FELP - Foresight Energy

[Picasso]

10-K's of their respective producers.

 

For example FELP:

 

2015 10-K:

 

For 2016, we have 18.4 million tons of our projected production contractually committed with 23 separate customers.

 

2014 10-K:

 

For 2015, we have 20.2 million tons of our projected production under contract with 26 separate customers.

 

Another example ARLP:

 

2015 10-K:

 

As of February 22, 2016, our nominal commitment under long-term contracts was approximately 34.3 million tons in 2016, 19.1 million tons in 2017, 14.5 million tons in 2018 and 7.1 million tons in 2019.

 

2014 10-K:

 

As of February 13, 2015, our nominal commitment under long-term contracts was approximately 39.3 million tons in 2015, 28.9 million tons in 2016, 12.8 million tons in 2017 and 9.6 million tons in 2018. 

 

So on a one year basis, ARLP is down 13% versus 9% for FELP.  FELP doesn't disclose past one year, but ARLP is down from 90.6 to 75 million tons of contracted volume over the next four years.

 

I've been building a spreadsheet across PRB vs. ILB miner contracts but it fits into what that Bloomberg analyst was saying.  I think FELP has an advantage because of their cost structure, so they can go for market share at the expense of some margins if it makes sense to do so.  But that market is shrinking...

[Green King]

Thanks for the a key info I passed it over since there is no price. Cloud Peak Energy disclose both volume and price. It felt like a red flag to me since they are hiding key information. Since both price and volume is needed to get a understanding of the true quality and pricing power of their product.

 

[Green King]

What do you view as the key drivers in determining the economics of a coal fired power plant ?

 

So far i have

 

Price per BTU

Transportation cost

Operations (scrubbers for regulation)

BTU conversion efficiency

 

[Picasso]

FELP is easy to get price because you just back in guidance or past years sales against contracted volume. Especially since contracts are 95% of sales or around there.

[Green King]

FELP is easy to get price because you just back in guidance or past years sales against contracted volume. Especially since contracts are 95% of sales or around there.

Thanks for that.

[Picasso]

I think that's it, but I've been reading through all kinds of utility conference calls (especially AEP) to get a sense of how they view those coal plants.  In the short-term nat gas looks better but it's a volatile commodity and these plants have to take a really long-term diversified view on pricing across various reliable sources.  I'm not bullish nat gas (at all) and I bet it stays depressed for a while.  So with that said how can you get bullish on coal?  I guess my answer is you don't need to be bullish on coal to make a lot of money in FELP because it's not trading on those economics.  And they're lowest cost in that advantaged region (but disadvantaged in that they're also where there's a ton of nat gas...) so I think you'll see profitable economics for FELP regardless.  But it's something I need to think about more when/if a deal gets done because I may want to own this for a while.  In the meantime I'm just reading through a lot of utility calls and how they're explaining their thought process to their own investors and analysts. 

[sampr01]

Thanks for more details. I hope it works for you like :) SXC.

 

[Rasputin]

Picasso,

 

Thank you for all the details you have provided.

 

With Hillsboro mine sealed indefinitely, I think FELP fcf/dcf is negative (was negative $3 million in Q4 2015, likely worse now). 

 

How do you get comfortable around this issue? 

[Picasso]

It's been idled since March of 2015 and they still managed to produce 2015 DCF of $136 million and there's enough capacity at other mines to meet 2016 contracted volumes.  Direct and indirect costs brought that down about $30 million in 2015, so by indefinitely sealing the mine while they build out the second long wall you'll probably see some short-term cash usage with the second mine but you get some of that $30 million from 2015 "back."  It sucks to lose their best asset in the short-term but at the same time puts pressure on the noteholders to get to some sort of agreement. 

 

One thing that worries me would be running through some of the financial covenants later in 2017 if they can't keep costs down.  That's a risk to track for sure...

[Rasputin]

Didnt they restart it in July 2015? 

