Ferrellgas Partners, L.P.'s (FGP) CEO James Ferrell on Q4 2016 Results - Earnings Call Transcript

| About: Ferrellgas Partners (FGP)

Ferrellgas Partners, L.P. (NYSE:FGP)

Q4 2016 Results Earnings Conference Call

September 28, 2016, 10:00 AM ET

Executives

Alan Heitmann - EVP and Chief Financial Officer

James Ferrell - Interim President, CEO and Chairman

Analysts

T.J. Schultz - RBC Capital Markets

Jeremy Tonet - J.P. Morgan

Brian Gamble - Simmons & Company

Mirek Zak - Citigroup

James Spicer - Wells Fargo

Tarek Hamid - J.P. Morgan

Benjamin Brownlow - Raymond James

Operator

Good morning. My name is Susanne and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter FY2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Mr. Al Heitmann, Executive Vice President and Chief Financial Officer, you may begin your conference.

Alan Heitmann

Thank you, Susanne and good morning everyone. I am joined this morning by Jim Ferrell, our Interim President, CEO and Chairman of the Board.

Before we get started, I would like to remind all of you that some of the statements made during our call today may be considered forward-looking and that various risk and uncertainties and other factors could cause actual performance to differ materially from anticipated performance. These factors are discussed in our Form 10-K and other documents filed from time to time with the SEC.

Now with that, I would like to turn the call over to Jim Ferrell for his opening remarks. Jim?

James Ferrell

Thanks, Al. While we continue to be America's premier propane provider, we have attempted to diversify our business into midstream logistics. Like others in this industry, we have been seriously impacted by extremely challenging market conditions. We remain committed to diversification, but in a much more disciplined way.

The Board has decided to accept the resignation of CEO and Board member, Steve Wambold, effective immediately. I have been appointed as Interim President and CEO, a role that I will occupy for as long as necessary. No search for my replacement will be conducted in the foreseeable future.

I have spent most of my life building this company, having retired as CEO seven years ago, yet have remained on the Board as Chairman. While it was not my idea to return to head up this company, I am uniquely qualified to step in and look-forward to helping to right the ship. The good news is that we have seasoned and dedicated people throughout the company, many who have been with us for years who are not only supportive, but responding well to my leadership.

With that, I will turn the call back to Al, who will provide details on the partnership's financial performance for the fiscal year and additional color on our initiatives that are announced today.

Alan Heitmann

Thanks, Jim. I will begin with a discussion on the recently announced Jamex settlement. During FY2016, 80% of the adjusted EBITDA from our Crude Oil Logistics segment was generated from our largest customer in Jamex Marketing, that customer supplier undertake our pay arrangements.

The agreement with our customer provided for a minimum volume commitment and payment obligation for logistics services associated with the delivery of 65,000 barrels per day. However, if the quantity of crude oil delivered fell below 35,000 barrels per day, the payment obligation from the customer would be suspended and Jamex would in turn become responsible for the payment.

This past February, Jamex ceased sourcing barrels for delivery to our customer, and since that time, we have been billing Jamex directly in accordance with the provisions of this agreement.

In July, we determined that Jamex would not resume sourcing barrels for our customer. Due to concerns about the collectability of amounts owed to us from Jamex for previously billed deficiency payments, we entered into a group of agreement which among other things, terminated the Jamex agreement and provided for a secured promissory note from Jamex and settlement of amounts owed.

While the agreement with our customer was not terminated as a result of the Jamex settlement, we do not anticipate any material contribution to revenue or EBITDA from Jamex or our customer in the future.

As a result of this decline in our future cash flows as well as sustained decline in crude oil prices and the resulting decrease in crude oil production in the regions in which we operate, we performed impairment testing during the fourth quarter of fiscal 2016, which resulted in $629 million impairment charge.

Due to the outstanding debt balance from Jamex as well as the decrease in propane demand caused by the record warm temperatures in fiscal 2016, our leverage ratio has increased to levels approaching the 5.5 times limit allowed under our secured credit facility and our accounts receivable securitization facility. Yesterday, we entered into amendments for both facilities, under which the maximum leverage ratio was increased to a range of 5.95 times to 6.05 times over the next six quarters.

We are focused on preserving capital and enhancing our financial position. This includes a possible reduction in our annual cash distribution. While the distribution amount for the first fiscal quarter of 2017 hasn't been determined yet, our Board believes that it is possible that the annual distribution rate may be reduced from $2.05 to approximately $1 per common unit.

