Author Topic: FELP - Foresight Energy  (Read 285011 times)

heth247

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Re: FELP - Foresight Energy
« Reply #400 on: August 02, 2016, 10:34:25 AM »
Thanks again Picasso. I've learned a lot from you on FELP and SXC(P) these past few months.

Same here!


Picasso

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Re: FELP - Foresight Energy
« Reply #401 on: August 02, 2016, 10:52:23 AM »
Always happy to share my ideas and get feedback. 

Picasso

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Re: FELP - Foresight Energy
« Reply #402 on: August 02, 2016, 11:58:07 AM »
Spoke to a tax lawyer who deals with a lot of these MLP's (represents LINN and couple others getting hit with CODI) since there's the last pressing matter related to cancellation of debt income.  Depending on where the new FELP debt and warrants trade, if they trade for say $90, then there will be $10 of income generated that will be distributed across the unit holders.  If that's $60 million of CODI (10% of par), then there will be a 0.46 gain sent down to the units (poor Murray).  There's a 31 day window, 15 days after the exchange is over where they assess the value of the exchange for tax reasons.  Even though it's a $600 million for $600 million swap, for tax purposes it will depend on the market value post exchange.

So something to consider in case anyone thinks the value of the exchange will somehow be much less than par, or you start seeing headlines that you may get hit with massive tax bills.  Since Cline and Murray own 85% of the equity, it seems like they made this as close to a par deal as possible.  Unless they think the upside to the deal is way more than the potential tax hit.
« Last Edit: August 02, 2016, 12:03:40 PM by Picasso »

Picasso

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Re: FELP - Foresight Energy
« Reply #403 on: August 02, 2016, 12:27:30 PM »
Just some back of the envelope here to calculate the CODI:

$300 million of 2021 2nd liens @ 90% of par = $270 million
$300 million of 2017 PIK @ par = $300 million
FELP @ $4 gives $3 or so of value to the warrants x 5.85 million = $17.6 million

That's $587 million instead of $600 million, so potentially $13 million of CODI.  Which would be about $0.10 of taxable income for unit.  Seems kind of de minimum but I could see how buyers of FELP will hold off until after the exchange to avoid paying the tax. 

Edit: Turns out the accrued interest (even though it's in the form of bonds) is adjusted into the basis.
« Last Edit: August 02, 2016, 06:32:40 PM by Picasso »

PullTheTrigger

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Re: FELP - Foresight Energy
« Reply #404 on: August 03, 2016, 11:10:00 AM »
From Taylor Kuykendall on Twitter:

Westmoreland CEO 'excited' to report coal results for coming quarters

http://www.snl.com/web/client?auth=inherit#news/article?id=37289616&cdid=A-37289616-12325

Quote
Like many other coal producers providing quarterly results so far, Westmoreland is reporting improved demand trends due to hotter summer weather. He said the increased number of cooling days at utilities this summer has offset the softness in the first quarter and that Westmoreland is "eager to see" how trends play out.

Jason Veenstra, CFO and treasurer, said the company would expect a "much stronger" 2017 if pricing levels hold.

Tempered by this:

Cloud Peak CEO: Coal not 'going back to where we were'; some optimism in H2'16

http://www.snl.com/web/client?auth=inherit#news/article?id=37287127&cdid=A-37287127-12585

Quote
On a conference call hosted by Morgan Stanley, Marshall said the recent hot weather of summer 2016 is bringing back demand from coal plants that has not been around since Thanksgiving of 2015. He said there is a marked increase in shipments heading through the summer, and demand is expected to improve as utilities whittle down their coal stockpiles.


He said the changes the coal sector has made have been "miserable" but said not to worry that coal demand is "going to nothing." He added that it is mostly a matter of operators figuring out how to operate in a more volatile market, though more stability could be on the horizon.

"It looks like we'll get back to a much more supportive pricing environment and volume as things come out if there's any stability in gas and some sort of normal power demand," Marshall said. "We do have to accept, going forward, that coal, which used to be a true baseload business, is going to become a lot more variable, and demand will vary with the price of gas and weather, and that's just the way it's going to be going forward and we have to adapt to that."


heth247

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Re: FELP - Foresight Energy
« Reply #405 on: August 04, 2016, 04:25:40 PM »
Just some back of the envelope here to calculate the CODI:

$300 million of 2021 2nd liens @ 90% of par = $270 million
$300 million of 2017 PIK @ par = $300 million
FELP @ $4 gives $3 or so of value to the warrants x 5.85 million = $17.6 million

That's $587 million instead of $600 million, so potentially $13 million of CODI.  Which would be about $0.10 of taxable income for unit.  Seems kind of de minimum but I could see how buyers of FELP will hold off until after the exchange to avoid paying the tax. 

Edit: Turns out the accrued interest (even though it's in the form of bonds) is adjusted into the basis.

I hope they try their best to keep the CODI as small as possible. Just learned that for CODI, it will be counted as UBTI in the K-1 form. For any UBTI over $1000, we need to pay a tax rate of 39%, even for IRA accounts!