 

So going forward, even with Hillsboro shut down, do you expect adjusted EBITDA to go back to the $90-$100 million quarterly run rate Q1-Q3 2015 vs $42 million in Q4 2015?  Why did Q4 2015 adj ebitda dropped around 50%+?

 

They did call out $20 million costs with Hillsboro and $11 million salary/ovhd without production for Q4 2015.  They laid off 100 workers in early 2016, but that's probably $2.5 million salary/quarter. 

 

 

[Picasso]

And I guess in terms of quantifying how I get comfortable with the risk, I looked at the last time they had to temporarily shut down Hillsboro because of another fire incident and costs went up a bit but nothing dramatic.  I think it brings down margins to worst case $10 per ton, from closer to $15, which on ~19 million tons is $190 million of EBITDA.  If you assume that never gets fixed and costs stay high then DCF is around $0. 

 

More than likely Hillsboro gets fixed (this isn't a complicated zinc plant..) and costs go back down.  But there is a balancing act here because of the debt burden.  Costs per ton used to be under $20/ton in 2014 and the 4Q that you're using as a small couple million cash burn was up to $28/ton.  I don't think $28/ton is going to be the normalized cost here.

 

Edit: by last time they shut down and restarted Hillsboro, I mean 2014.

[Picasso]

That's what I thought at first too, the press releases are a little bit confusing.  I had to clarify with IR a couple months ago but it's in the 10-K.

 

We own four mining complexes where we operate four longwall mines and one continuous miner operation. Our four mining complexes can collectively support up to nine longwalls, with a portion of the existing surface infrastructure available to be shared among most of our potential future longwalls. Mining operations at our Hillsboro complex have been idled since March 2015 due to a combustion event.

 

4Q adjusted EBITDA fell because production fell substantially YoY with a somewhat fixed cost structure.  They didn't take analyst questions in the last earnings call as I was hoping they'd talk about that a little bit.  But if you annualize 4Q tons produced, you only get 15.6 million tons versus about 19 contracted.  So costs per ton in the 4Q weren't normal.

[Picasso]

And to double check what IR clarified as Hillsboro being idled since March, they talk about it in various conference calls before they went dark this quarter.

 

Q3 2015

 

Cash cost per ton sold in the third quarter was $22.94 per ton compared to $20.56 in the prior year period. The increasewas driven primarily by the continued production outage at Hillsboro and higher operating costs at Williamsonresulting from lower clean coal recovery. Partially offset increases were synergies from the transaction with MurrayEnergy.

 

Q2 2015

 

During the second quarter, we sold a total of 5.6 million tons, compared with 5.4 million tons in the same quarter lastyear. In addition to the weaker market demand, our production volumes were affected by the temporary closure sinceMarch of our Hillsboro mine due to a combustion event. In the second quarter of 2014, Hillsboro produced 1.6 milliontons.Earlier this week, we resumed longwall operations at the Hillsboro mine and the mine is operating today. Our plan asapproved by the Mine Safety and Health Administration is to operate the longwall in the current panel until we reach apoint in that panel where the longwall equipment can be safely recovered.

 

So it was operational in July but didn't produce anything.  That's what makes those press releases and 8-K's on Hillsboro kind of confusing.

[Rasputin]

The cash cost that they publish is per ton sold. 

 

Total tons sold in Q4 2015 was 5506 which is in-line with previous quarters.  Yes production was much lower in Q4 2015 vs previous quarters, but all their metrics are based on ton sold not produced. 

 

Yeah too bad there is no q4 cc.  I want to know what causes margin per ton sold to go down to $7 per ton sold in q4 2015 vs $15 in q1 through q3 2015.  I'm not sure it's due to mainly hillsboro.

 

I just re-read q4 2015 press release.  You are right that $20 million indirect cost + $11 million ovhd/salary is for the whole 2015, at first i thought it was only for q4 2015. 

[Rasputin]

oh ok yeah probably just a few days in July Hillsboro was operating :)

 

I'm also worried because during Q3 cc they were still guiding to $375 million ebitda (low end) for 2015, $10 million lower than previous guidance due to Hillsboro shutdown per CFO.  This means guided Q4 2015 would be around $80 million (low end). 