We believe that any such reduction together with any other debt reducing actions taken would likely remain in effect until our leverage ratio reaches a level that we deem appropriate for our business.

Now for a brief overview of our fiscal 2016 results. As detailed on our earnings release and our Form 10-K both of which were filed earlier today, our FY2016 adjusted EBITDA was $345 million compared to $300 million for FY2015.

Adjusted EBITDA for our Propane segment was $287 million or $39.1 million less than the prior year, primarily due to the decline in our propane sales resulting from temperatures, which were 19% warmer than average and 16% warmer than the prior year period. The effect of weather was partially offset by stronger margins driven by lower propane wholesale cost.

Adjusted EBITDA for our midstream operations Crude Oil Logistics segment was $108 million compared to the $8.6 million for the one year of operations in the prior year period.

Propane sales volumes for the fourth quarter were almost 144 million gallons, down 3.5% from the 149 million gallons a year ago. For the full year, 779 million total gallons were sold compared to 879 million gallons in FY2015. This decrease is primarily due to the warmer than normal nationwide temperatures previously mentioned.

Total gross profit for the quarter was $182 million compared to the $161 million in the prior year's fourth quarter. For the full year, gross profit was $878 million compared to $800 million in FY2015. The increase in gross profit for the year is a result of the full year of Bridger operations in FY2016 compared to the one-month partial year of operations in the prior year.

Operating expense for the quarter was $111 million down from $115 million. And for the full year, it was $458 million compared to last year's $432 million, primarily due to the additional expenses associated with the Bridger acquisition.

General and administrative expense for the quarter was down to $12 million compared to the $27 million last year. And for the full fiscal year, G&A expenses were $49 million down from the $56 million in FY2015. These decreases are primarily due to Bridger acquisition and transition costs recorded in FY2015 that were not repeated this year.

And finally, interest expense for the quarter was $35 million up from $29 million a year ago, and for the full year, interest expense was $138 million compared to $100 million in FY2015, primarily due to the additional debt and increased borrowings to fund the Bridger acquisition and growth CapEx. All of this resulted in FY2016 adjusted EBITDA of $345 million and distributable cash flow for the year of $200 million equating to a DCF coverage rate of 0.97 times for the trailing 12 months.

Now, I would like to turn the call back over to Jim for his closing remarks. Jim?

James Ferrell

Now I will tell you why I came back. The primary reason is for the people, who have made this business work, to whom I have a very deep loyalty. They also own some 30% of the company through an employee stock ownership trust.

The second reason is that this is a company I have built. And while I had a life after Ferrellgas and still do, I will make sure that there is some way to preserve this company for another 77 years.

What we're going to do is make every area of the company more competitive and more profitable. I will be focused internally because I think that serves every constituent much better than looking for the next deal.

Finally, I own about 5 million common units of FGP, just like those everyone else owns, and clearly have a vested interest in seeing investors be happy.

The company is 77 years old. We have been public for the last 22. I feel an obligation to all constituents, but the way I do it is to perform on my promises the same way our people do it. Together, we will make sure Ferrellgas has a long and prosperous future. Thank you.

Alan Heitmann

Thanks. At this time, we would like to turn the call back over to Susanne, so we can address any questions there might be from the analyst group.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And your first question comes from the line of T.J. Schultz of RBC Capital Markets. Your line is open.

T.J. Schultz

Great. Thanks. Good morning. So, I think first on the distribution. I understand the distribution policy is at the discretion of the Board and you throw out the $1 a unit. So, just looking for any color on what gets you to that as maybe the right level? And then what debt leverage would you want to get to before considering returning to higher payouts?

Alan Heitmann

Yeah, thanks, T.J. The $1 that's an approximation. There are a lot of things that are going to be considered before the Board takes action. First quarter distribution won't be announced until late November. By that time, we'll have the first quarter in the books. We'll have a pretty good sense of where November is coming in, and we'll have a pretty good window into what the temperatures are going to be like in December. So all of those factors are going to be taken into consideration before the Board takes action on the first quarter distribution.

As far as the appropriate leverage ratio, clearly, we want to be less than where we are at right now. I can't give you a hard number. That's going to be driven by the facts and circumstances and the nature of the environment that we are dealing with. So, hope that answers your question.

