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FELP - Foresight Energy

Picasso

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Picasso Newbie

Picasso

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I'm just confused why he didn't use language that indicated the "earlier of."  I'm turning into those FNMA guys reading into the silliest phrasing.*  ;)  I'm having a lawyer who does nothing but work on these credit agreements read back through it to see what kind of options are available here.  Should have had her work on this earlier but it didn't seem like a big deal at the time.  Well, still doesn't but trying to see if there might be an earlier catalyst or another incentive here... There's $773 million of senior debt that is all under the amended credit agreement so my guess is you need a pretty big refi across the board.  And rolling over the PIK's will take a refi of the 2021 2nd liens as well.  That's a lot of make whole and finance related costs in addition to giving the bond holders more than par in the exchange.  Would probably make sense to wait that out but those interest payments on the Murray debt must be painful to stomach. 

 

My guess is that Murray will have to do a transaction similar to what he did to buy his subordinated units in 2015.  He paid a pretty big premium to get Cline to hand over that 50%.  He'll likely need to offer a premium in order to keep the common units out of the hands of the Reserves group.  So the units might trade for $7, but it would be economical for Murray to take new common units at $12 (or whatever) since he wouldn't be giving FELP earnings back to Cline.  It would give Murray more value to his IDR's and he'd probably get a reasonable return on the commons.  FELP doesn't have to actually trade at "fair market" for there to be something done along those lines.  But the transaction would be a positive for FELP common units and the market price might start to approach that Murray deal price over time, so Murray might not be overpaying in that sense.  FELP never traded at the $20 Murray paid for his original sub units.  (I know, I know, starting to sound like those guys on the PWE board talking about "bought deals" at a premium to the market price).

 

And if Murray offers something like $15 maybe Cline is a "jerk" and still says he'll take 60%.  But at least the dilution to Murray will be minimal.  Also important to note that Cline doesn't want to be diluted either.  He still owns a big chunk of FELP, helped with the bond tender (granted made a good return off it), reduced the 15% option price, and so on.  It would make sense to just agree upon the right price to minimize dilution and keep Cline in the picture.  $7 seems too low for a Cline/Murray redemption price but as usual we'll see.

 

* http://img.wennermedia.com/article-leads-horizontal/elin-nordegren-48ee4d7b-9e72-4374-9e71-4da702fe8533.jpg

 

(You might spot an interesting book in the background.  Maybe Cline is a time traveler who left a message for us.  CC: conspiracy theory fanniegate)

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Aqul Newbie

Aqul

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There's $773 million of senior debt that is all under the amended credit agreement so my guess is you need a pretty big refi across the board.  And rolling over the PIK's will take a refi of the 2021 2nd liens as well.  That's a lot of make whole and finance related costs in addition to giving the bond holders more than par in the exchange.  Would probably make sense to wait that out but those interest payments on the Murray debt must be painful to stomach. 

 

Can you clarify this further please? All I've read with respect to the amended credit agreement and the senior secured debt is that there is now an anti-hoarding provision.

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Picasso Newbie

Picasso

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Merry Christmas to entire FELP board!

 

- bonkers

 

Merry Christmas my fellow financial markets warrior amigos, it is a privilege and an honor to share the scars and spoils of battle with you.

 

To my FELP family, you'll always be my brothers.  Even if we aren't a quarter mile away.

 

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PullTheTrigger Newbie

PullTheTrigger

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Illinois coal production down 21% in 2016, but expected to improve. [Duh]

 

http://www.platts.com/latest-news/coal/louisville-kentucky/illinois-coal-production-down-in-2016-but-may-21573820

 

Illinois apparently produced around 44 million short tons of thermal coal in 2016, down from 56 million st the year before, but certain factors are trending upward for 2017, a coal industry official said Wednesday.

 

Although final data is not yet in, Illinois turned out less coal last year for several reasons including a soft market, a cutback at Murray Energy's Galatia underground mining complex in Saline County, the continued idling of Foresight Energy's Deer Run longwall mine in Montgomery County and the closing last April of Vigo Coal's Friendsville surface mine in Wabash County, Phil Gonet, president of the Illinois Coal Association, said in an interview.

