This week, we revisit the second largest propane distributor in the nation. We first reviewed Ferrellgas Partners LP (FGP) in September 2015. Since that time, the company has continued to grow EBITDA, expand via acquisitions and pay dividends. Here are some highlights from its Q3 2016 results.
Ferrellgas recently posted 12% growth in adjusted EBITDA over Q3 of 2015, growing from $96.3 million to $108 million.
In addition to its immediate accretive acquisition in June 2015 of Bridger Logistics, Ferrellgas has continued to acquire regional, independent propane retailers to add revenues and profits to the bottom line.
The company recently declared a quarterly dividend for unitholders, a good sign for bondholders of excess cash that can be used in the event of quarterly cash volatility.
Ferrellgas has three bond issues, with maturities in 2020, 2021 and 2023. The yields on these bonds range from ~8.4% to 8.7%. While these yields are less than some of the other bonds we have recently reviewed, what we like about Ferrellgas is that in many areas, it’s a geographic monopoly – where there is usually only one propane distributor in an extended rural area. The coupon for these bonds range between 8.625% to 6.5%, which means the majority of the yield is returned in good cash flow interest income. Therefore, we think the competitive 8½% yield of these better rated Ferrellgas Partner bonds make for a sound enhancement to our FX1 and FX2 global high yield income portfolios.
Ferrellgas’ Q3 Results
We last reviewed Ferrellgas in September 2015. Since that time, the company’s acquisition of Bridger Logistics has added revenues and adjusted EBITDA in line with expectations. When Ferrellgas acquired Bridger Logistics, it estimated Bridger’s annual contribution to adjusted EBITDA at $100 million. Now, over a year later, Bridger is indeed on pace to fulfill the $100 million in adjusted EBITDA for fiscal year 2016 (ended July 31, 2016). Indeed, Bridger’s contribution to Ferrellgas’ numbers were critical to the company’s year-over-year adjusted EBITDA growth in its most recent posted quarterly results (Q3 ended 4/30/2016). Ferrellgas’ Q3 results were affected by the unusually warm weather winter in the U.S, with overall temperatures 18% warmer than normal and 21% warmer than last year. However, thanks to the contributions from Bridger, the company was able to post a healthy increase in adjusted EBITDA. For Q3, Ferrellgas posted 12% growth in adjusted EBITDA over Q3 of 2015, growing from $96.3 million to $108 million. Bridger contributed $25.2 million, just above 23%, to the quarter’s adjusted EBITDA total.
Providing Propane Transportation and Utility Services
While Ferrelgas is linked to the propane industry, it is important to differentiate this company from energy (oil and gas) producers. Its role is strictly as a transportation and distribution solution for propane, especially in rural areas. During oil and gas’ declines over the past two years, Ferrelgas has remained profitable and continued to build its distribution network, while diversifying its revenue sources. Ferrellgas’ business model has not been as closely linked with oil and gas volatility as one might think.
Ferrellgas continued to grow by acquisition. Since our last review the company has acquired two more local propane dealers. In December 2015, the company acquired Gasco Energy, which is based in Missouri. Then in June 2016, Ferrellgas acquired Selph’s Propane, a local propane dealer located Colorado. In Ferrellgas’ 80-year history, the company has purchased more than 235 businesses. Indeed, the company continues to look for opportunites to expand, both organically and also through continued acquisitions, either in mid-stream services (like Bridger Logistics) or propane. The company has a stated goal of transforming its business mix by 2018 to 50% propane and 50% midstream services. With this in mind, it seems Ferrellgas will be expanding its foothold in the midstream services sector.
About the Issuer
Ferrellgas is a leading U.S. distributor of propane and propane related equipment. The company is based in Overland Park, KS and currently employs nearly 4000 people nationwide. The company also provides oil and gas midstream services to major energy companies in the United States. The company’s core operations of providing and distributing propane serves the industrial / commercial, portable tank exchange, agricultural, wholesale and other customers in all 50 states, the District of Columbia and Puerto Rico. The company also generates sales from portable tank exchanges, nationally branded under the name Blue Rhino, through a network of independent and partnership-owned distribution outlets. Its residential and agricultural customers generally live in rural areas, whereas its industrial/ commercial and tank exchange customers generally reside in more urban areas.
Over the past few years, Ferrellgas has been diversifying its revenue generating segments. The acquisition of Sable Environmental in May 2014, gave Ferrellgas new inroads into the midstream oil and gas industry. Sable Environmental provides salt water disposal services throughout Eagle Ford Shale in Texas. In June 2015, Ferrellgas acquired Bridger Logistics, which provides end-to-end crude oil logistics from the wellhead to end markets across North America. Ferrellgas forecasted the Bridger acquisition to be immediately accretive for Ferrellgas, with projections of an additional $100 million in annual EBITDA.
