we think could be sustainable through 2017. And we do believe that we will see even better results.

As we look further out, I'm sorry, that I've got this throat today. But as we look further out to 2018, we do believe that

this will be a foundation to grow, because we believe prices will strengthen and tonnages and volumes will be able to

be returned back to where we were a year ago plus. So really our focus is how do you get through the current, really the

2017 time period. And we wanted to make the reduction to a level that we felt comfortable that it was sustainable based

on what we know today. And so that's how we got to the amount.

 

So it would seem like this would be the ideal time for someone like ARLP to buy an asset from FELP.  If they truly believe what they are saying.

 

It would fly in the face of what Cline and Murray have stated in the past, but why have so much capacity if you can't place it?  Especially if you're at risk of losing your whole investment and future optionality?  I'd like to think they would be rational about that decision.  They would just have to start spending capex on the remaining assets once their capital structure started to trade more normal and they had access to credit again.  They could still double capacity with minimal capex even by doing that asset sale so I don't think it kills the end game here.  It would make their competitor a bit stronger, raise their cost structure (but we've already dealt with that for a full year), and negates some of the Murray/Foresight teamwork.  I guess it would shift the picture from last man standing to "one of the last..." 

 

I need to look at comps for any ILB asset sales.  I'm not aware of any recently.  I know there were some in 2014/2015 that were going for 8x EBITDA but it's obviously a different world now.

[heth247]

Down to the wire again. This is getting old.

 

Accipitor didn't sell any.

 

Tick tock, tick tock.

 

Is there another extension? I haven't seen any SEC filing today or news yet.

[Picasso]

Pull, you don't like getting water boarded on a weekly basis?

 

It's sort of funny because I'm 99% sure that Fidelity has finished selling their entire stake.  But now there are no buyers!  I started buying when Fidelity was taking a machete to the stock price with no end in sight, there was no senior lender deal, and there weren't any hints towards what the resolution would look like.  It's maybe 90% to the goal post and there is just as little market interest as before.  What a stock.

[PullTheTrigger]

The weekly water boardings are getting old.

 

Definitely little interest here right now.

 

Let's just get to the goal line!

[sampr01]

No filings yet :-[, last time we had spike before filing.

[Picasso]

Does anyone have access to the FBR report on FELP?  I'm curious why they think it's only worth $1.50.  I'm assuming some kind of dividend discount model?

[Picasso]

No luck yet.  I'm almost certain FBR did a dividend discount model since they may not pay distributions until sometime in 2017/2018. 

 

It seems likely that we get another extension in the morning.  If so, it's becoming more likely that extra value is going to be extracted from the equity holders.  Hopefully just something they can refinance in the future versus giving away more equity.  Those FELP notes at $70 ish look pretty attractive right now.

 

Can you believe it's already May?  This has been going on since December.... Yeesh

[sampr01]

FELP saga reminds me of ROIQW nightmare, where they extended 3-5 times and then BIG FAT EGG. I am expecting something different this time :)

[PullTheTrigger]

There are interesting videos on long wall coal mining. The auger is crazy. I can't imagine the maintenance to keep this equipment up and running in these underground conditions.

 

 

 

Just think of all these stranded assets if coal is forced out of electrical production.

[Picasso]

What's funny is that FELP shares Murray facilities to reduce that maintenance capex.

 

Additionally, access to the Murray Energy manufacturing facilities will allow us to significantly reduce our repair cost and maintenance capital expenditures on critical equipment. We continue to expect capital synergies to be $10 million annually, which allows to keep average maintenance capital expenditures at approximately $70 million per year. With respect to SG&A cost, we've largely realized the significant cost reductions laid out when the Murray Energy transaction was announced and expect to see annual SG&A savings of $16 million versus 2014 spending levels.

 

I wonder what would happen if Cline simply let it go into bankruptcy.  I doubt they'd let Foresight continue to use their facilities.

 

What exactly happened with ROIQW?  It didn't seem that compelling to me (maybe 50/50 odds) but I'm not entirely aware of what made it fail.

[bigbadwolf]

Extension to May 20

[PullTheTrigger]

Of course and we'll see the next extension on Monday after.

[Picasso]

Or we'll see the global support agreement on Monday like we saw the senior lender agreement after the last two day extension.

[bigbadwolf]

Maybe I am misinterpreting the details but...

 

The First Amendment to the Transaction Support Agreement (senior lenders) expired yesterday - 5/17/16.  As per the 8-K filed on 5/9/16 - "The Support Agreement may be terminated automatically after three business days upon the Partnership failing to enter into such agreement on or before May 17, 2016."  They have three more days for the support agreement terms with the senior lenders - until May 20th.  The language of today's 8-K makes no mention of extending the senior lender support agreement.  Today's 8-K only extends the 7.875% lender's forbearance period until 5/20/16.  This is different than the last 8-K filed on 5/9/16 that extended both the senior and 7.875% lenders.

 

It has been one month since the original senior lender support agreement dated 4/18/16.  I wonder if the senior lenders have seen enough - tiring of this waiting game.  Is it really time to poop or get off the pot this Friday?

[Picasso]

Yeah that's my read as well.

[wachtwoord]

Both mention the possibility of a further extension:

 

https://biz.yahoo.com/e/160518/felp8-k.html

 

https://biz.yahoo.com/e/160422/felp8-k.html

 

FELLC and Foresight Energy Finance Corporation (together, the "Issuers"), together with the Partnership, again extended the term of the existing forbearance agreement that was entered into on December 18, 2015 with certain holders (the "Consenting Noteholders") of the Issuers' 7.875% Senior Notes due 2021 (the "Notes"). As a result of the extension, the forbearance period runs through May 20, 2016, unless further extended by the Consenting Noteholders in their sole discretion or unless earlier terminated in accordance with its terms.

 

The extension is intended to provide additional opportunity to engage in discussions and negotiations with the holders of the Notes and our secured lenders.

 

(emphasis mine)

[Picasso]

The difference here is that we're in the three day grace period. The last time they amended the agreement before going into the grace period.