T.J. Schultz

No, that's helpful. I guess kind of more big picture what's the midstream strategic direction going forward? Jim, I think you said you remain committed to diversification, but in a more disciplined way. So, just any color on what that means? What you may be working on in the midstream business or just what the commitment level is still there?

James Ferrell

You got to remember, this is my first day on the job, so I haven't gotten into it yet. We are going to -- we kind of be in there big time and find out what we have. I like midstream. I have been in midstream before in my own personal history. I understand the pipelines. I understand the trucks. I understand the railcars, the plants, all of that. I like the business, but I can't tell you what we are going to do there except that we are committed to the diversification.

T.J. Schultz

Okay. Just one more maybe Al, a little bit more detailed question around the Eddystone terminal. My understanding it's in arbitration to get some deficiency payments for volumes that were not going through the terminal. I think this is due from Jamex and not Ferrell, but if you could just clarify who may be on the hook for those payments? What the timing was for those payments to transfer from you to Jamex or just if there's any potential for you all to be part of that arbitration process? Thanks.

Alan Heitmann

You correctly identified it, T.J. We are really not a party to that. I think you correctly identified that, that is between Jamex and Eddystone.

T.J. Schultz

Okay. Thank you.

Operator

And your next question comes from the line of Jeremy Tonet of J.P. Morgan. Your line is open.

Jeremy Tonet

Good morning.

Alan Heitmann

Hello, Jeremy.

Jeremy Tonet

I believe last year at this time, you guys have provided full year guidance. I am just wondering if you could give us any thoughts as far as how you think next year shapes up on the propane side and midstream side now, if not guidance on EBITDA or just kind of relative to where it was this year.

Alan Heitmann

Yeah, Jeremy, we are really not in a position to provide guidance. It's just too early. And without an indication on what the weather is going to be for FY2017, it would be a bit premature. So, we are not issuing guidance at this time.

Jeremy Tonet

Okay. Great. And then following up on T.J.'s question a bit as far as disclosing $1 as the number where the distribution could possibly fall, I was just wondering if you could add any more thoughts as far as why $1 as opposed to $1.50 or any other number?

Alan Heitmann

As we looked -- and again, we are modeling out what we think is fairly close to normal weather. And as you know, Jeremy, a big part of our business is still weather dependent. So, the approximate $1 is a reflection where we think we may be if we get normal weather, but there are too many variables right now. As Jim alluded, we are trying to get our arms around the midstream space, midstream assets that we purchased. So there are just too many variables to narrow it down any more than what we have.

James Ferrell

I might add that the propane side is in great shape. I mean, we are not worried about that at all. Matter of fact, they are in better shape than you might realize. Blue Rhino is doing -- I mean, every part of the non-midstream is -- it looks very good. And we -- you can add up how much -- you can multiply on how much we can -- how much money we can save by making the cut, if we make this cut. And you can see what we are trying to do here in getting our ratios back in order.

Jeremy Tonet

Great. And then just one last one from me. I am just wondering as far as your refiner customer Trainer not paying, is that something that you guys had discussed before in the Qs or the calls, or is this kind of new today? I don't think I recall that part.

Alan Heitmann

Yeah, that was -- that had previously been disclosed.

Jeremy Tonet

Okay. That’s it for me. Thank you.

Alan Heitmann

Thanks, Jeremy.

Operator

And your next question comes from the line of Brian Gamble of Simmons & Company. Your line is open.

Brian Gamble

Thank you. Good morning, guys.

Alan Heitmann

Morning, Brian.

Brian Gamble

A couple of things. Jim, I didn't know if you wanted to touch on any other details of Steve's departure. I understand if you don't want to there, but just any color on how that came about and what the Board ultimately decided?

James Ferrell

No.

Brian Gamble

Fair enough. On the $1, Al, maybe to tackle it from a slightly different direction. When you think about the way the propane business is going, and Jim, you noted going very well and that's good to hear. As far as the expectation for that business juxtaposed against what you are hoping to do to reduce the debt ratios moving forward? Al, I guess, how quickly are you looking to pull the debt ratios back towards something that you deem as an appropriate level moving forward?

Alan Heitmann

Well, again, the answer is going to be as quickly as possible. But as we detailed, we're prepared to take action with a thorough evaluation of our distribution in Q1. And we'll have to see where that action takes us together with the returns we are able to generate from our midstream assets. And we'll see where the degree days take us into FY2017.