The Propane Industry
Presently, the propane industry is made up of a few big players and many smaller players, mostly small, regional suppliers. Today, Ferrellgas comes in as the second largest propane distributor in the United States, with operations in all 50 states. Propane has a wide range of uses beyond what most people consider – backyard grilling and portable cook stoves. More than 660,000 farmers use propane for irrigation pumps, grain dryers, standby generators and other farm equipment. It is an essential fuel for crop drying, flame cultivation, fruit ripening, space and water heating and food refrigeration. In addition to this, more than 9 million families nationwide use propane daily for furnaces, water heaters, cooktops, outdoor grills, fireplaces, generators, and other appliances. Business owners across the country are also choosing this clean-burning fuel for bus, taxi, delivery, and other fleets to minimize air pollution in metropolitan areas. Ferrellgas has built an extensive distribution network that serves all of these consumer segments.
Another item to note about propane; in rural areas of the country, propane distribution, by nature, is usually a geographic monopoly, meaning there is usually only one distributor in an extended rural area. Ferrellgas has used this to its advantage, actively acquiring and continuing to solicit regional propane suppliers / distributors who might be interested in selling their operations. This strategy has paid off, making Ferrellgas the second largest propane distributor in the nation. With approximately 68% of the propane market made up of independent retailers, Ferrellgas has continued opportunity for growth through industry consolidation.
For fiscal Q3 (ended 4/30/2016), Ferrellgas posted operating income of $54.2 million and interest expense of $34.4 million for an interest coverage ratio of 1.6x. Although this is lower than Q3 of 2015, readers should take note of a few items. First, Ferrellgas issued $500 million in bonds at 6.75% to help finance the Bridger acquisition. Also, as previously mentioned, with the much warmer winter temperatures in late 2015 and early 2016, propane demand was not at its historic levels.
Other notable balance sheet figures from its Q3 report: the company had cash on hand of $6.3 million, and property, plant and equipment valued at $981.5 million. In terms of liquidity, Ferrellgas also has approximately $135 million available on its revolving credit facility as of 4/30/2016.
Ferrellgas continues to pay its unitholders a quarterly distribution. The company recently declared a Q4 cash distribution of $0.5125 per common unit. While these distributions do not affect bondholders, bondholders should be encouraged as this dividend level provides an extra cash cushion in the event the company experiences quarterly volatility in its cash flows.
The default risk is Ferrellgas’ ability to perform. Ferrellgas has continued its strategy of acquiring local propane retailers to add revenues to its bottom line. The company’s midstream services acquisitions appear to performing as anticipated, adding additional EBITDA to Ferrellgas consolidated results. With the company targeting additional revenues from midstream services, we can expect organic and / or acquired growth in oil and gas midstream services. The average yields on Ferrellgas’ three bond issues appear to outweigh the risks we can identify.
Ferrellgas’ revenue stream from the sale and distribution of propane varies throughout the year due to seasonal temperature changes. There is increased demand during the winter months (for heating residential and commercial buildings). As a result, the company’s revenues are higher during the second and third fiscal quarters (which occur during peak winter months). One of the ways Ferrellgas levels these revenues during other times of the year is through its portable tank exchange propane sales through its Blue Rhino division. These sales provide increased operating profits during the company’s first and fourth fiscal quarters due its counter-seasonal business activities.
Ferrellgas, through its Bridger Logistics subsidiary, recently shed a five-year contract it held with the Eddystone terminal, a Philadelphia-area rail terminal. This contract was a link in Bridger’s deal with Monroe Energy (a subsidiary of Delta Airlines) to supply Monroe’s refinery in Trainer Pennsylvania. Although it is uncertain how Bridger / Ferrellgas will proceed at this point, the prospect of the cancellation of the Monroe contract is a concern, as 60% of Ferrellgas’ Midstream Operations gross margin was due to this one customer.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
These three bond issues from Ferrellgas Partners, maturing in 2020, 2021 and 2023 and yielding about 8½%, are similar in yields and durations to other bond issues reviewed on Bond-Yields.com, including the 8% Commercial Vehicle Group and 12% Alliance One bonds.
Summary and Conclusion
Ferrellgas’ shrewd midstream services acquisition in mid-2015 is paying off. Bridger Logistics is on pace to deliver the anticipated $100 million in additional EBITDA for fiscal year 2016. The company continues to acquire regional independent propane retailers to grow its bottom line revenues. Ferrellgas also continues to pay its unitholders a quarterly dividend, which is excess cash that can be used for bondholder payments in the event of quarterly cash flow volatility. While the 8½% yields on these three bond issues, maturing in 2020, 2021 and 2023, mean that they are trading near or below par, they are plainly leaps and bounds above U.S. Treasury Yields, which were between 0.92% and 1.50% for 3-year and 7 year durations respectively. Consequently we are targeting these bonds for addition to our global high-income managed Fixed-Income1.com and Fixed-Income2.com portfolios.
Issuer: FerrellGas Partners LP
Yield to Worst Call: ~8.0% (@100 on 6/15/2018)
Yield to Maturity: ~8.3%
Yield to Maturity: ~8.25%
Yield to Maturity: ~8.5%
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Disclosure: Some Durig Capital clients may currently own Ferrellgas Partner LP’s 2020 bonds.
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