 

The state produced 11.2 million st, 11.1 million st and 10.1 million st, respectively, during the first three quarters of 2016, according to Gonet. But there are indications the tide may be turning more positive for a state that posted steady production gains in recent years, reaching 58 million st in 2014 only to drop off the past two years.

 

Not much there regarding Foresight other than:

 

No major mine closings or cutbacks are expected in Illinois in 2017. That would be a relief to an industry that saw Foresight keep Deer Run idle in 2016 because of a stubborn underground fire or hotspot that has bedeviled the mine since March 26, 2015, and Ohio-based Murray finally closed the New Era part of its two-mine Galatia complex. The New Future mine continues in operation under the auspices of Murray's American Coal subsidiary.
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Patmo Newbie

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So discussion died down on this name, we are now playing a bit of a waiting game until October to see if PIK can be mostly refinanced. I think we are sitting right around fair value if "worst case" scenario happens as at current prices, including interest (assuming March is accrued) we would face 35% dilution (344mil total consideration at 7.34 so 47mil shares to be issued vs current 131mil outstanding common + sub, correct me if I'm missing something). That would bring EV to $3bil with no share price change, and in my opinion that's about FV with current Illinois coal prices and on the low end on a normalized basis. There's inherent pricing risk though - market might think it's currently giving more credit to FELP than it is, and negative outcome could drop share price. There's also the 350mil that will need to be refinanced on the revolving credit facility in Aug 2018 - I take it this facility is not too difficult to extend?

 

As Picasso has mentioned multiple times, all the incentives are in place on FELP mgmt side to make sure this gets refinanced. It would be a near term catalyst that should send the share price at least into the $10 range (+ a premium for taking on odds, hopefully.), so I think it's still worth holding given the odds and risks. It's important to note that the risk/reward profile goes way up if the business is really worth more than $3bil.

 

After that the next hard catalyst will be resumption of dividends which would attract yield guys again and send the multiple upwards, I think I will sell majority of my shares sometime after we learn of the PIK outcome though. It seems they can only pay out dividends at earliest past July 2018, and from then on out only 25mil per year until the entire senior credit facilities are undone, which by my understanding would happen 2020 (term loan).

 

And also there's the wild card of the new presidency possibly calling for some crazy policies that could affect the coal industry significantly.

 

Just my random thoughts, maybe we can get some discussion going again.

 

 

 

 

 

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valcont Newbie

valcont

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So discussion died down on this name, we are now playing a bit of a waiting game until October to see if PIK can be mostly refinanced. I think we are sitting right around fair value if "worst case" scenario happens as at current prices, including interest (assuming March is accrued) we would face 35% dilution (344mil total consideration at 7.34 so 47mil shares to be issued vs current 131mil outstanding common + sub, correct me if I'm missing something). That would bring EV to $3bil with no share price change, and in my opinion that's about FV with current Illinois coal prices and on the low end on a normalized basis.

 

What does EV has to do with dilution? If debt is converted to equity , it counts towards market cap and the EV is constant. Are you referring to the stake of each unitholder in case of dilution. Here is my take on it:

 

Right now they have 65m outstanding , forget the subs since FELP has about $2 MQD before they can count. Add up 47m post dilution and you end up with 112m unit count.

If they do $150m DCF this year, then you have got $1.33DCF/unit. So at today's price they are at 5.5x multiple. A 10x multiple would take the price at $13.So it is slightly undervalued considering they can easily do $150m this year.

 

Murray will probably take it private post PIK payment. The notes are structured in a way that gives him the option to convert into units.Why keep it public if market is not giving it any credit for the low cost, drop down yield vehicle? Plus the Trump's election is another tailwind. Trump won big in coal counties of Pennsylvania & Ohio. I won't be surprised if he offers subsidies or at least remove the subsidies from clean energy. CPP and probably the  EPA is dead.

 

I am also curious about Hillsboro. If I were Murray, I would have no incentive to bring this back up until I can take it private so as not to pay the multiples on its cash flow to Cline and unit holders. But that's just me, I'm evil that way.

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Patmo Newbie

Patmo

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So discussion died down on this name, we are now playing a bit of a waiting game until October to see if PIK can be mostly refinanced. I think we are sitting right around fair value if "worst case" scenario happens as at current prices, including interest (assuming March is accrued) we would face 35% dilution (344mil total consideration at 7.34 so 47mil shares to be issued vs current 131mil outstanding common + sub, correct me if I'm missing something). That would bring EV to $3bil with no share price change, and in my opinion that's about FV with current Illinois coal prices and on the low end on a normalized basis.