Anybody holding MLPs in IRA in the past?  For the ordinary income part from the K-1 form, you don't need to worry about tax, do you?
 

Picasso

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Re: FELP - Foresight Energy
« Reply #406 on: August 04, 2016, 05:03:35 PM »
I think I referenced this early in the thread but since Cline and Murray own 85% of the units that currently do not pay distributions, they would not want to create a lot of CODI.  So say you own 100k units, $13 million of CODI across all the units would hit you with a $10,000 gain.  If you pay out 40% of that in tax, it cost you $4k.  But what are the 100k units now worth?  Each $1 increase nets you $100k and if it's in an IRA, you're deferring tax on that short-term gain.  I think it's very de minimis but we'll see how the notes trade.  Much ado about nothing imo.  What investors have to worry about are the Linn energy type situations.

heth247

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Re: FELP - Foresight Energy
« Reply #407 on: August 04, 2016, 08:27:28 PM »
I think I referenced this early in the thread but since Cline and Murray own 85% of the units that currently do not pay distributions, they would not want to create a lot of CODI.  So say you own 100k units, $13 million of CODI across all the units would hit you with a $10,000 gain.  If you pay out 40% of that in tax, it cost you $4k.  But what are the 100k units now worth?  Each $1 increase nets you $100k and if it's in an IRA, you're deferring tax on that short-term gain.  I think it's very de minimis but we'll see how the notes trade.  Much ado about nothing imo.  What investors have to worry about are the Linn energy type situations.

Yeah, can't complain about the tax-free capital gains. :)  I was just surprised that I will have to work with my broker to file a 990T form for my Roth IRA account due to the CODI. I never need to worry about tax for those type of account before. Anyway, it is my first time to own these MLPs, so lots of things to learn....

It seems that even for taxable accounts, the future cash distribution is counted as return of capital (ROC), so they will mostly just reduce the basis of the units. Unless you sell, you can get those cash distribution tax-free. Is that so?

Picasso

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Re: FELP - Foresight Energy
« Reply #408 on: August 04, 2016, 09:26:30 PM »
Correct, the vast majority of the distributions are considered return of capital.  In the case of FELP if you own it at $1.50, it might only take a couple or few years before the distributions reduce your basis down to zero.  At that point all the distributions become taxable as ordinary income.  Then if you sell FELP in several years, the basis reduction becomes taxable.  Any capital gains above the ROC would be at long-term capital rates.

So say you owned it at $1.50 and by 2020 you received $3 of distributions, maybe $2.50 of which were ROC, and you sell the units at $10.  You would have $3.00 of ordinary income ($1.50 of that was deferred until sale), and $8.50 of long-term capital gains. 

If you own it in an IRA, you just have to deal with the UBTI.  In the case of FELP, if you do not own it on the date of the exchange then you won't have to deal with the CODI.  I believe we'll get news of a successful exchange before that date (not entirely sure, need to double check) which might have a favorable impact on the units.  So technically you could sell ahead of that date, but I feel like there would be investors waiting to buying after that date who do not want to risk CODI?  So you'd risk missing out on that upside.  Would it be worth saving something like 0.05-0.10 of Roth cash?  The bid ask spread on FELP is basically around that area anyway. 

And just a little more color on why I think it wouldn't make a ton of sense to game that exchange date to avoid CODI.

This was in the last SNL report on FELP:

Quote
The company warned the restructuring contemplates potential issuance of additional equity securities that could "significantly dilute" the ownership of existing unitholders. It also warned the exchange offer will generate substantial cancellation of indebtedness income that will be taxable to unitholders and could result in a liability per unit substantial to or even exceeding the value of a common unit.

That's scary for investors right?  But there's a reason for that language.  What if FELP had $600 million of 2021 8% debt being exchanged for $600 million of 2035 2% debt.  It's the same amount of debt being swapped, but in reality the 2% 2035 debt is worth just a fraction of the 2021 8% debt.  Which is basically a de facto debt reduction.  To avoid free income to those types of restructurings it makes sense to tax that market value difference. 

In the case of FELP we're going from $600 million of 2021 unsecured 7 7/8% debt to $300 million of 2017 15% 2nd lien and $300 million of 2021 10% (or so) 2nd liens.  Plus in the money warrants.  So the principal is staying the same, but a big jump in the interest rate, half the duration, higher in the cap structure, and extra warrants.  If FELP debt was trading at around $90 last year (December), here we have much better debt that should be trading much higher than that.  At least collectively between all the pieces. 

So maybe investors are nervous about that nasty language of being taxed more than the value of the units.  But it's clear that's not going to happen.  Between that and the confusion around the potential dilution, it really explains why the units are still so cheap.  My position isn't exactly liquid enough to game that exchange date, but maybe it hits a price high enough to warrant trying to avoid the CODI headache for others. 

heth247

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Re: FELP - Foresight Energy
« Reply #409 on: August 05, 2016, 09:58:52 AM »
Thanks for the color, Picasso.  Yeah, I don't have that many of units in my IRA, so economic wise, it is not a big deal. I was just surprised that I have to deal with it even for Roth accounts.