Image source: Ferrellgas Partners.
Last month's announcement that Ferrellgas Partners (FGP) had cut ties with its CEO and was planning to cut its payout to shareholders really rocked the company's share price. With so many things happening all at once, clearly the company had a lot of explaining to do during its most recent conference call. Here are five quotes that explain why the company is in its current situation -- and what it plans to do from here.
Why the big writedown?
Ferrellgas Partners really surprised Wall Street last month when the company announced more than $650 million in writedowns related to its crude oil logistics and its water solutions business. These two parts of the business were from the $870 million acquisition of Bridger Logistics in the middle of last year. CFO Alan Heitmann went into the details as to why the company wrote down almost all of this business after just more than a year of owning it.
During FY '16, 80% of the adjusted EBITDA from our crude oil logistics segment was generated from our largest customer in Jamex Marketing, that customer supplier under take or 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've 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 collectibility 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.
A little debt trouble
If buying a business that has turned out to be a dud less than a year in wasn't bad enough, Heitmann also went on to explain that the company is in a little hot water with its debt situation.
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.
Clearly, the troubles of this Bridger acquisition won't end with this writedown, and it may take a while until the company can get its balance sheet back under control. That is especially true if the winter proves to be another warm one.
Righting the ship
As part of the quarterly earnings press release, management announced that it plans to lower its distribution to around the $1 range after they can assess the performance of this first quarter. This raised a few questions -- like "Why wait until next quarter?" Heitmann explained why management wants to wait and why it doesn't have a more definitive number for its new distribution.
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're at right now.
Based on this, it seems as though management wasn't fully prepared for the fallout from this blunder and the abrupt departure of former CEO Stephen Wambold. It will likely take a few months for management to get its bearings.
Core is good
Despite all the bad news related to the botched Bridger deal and the tough winter, interim CEO James Ferrell wanted to remind investors and Wall Street analysts that the core of Ferrellgas' business -- propane distribution and retail sales -- is still on solid footing.
The propane side is in great shape. I mean, we're not worried about that at all. Matter of fact, they're in better shape than you might realize. Blue Rhino is doing -- I mean, every part of the nonmidstream is -- it looks very good. And we -- you can add up how much -- you can multiply out 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're trying to do here in getting our ratios back in order.
The cut he is referring to there is the distribution cut. Basically, he is saying to analysts that it's easy to see what kind of cash generation the company will be able to achieve if it doesn't need to shell out as much to shareholders. That, of course, is going to be a little weather-dependent.
Founder interest in returning to prominence
Wambold's departure left a bit of a void in the C-suite that chairman James Ferrell quickly stepped into. As troubling as the situation looks today, Ferrell wanted to give investors a good reason why he chose to fill the CEO chair instead of someone else. It also doubled as a reason why investors should stick around with this company.
Now I'll 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's 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.
With so much in the air at Ferrellgas Partners, the fact that the one man with the biggest interest in seeing the company succeed has stepped back into the captain's chair is a small glimmer of hope. Now, it's up to Ferrell to prove that he can get his company back on the right track by executing over the next several quarters.
