A $150mm equity offering and a distribution cut to $1.00/unit.
FGP needs to sell at least $150mm of equity to avoid a covenant breach within the next 2-3 quarters. Only problem is that with trailing 12 month distribution coverage around .55x post their Q3 earnings, FGP will need to communicate a new sustainable distribution level before any investments bank will underwrite an equity securities offering. Weather adjusted with 1.2x coverage, and pro forma for a $150mm equity raise, I expect the aggressive end of the new distribution range to be $1.00/unit. If they pro forma for their targeted leverage level of 3.5x debt/EBITDA it would be lower. But assuming they don’t take the full dose of medication this time around, they optimistically will sell equity at a 9-10% yield on the new $1.00 distribution. Execution and post-sale trading will be very sloppy and the price will likely decline from there to around $9.00. Which, btw, is Tysseland’s price target for FGP.
I think the recent rise in FGP's unit price is based on speculation that FGP could be acquired the way Heritage Propane and Inergy Propane were acquired.
But what speculators don't seem to understand is that there are not any natural acquirers for FGP. Amerigas and Suburban are not going to be ready operationally to do more large acquisitions for a couple years as they are busy integrating their recent purchases to realize cost saving synergies. Also, Amerigas and Suburban had to take on a lot of debt to get their deals done and neither of them have the balance sheet to purchase FGP with FGP's enormous debt load.
I agree a distribution cut is inevitable. FGP cannot continue to borrow to pay out a distribution that is only 50% financed by cash flow. I suppose FGP could sell more units to finance the cash flow gap sort of like a ponzi scheme, but that can't last forever. The question is when not if FGP cuts its distribution.
You allude to a proprietary analysis report by Mr. Tysseland, which unfortunately, is unavailable for verification. However, I follow this company closely. There have been repeated assurances, not only in managements financial reports as well as investor conferences, that FGP is not even near being in jeopardy in violating financial covenants. Whats more, where is the 3.5X Ebitda coverage cited? It doesn't appear among the coverage of covenants in FGP's SEC filed latest annual report nor I suspect subsequent reports. It only refers to fixed charge coverage and since there are no maturities until 2016, that shouldn't be a problem.
Whats more, FGP's auditor issued a clean unqualifed opinion.
So, if you're correct I plan to sue the hell out of them and if I can find you, you as well if I can find you for spreading false, malicious rumors.
You can be found.
Where is the loan document and covenant issues specifically? FGP in its last conference call indicated there were no covenant issues. And there aren't any in the shelf offering, which also can include debt as well as common. If there are covenant issues as you assert, they can issue debt and issue a tender to call the debt with the "alleged" covenant issues. Your assumption of massive dilution is just that, an assumption.
500 million gallons were sold in the last 6mos...margins will likely improve, more municipalities are converting to propane for school buses( and they burn a lot), not to mention mowers.