Brian Gamble

Okay. And then maybe a couple of pieces. It might make a little sense to talk about. I know you are not giving full year guidance, but when we think about a couple of the line items that changed year-over-year due to the Bridger acquisition and specifically kind of below the line stuff, OpEx and depreciation.

As we look at the balance sheet as it stands at end of the year, should we expect that those levels -- those below the line kind of non-Op type of things would go back towards the levels that you recognized in 2015 pre-Bridger, or would those change materially from there, Al? Just trying get some semblance of ballpark as to where -- how to think about those two?

Alan Heitmann

Yeah, clearly, it's going to be less than where we were this year with the impairment charges that we took that affected the tangible assets as well as some of the amortizable intangibles. So, it's not going to go all the way down to where we were in FY2014, but it's certainly going to be less than where it was in FY2016.

Brian Gamble

Okay. Great. And then Jim, you talked about the strategy, you know, continuing to diversify is the plan eventually, but you definitely said in your remarks, you want to focus internally first which makes a lot of sense as far as how to reorganize and cut costs. And I am sure all the current shareholders appreciate you stepping back into take the reins.

When you think about, I guess, the opportunities that were there last time, and as Chairman of the Board I am sure you had a heavy hand in how that came about. What would you -- I guess looking back on, what would you have done differently when deciding to branch out into midstream? And just can you give us your thoughts on what could have been done, or what will be done differently in the future?

James Ferrell

You know what -- we were just like you. You can look back at everything you've done and you can pick the part and you can decide that you did something you prefer not to have done. The trouble is there's no way go back in history. It's -- history is history. And I can't do anything about it.

If the question becomes really what are we going to do about it now. I mean, you've got -- we've gotten issues presented to us that demand some action and demand somebody being in charge and somebody doing some tough things. That's all going to happen. So, I think the future looks good. And I can't do anything at all about the past. So, we are going to try to make better decisions this time, I can say that.

Brian Gamble

But just to clarify, the future is still main core focus propane for the near-term and reevaluate midstream strategy medium to longer term. Is that a fair way to categorize it?

James Ferrell

That's a good summary.

Brian Gamble

Okay. Great. I will leave it at that, guys. I appreciate it.

Alan Heitmann

Thanks.

Operator

And your next question comes from the line of Mirek Zak of Citigroup. Your line is open.

Mirek Zak

Hi. Good morning, everyone.

Alan Heitmann

Good morning.

Mirek Zak

Just a few quick questions from me. Regarding the potential distribution cut to $1 again, does that include the possibility of the Eddystone commitment going back to Bridger? Was that included in the analysis?

Alan Heitmann

No, no.

Mirek Zak

Okay. And are there any other contacts or agreements with Jamex on other Bridger assets at this point other than the new agreement you recently reported?

Alan Heitmann

Other than that was -- other than the group of agreements that we disclosed in our 8-K, there are no other Jamex agreements.

Mirek Zak

Okay. And are you able to securitize that Jamex promissory note via your AR facility?

Alan Heitmann

No.

Mirek Zak

Okay. And I guess lastly, can you tell us how much EBITDA your trucking business generated in 2016? And if you can quantify the magnitude of the impact that experienced in the last quarter?

Alan Heitmann

No. We don't disclose that as a part of the Crude Oil Logistics. We disclose Crude Oil Logistics in total. So, I am really not able to break that out for you.

Mirek Zak

Okay. That’s all for me. Thank you for your time.

Alan Heitmann

Thank you.

Operator

And your next question comes from the line of James Spicer of Wells Fargo. Your line is open.

James Spicer

Yeah. Hi. Good morning. I had a couple of questions. Just some clarification questions on the Jamex settlement. Firstly, can you clarify what, if any, residual commitments or obligations remain at Ferrellgas to Monroe at this point?

Alan Heitmann

We have no obligations to Monroe. Monroe really has no obligations to us. Like we disclosed, the obligation really is from Jamex. And the Jamex settlement is in anticipation of settling the outstanding amounts due.

James Spicer

Okay. Now, do you have any assets under operating leases that are -- that were related to the Monroe contract that maybe unutilized at this point, but for which payment still need to be made or contacts with other service providers or third parties for the purpose of meeting commitments that are still going to need to be paid?

Alan Heitmann

There are some. Most of the assets that service Monroe were owned. So, there is a small amount of assets that are leased. It's not significant.