 

What does EV has to do with dilution? If debt is converted to equity , it counts towards market cap and the EV is constant. Are you referring to the stake of each unitholder in case of dilution. Here is my take on it:

 

Right now they have 65m outstanding , forget the subs since FELP has about $2 MQD before they can count. Add up 47m post dilution and you end up with 112m unit count.

If they do $150m DCF this year, then you have got $1.33DCF/unit. So at today's price they are at 5.5x multiple. A 10x multiple would take the price at $13.So it is slightly undervalued considering they can easily do $150m this year.

 

Murray will probably take it private post PIK payment. The notes are structured in a way that gives him the option to convert into units.Why keep it public if market is not giving it any credit for the low cost, drop down yield vehicle? Plus the Trump's election is another tailwind. Trump won big in coal counties of Pennsylvania & Ohio. I won't be surprised if he offers subsidies or at least remove the subsidies from clean energy. CPP and probably the  EPA is dead.

 

I am also curious about Hillsboro. If I were Murray, I would have no incentive to bring this back up until I can take it private so as not to pay the multiples on its cash flow to Cline and unit holders. But that's just me, I'm evil that way.

 

valcont you are right, I went through a lot of mental gymnastics for no reason. I swear I do this all the time, that and putting milk back in the cupboard. Ask me to kill the electronic bad guys and my genius goes unrivalled. Other than that...

 

I think you do need to cap the 50mil in interest on the PIK's though which is not trivial in my opinion, so my effort was not a complete waste. Unless I read the language in the filings wrong?

 

Good bit on the MQD, totally flew over my head. These shares do need to be accounted for at some point since they do end up grabbing some of the profits. But put a 10% yield on the distribution and it stays irrelevant until the 20's, and that's without accounting for arrears... Although it looks like the MQD is 1.35 annually and the $2 mark is a threshold to allow the subs to be converted to common? I'm not clear on this, the writings are confusing.

 

Question: The terms for the credit facilities don't allow any "restricted payments including discretionary dividends" until the later of June 2018 or some other crap, after which they can pay up to 25mil. Do the MQD's get lumped into "discretionary dividends" or is the company in the clear for those distributions? I figure some common holders with a lot of clout in the company might want to drive share price up before that happens. You're not the only person who is evil that way !

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Picasso Newbie

Picasso

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Patmo where are you getting a $3B EV? 

 

Assuming they pay for all $350 million at $7.34, that would add the 47 million common units on top of the 6 million warrants issued as part of that redemption plus the existing 130 million common + subs.  183 million units total @ $.734 = $1.3B.  But debt will drop down to $1B plus FELP itself has a decent amount of cash and will generate more going into the refi (some of which will pay down the senior debt).  That's an EV around $2.3B or so. 

 

If Cline was buying in the open market at $6.74, then he's probably a buyer for his 60% of that $7.34 and Murray would be handing out a lot of value at that price? 

 

I'm in agreement with you guys that there shouldn't be a lot of downside here.  I haven't sold anything and it makes up at least 95% of my net worth.  But if it started trading with more liquidity in the $10-12 area I'd probably sell some of it down.  There's still some interesting optionality like killing the CPP, something with Deer Run, restarting distributions, maybe some drop down and so on.  Right now Cline and the remaining common units stand between Bob Murray and a lot of free cash flow so I imagine we'll get some conclusion to the situation when the capital markets allow it.  The 2017 PIK debt is at 104 and the 2021 debt is at 102.  If that continues to firm up (I imagine the 2021 debt will trade tighter once the PIK refi is over) then you do open up a lot of options for both FELP and Murray.  API 2 is holding up nicely, we had a cold winter, nat gas pricing in the Marcellus has gone up a lot.  I think we have decent visibility into that refinance unless something weird comes out of left field.

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valcont Newbie

valcont

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Good bit on the MQD, totally flew over my head. These shares do need to be accounted for at some point since they do end up grabbing some of the profits. But put a 10% yield on the distribution and it stays irrelevant until the 20's, and that's without accounting for arrears... Although it looks like the MQD is 1.35 annually and the $2 mark is a threshold to allow the subs to be converted to common? I'm not clear on this, the writings are confusing.