 

It ended up being $42 million ebitda for Q4 2015.  This is with complete knowledge of Hillsboro complete shutdown. 

 

hmm...i got 500 shares but i want to buy more but i'm stuck with this issue. 

[Picasso]

You're right it's per produced tons sold or $148 million into 5,229 tons versus $127 million into 5,775 in 4Q 2014.  So it's really just nailing down the extra $20 million of costs and knowing whether that's the new normal.  I'll need to think about that a bit more, but I really think it's mostly Hillsboro issues.  They didn't see the Hillsboro issues getting this bad back in the 3Q call, but it happened at the back end of the 4Q so maybe there is something else increasing the cost.  Losing tons sold is going to increase the cost per ton no matter what.  It would have been helpful to get some questions on the last earnings call because those new cash costs were eye popping. 

 

Which makes me think what's going to happen to the likes of ARLP, given their tons sold are falling faster and they're starting from a higher cost structure.  Yet it still trades at 5x DCF.

[Picasso]

Also something I thought about was that produced tons sold dropped 10%, but all of 2015 and 2014 tons sold are nearly identical.  So there might be some timing differences between a different customer mix in 4Q 2015 versus 4Q 2014.  So some other quarter in 2015 was lower in exchange for 4Q being higher.

[Picasso]

Actually, I just went back through all the 2015 press releases and that customer timing explanation makes a lot of sense.

 

These are YoY comparisons

 

1Q 5101 vs 4706

2Q 5589 vs 5413

3Q 5588 vs 6008

4Q 5229 vs 5775

 

They both add up to about the same, but the mix of different timing + Hillsboro is a good explanation in my opinion. If you add in say $10 million from Hillsboro you're explaining 70-80% of that delta.  And I agree with you that there might be some other cost in there for the 4Q we don't know about yet.

[Picasso]

oh ok yeah probably just a few days in July Hillsboro was operating :)

 

I think (and I need to clarify this, but just reading through the transcripts) that operational means that regulators allow them to go back in and get equipment and try to restart production.  Operational doesn't mean that actual production is going on.  I would need to find some other public coal stock with a mine fire and see how they phrase that, I don't know if Moore was being misleading or it's typical coal phrasing and anyone familiar with the sector realizes you can't immediately restart production after a fire breaks outs.

[bonkers]

Utilities are already relying more on the spot market and you can see this by looking at the massive drops in contracted volumes.  Yet FELP has had the smallest declines in YoY contracted volume at around 10% versus this time in 2015.  Some of these others are down 15-30%.  I'll try and post my spreadsheet on this later. 

 

One thought that still came to my mind is the cost of debt, which for FELP is substantial. So far the lower drop in volumes is an encouraging sign, even though the time period 2014-2015 may be too short to draw definite conclusions. Nonetheless, if this continues, it should force the already-higher-cost competitors out even faster, as their cost/ton increases even more quickly, and when they can't make positive cash contribution margin they shouldn't make new sales.

 

However, assuming that others still continue to make some positive contribution, wiping out the debt of bankrupt competitors allows these "zombies" to keep pushing the coal prices even lower. Considering that debt with FELP is not nullified, how do you see FELP's competitiveness and viability in such a situation? They might soon have difficulties servicing their own debts as well, even if they are the most efficient producer, because suddenly their balance sheet is relatively weaker.

[Picasso]

That's something I'll need to keep an eye on in 2016/2017.  They aren't going to have issues servicing the debt in the short term, even if DCF for unit holders grinds towards $0 in that kind of situation.  As long as they can manage the debt during this part of cycle then I think it can come out the other side.  In theory they could sell an asset if it gets really bad, but that would put them in a worse competitive position. 

 

I mentioned this early in the thread but in 2015 they covered the debt pretty easily.

 

Our covenants required a consolidated interest coverage ratio of greater than 2.00x and a consolidated net senior secured leverage ratio of less than 2.75x as of December 31, 2015. As of December 31, 2015, our consolidated interest coverage ratio and consolidated net senior secured leverage ratio were 3.00x and 2.50x, respectively.