James Spicer

Okay. Okay. And then on the leverage, I guess, do you think that the -- whatever distribution cut you guys decide, is that going to be sufficient to get you to where you want to be in terms of leverage, or are there other levers that you're looking to pull or may need to pull?

Alan Heitmann

The answer is yes to both. We do anticipate that the distribution reduction will in time get us to a leverage ratio that we deem appropriate. But we do have other alternatives that we will evaluate as a way to help to de-lever.

James Spicer

Okay. Any commentary on what those may be? I mean, I've seen the asset sales -- some residual asset sales on the midstream side potentially.

Alan Heitmann

We are not going to go into details right now. But we will investigate all of our alternatives.

James Spicer

Okay. Great. And then one last one from me. I am not sure what Jamex's financial situation is in totality. But to the extent that they need to go through any sort of formal restructuring. Given your relationship with Jamex, would there be any claim that Jamex creditors could have on Ferrellgas assets?

Alan Heitmann

No. We don't believe so.

James Spicer

Okay. That’s it for me. Thank you.

Alan Heitmann

Thanks.

Operator

And your next question comes from the line of Tarek Hamid of J.P. Morgan. Your line is open.

Tarek Hamid

Good morning and thank you.

Alan Heitmann

Hi, Tarek.

Tarek Hamid

I guess maybe just following up on James' question, just as you think about some of the assets that you have dedicated to Trainer, can you sort of give us a sense of kind of what if any fixed cost absorption we should thinking -- be thinking about with those assets, presuming that they are not going to be redeployed instantaneously?

Alan Heitmann

You know, the challenge for us and our goal really is to redeploy those assets and to begin to generate revenue with the assets we have. I can't really give you specifics on the fixed costs, but I think we detailed in the comments what our expectations are and the loss we are going to experience are about 80% of adjusted EBITDA.

Tarek Hamid

So, we should think about that as sort of reflecting both lost revenue as well as the cost as kind of reasonable starting point?

Alan Heitmann

Absolutely.

Tarek Hamid

Okay. Thank you. And then five other people have asked this, but I'll try again. So, as you think about sort of the timeline to kind of get leverage where you wanted to go, do you think about it as a sort of fiscal year 2017 event, or do you think about it as something that may take a little bit longer depending on how things play out?

Alan Heitmann

I think it may take a little longer. But again, it's going to depend on how successful we are in redeploying our midstream assets and how kind Mother Nature is to us in FY2017.

Tarek Hamid

Okay. Is it fair to say that a lot of this -- a lot of your plans will be clear kind of once you get a sense of what the winter plays out?

Alan Heitmann

That's fair.

Tarek Hamid

Okay.

James Ferrell

Well, I think yes, we are going -- we are digging in here. It's -- there are things to be done and improvements to be made, and that's what we are going to be doing. And so we'll know -- yeah, as you get into winter, as you get in more deeply into what we are going to take care of here, we'll have a better picture of it.

Tarek Hamid

Got it. That's it for me. Thank you very much.

Alan Heitmann

Thank you.

Operator

And our final question for today is from Ben Brownlow of Raymond James. Your line is open.

Benjamin Brownlow

Hi. Good morning. Thanks for taking the questions. On the Bridger kind of Midstream segment and that 80% cut to EBITDA or hit to EBITDA, can you talk about is there an opportunity to flex the expense structure there? Or is it purely 100% focused on securing another contract for that segment?

Alan Heitmann

That adjustment -- the comment that we made is reflective of the expenses and at least the impact of the loss with Jamex and Monroe. But it's reflective of all of the carrying costs and fixed costs that are associated with those assets.

Benjamin Brownlow

Okay. Great. And just on the Jamex note, can you discuss how kind of the accounting flow through on those future payments?

Alan Heitmann

How the accounting flows through on the future payments?

Benjamin Brownlow

Yes.

Alan Heitmann

I mean, we are scheduled to receive -- I believe starting in March, $2.5 million. This is part of the note that was disclosed. It will simply be used to retire or be charged off against the outstanding note receivable.

Benjamin Brownlow

Okay. Great. Thank you.

Operator

And that concludes today's question-and-answer session. I'll turn the call back over to presentation team for closing remarks.

A - Alan Heitmann

Okay. Well, we appreciate everyone's participation on the call today. And we look forward to giving you some updates during our first quarter fiscal 2017 call. Thank you all very much.

Operator

And this concludes today's conference call. You may now disconnect.

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