 

Question: The terms for the credit facilities don't allow any "restricted payments including discretionary dividends" until the later of June 2018 or some other crap, after which they can pay up to 25mil. Do the MQD's get lumped into "discretionary dividends" or is the company in the clear for those distributions? I figure some common holders with a lot of clout in the company might want to drive share price up before that happens. You're not the only person who is evil that way !

 

Here is from their 10K

 

"All subordinated units are currently held by Murray Energy. The principal difference between our common units and subordinated units is that subordinated unitholders are not entitled to receive a distribution from operating surplus until the holders of common units have received the minimum quarterly distribution (“MQD”) from operating surplus. The MQD is $0.3375 per unit for such quarter plus any cumulative arrearages of previously unpaid MQDs from previous quarters. Subordinated unitholders are not entitled to receive arrearages. The subordination period will end, and the subordinated units will convert to common units, on a one-for-one basis, on the first business day after the Partnership has paid the MQD for each of three consecutive, non-overlapping four-quarter periods ending on or after March 31, 2017 and there are no outstanding arrearages on the common units. Notwithstanding the foregoing, the subordination period will end on the first business day after the Partnership has paid an aggregate amount of at least $2.025 per unit (150.0% of the MQD on an annualized basis) on the outstanding common and subordinated units and the Partnership has paid the related distribution on the incentive distribution rights, for any four-quarter period and there are no outstanding arrearages on the common units."

 

I take that to mean they can make a lump sum payment of $2 + outstanding arrearages($1.32/year) and convert the subs.

 

As for the MQD part question. Since these are normal distribution,they should be restricted by the notes's covenants.

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Patmo Newbie

Patmo

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Patmo where are you getting a $3B EV? 

 

Assuming they pay for all $350 million at $7.34, that would add the 47 million common units on top of the 6 million warrants issued as part of that redemption plus the existing 130 million common + subs.  183 million units total @ $.734 = $1.3B.  But debt will drop down to $1B plus FELP itself has a decent amount of cash and will generate more going into the refi (some of which will pay down the senior debt).  That's an EV around $2.3B or so. 

 

If Cline was buying in the open market at $6.74, then he's probably a buyer for his 60% of that $7.34 and Murray would be handing out a lot of value at that price? 

 

I'm in agreement with you guys that there shouldn't be a lot of downside here.  I haven't sold anything and it makes up at least 95% of my net worth.  But if it started trading with more liquidity in the $10-12 area I'd probably sell some of it down.  There's still some interesting optionality like killing the CPP, something with Deer Run, restarting distributions, maybe some drop down and so on.  Right now Cline and the remaining common units stand between Bob Murray and a lot of free cash flow so I imagine we'll get some conclusion to the situation when the capital markets allow it.  The 2017 PIK debt is at 104 and the 2021 debt is at 102.  If that continues to firm up (I imagine the 2021 debt will trade tighter once the PIK refi is over) then you do open up a lot of options for both FELP and Murray.  API 2 is holding up nicely, we had a cold winter, nat gas pricing in the Marcellus has gone up a lot.  I think we have decent visibility into that refinance unless something weird comes out of left field.

 

I included all LT liabilities and didn't remove the PIK or warrants which I should have, that should roughly explain the difference

 

EDIT the warrant liability is just carved out from the other debt and amortized, kind of a smoke show if I understand correctly (where the warrant liab is carved out and left there while LT debt is amortized for 34mil to "warrant exp" or something like that). So I still have to account for it by adding # of units and remove the warrant exercise price. I also removed the $300 PIK that will invariably be extinguished in the swap. Result is 2.55bil EV at 7.34, which includes  $250mil in ARO's, sale-leaseback accrued and other LT liabs and now reconciles exactly with your 2.3 figure. Probably a lucky coincidence though....................

 

I get to $11 value to fully diluted equity if we think 3bil EV is fair value. 2016 being a barrell-bottom year and still on track to yield 10%+ in FCF to enterprise and DCF to unitholders at that level makes it a reasonably conservative valuation, I'd argue it's worth a good deal more than that. Although not a pure comparable, Teck Resources was in a similar pickle and is now valued 2.5x more expensively than FELP, so clearly some people will be willing to pay a higher than current price soon enough.

 

 

 

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