 

Now 2016, 2017, 2018 will look a lot different than 2015 but I also previously highlighted how badly ILB production has fallen so far in 2016.  https://www.eia.gov/coal/production/weekly/ It wasn't long ago that ILB coal production was supposed to actually grow (I think people still thought that halfway through 2015) so we may be a lot closer to some kind of inflection point there, at the same time we're supposed to start seeing ILB producers take market share.  I don't know how successful those trends turn but you can kind of monitor them throughout the next couple years and get an idea of how that will look. 

 

Also Cline is likely going to own most or all of FELP unsecured debt and an equity stake in Murray.  I don't think Cline has a master plan of taking control of FELP from other unit holders and Murray (otherwise why bother going into Murray equity?) so having the 85% owners also control the debt kind of makes me feel better about them being able to service it.  Cline will accrue some 8%+ on the notes, it looks fairly well protected, and they're going to try to generate returns for the unit holders because for all intents and purposes, they are the unit holders.  Ultimately I think there are ways of working out any debt servicing issues without Cline being a source of charity.

[Picasso]

And then to add a couple more points to the debt worry.  Murray has repeatedly said that he wants to be the last coal guy standing.  Cline is looking to come in and buy up most or all of the Foresight debt.  Isn't Cline's action going to signal that they will do whatever is in their power to get to the other side?  It's different than owning a low cost, high leverage miner with almost no insider ownership or investors willing and able to put up that kind of support.  If they can work through this super nasty CoC issue then I think they can work through future leverage issues even if it may eat up short-term DCF.

 

It reminds me of a quote in a Bloomberg article from a month ago.

 

“Both of them have been fighters,” Ted O’Brien at Doyle Trading Consultants, an independent coal research firm, said of Cline and Murray. “It would be foolish to count them out. But the entire sector has been fighting an uphill battle against cheap natural gas, tightening regulations and a capital market they never had to worry about before.”

 

It's going to be a rough ride regardless of what happens, but I can't think of anyone else I would rather bet with in the coal sector.  Which is why I'm debating holding this position for a while if/when the note deal is done.

[Josh4580]

https://biz.yahoo.com/e/160418/felp8-k.html

 

On April 18, 2016, Foresight Energy LLC ("FELLC") and Foresight Energy LP

(together with FELLC and certain subsidiaries of FELLC, the "Partnership")

entered into a Transaction Support Agreement (the "Support Agreement"), with certain of the lenders (the "Consenting Lenders") under the Partnership's Second Amended and Restated Credit Agreement dated as of August 23, 2013 (the "Credit Agreement"), pursuant to which the Consenting Lenders have agreed (subject to the terms and conditions set forth therein) to support a proposed global restructuring of the Partnership's indebtedness (the "Restructuring"), including a proposed amendment and restatement (the "Amendment") of the Credit Agreement.

[awindenberger]

Picasso,

 

I'm very curious on your reading of the support agreement FELP came out with today. I skimmed it but wasn't able to fully grasp what is going to occur.

[Picasso]

My wife is super sick with the flu and I need to watch my son tonight, so I can't really go into it too much. 

 

But in general I think the deal structure is a really good outcome.  The dilution will be minimal as long as this company continues as a going concern with another year to refi the PIK debt.  I haven't gone into the actual change in interest costs before the one year term, but I bet it's lower on a cash basis than FELP currently pays, which helps pay for things they would otherwise dilute unit holders with.  They can also dilute at a higher share price if need be, they don't have to do it under $2 (yet).

 

If FELP is a $0.50 stock in a year, Cline dies and can't refi that $300 million, then you'll see a permanent loss of capital with the 75% dilution. 

 

Looks like a very good and complicated deal, but I wouldn't be surprised if the market doesn't fully appreciate the details tomorrow.  My second largest holding SXCP was up big today (maybe someone caught word?); that's another good second derivative off this FELP deal. 

 

Now we can focus on the longer-term picture...