I think I mentioned before that I would never buy stock in any company that was dumb enough to hire me as CFO. Tax guy, sure; CFO, never.
And the answer depends on too many variables. With NRP's leverage and CAPP coal problems, I'd lean towards units even though that hurts the unit holders. But if a lender were dumb enough to lend me that 9.5% money for 40 years with no amortization and no prepayment penalties, I'd probably borrow.
It will be interesting to see the rate/term that NRP gets when it puts the permanent financing in place, though. The debt that NRP repaid in the first half looks like it carried an average rate of about 6.4%. Most of that was just scheduled payments, so it's not as if NRP had a choice in the matter, but any debt they put on now will cost a good deal more than that.
I think just about every midstream MLP is either over valued or fully valued. But I like EPD a lot better than KMI. I also like ETE (a GP, like KMI) and MMP.
But my favorite MLP right now is a coal miner, ARLP or its GP, AHGP. It has been the 4th best performing MLP (price only; I don't bother counting the reinvestment of dividends) since I started tracking them in 2002 and continues to grow. Since the start of this year, for example, it's up another 25%, plus you get a nice distribution while you wait for its 2 new mines to come on line.
NRP has not given any great detail about the new deal yet, which leaves me free to guess.
First, the financing – NRP will issue $ 36 MM of new units and finance the remaining $ 169 MM.
While NRP says it’s issuing $ 36 MM of new units, it doesn’t say the price the new units are being issued at. If I use $ 16 per unit, that’s 2.25 MM new units. That’s probably generous; I would expect the sellers to want some discount off the market price, especially if the units are not covered by the ATM registration statement NRP did a short while ago. So let’s use 2.25 MM unit. At $ 1.40 distribution per unit, the extra cost is $ 3.15 MM in new distributions.
As to the borrowing, NRP’s short-term interest rate (floating) is about 2% - 2.5%, but that line matures in 2016, so I would expect NRP to line up long-term financing soon after the deal closes. Its most recently-issued long-term debt (fixed rate) is somewhere around 8% and change. It has some lower cost debt, but that money was borrowed when coal was a better risk. So short-term, I used 2.5% interest and then did a calculation at 8% to see the impact.
NRP says the new operation is expected to throw off $ 25 MM of EBITDA over the next 12 months. They don’t say anything about the level of maintenance capital expenditures. The new operation is similar to NRP’s investment in OCI Wyoming; it’s a real operating business, contrary to NRP’s traditional royalty business. So it will need to replace some of its fixed assets each year, but for now I have simply guessed $ 1 MM per year, just to have a place holder. The business sis also growing using a roll-up model. So it will need financing to grow, but presumably the growth in the business will fund expansion costs.
So $ 25 MM less $ 1 MM maintenance cap ex, less $ 4.2 MM short term interest less $ 3.15 MM for the current distribution on the new units leaves excess cash flow of $ 16.5 MM. Dividend by 114 MM units post-deal gives you per-unit cash flow of about 14 – 15 cents per year.
Doing the same calculation once long-term financing is in place gets you to excess cash flow of about $ 7 MM, or about 6 cents per unit per year.
Upside – the business is growing, and presumably NRP saw its projections, so these numbers are just the current ones. Presumably, growth will occur.
Downside – at some point the business needs to repay debt, and that will cut DCF. Also, what is NRP becoming? A low-risk royalty company or an operating company spread out among different materials? How do they sell that change to investors?
Overall – For the moment, I think it’s a nice deal but no home run; it will certainly let NRP say that the percentage of non-coal revenues it has will be much lower. Also, it’s evidence that NRP’s management is continuing to diversify. At some point, it would be nice if NRP shared the operation’s growth projections so we can figure out the long term impact. Also, how much of its growth is organic versus simply rolling up smaller competitors? Can the new operation exploit aggregates reserves on the BRP properties that NRP controls?
Just a pointless aside, KMI actually is a very large coal reserve lessee so it has something in common with NRP. It's funny, there was a Heard on the Street column in the Wall St Journal yesterday about the KMI/KMP/etc deal and what picture did they have accompanying the story? One of KMP's coal handling facilities, of all things.
Coal can't amount to more than a percentage point or two of KMP's business, but even 1% of a hige number is pretty big.
Like aI said, this is a totally pointless post. But it's true, and it's one of my reasons for not wanting to own KMI long-term. It has lots of businesses that deserve a low multiple, but all it wants us to focus on is its midstream operations.
NRP buying an additional aggregates business; the announcement makes it look like the purchase is from private equity people. Mostly debt-financed, but the sellers are also taking back $ 36 MM of NRP units. I did not see the per-unit price of the units, just the $ 36 MM.
Let's see the difference between the value the private market puts on the deal and the value the public market puts on NRP for making the deal. Although I don't own NRP just now, I hope the deal is well received.
I have no idea why you would want my opinion, but I owned a lot of KMR before the deal and I'm selling most of it because I don't want to own KMI anywhere near the current price.
I think the risk in NRP is to the downside until met coal recovers, but I think there's way more downside in KMI than upside. Frankly, in a few weeks, I don't expect to own KMI or NRP. I think there are less risky choices in coal and oil & gas midstream.
And the Treasury isn't really doing an investigation of MLPs. All the talk about corporate inversions has focused attention to all the non-corporate tax structuring that goes on within the US, including expansion of the types of businesses that qualify for REIT and MLP treatment. So when asked, the government says "we're looking into that, too." The controversy is about new types of operating businesses that only peripherally are involved in natural resources, like paper mills and plastics plants.
Don't worry about it. First, the losses should be fully deductible when the deal closes under any reasonable interpretation of the rules. And second, when KMP finally gets around to sending our a proxy for the unit holder vote, it will contain reams of pages about the tax consequences.
As a limited partner in KMP your share of the losses is treated as passive. When you fully dispose of your interest in the passive activity in a fully taxable transaction, the losses and loss carryovers are no longer passive and can be used against all of your ordinary income. Obviously, the "fully taxable" requirement is satisfied in the proposed deal. So the question is whether you have "fully disposed" of the passive activity. You have. Once KMI owns KMP, the activity belongs to KMI. As a corporation, its operations are not treated as being carried on by its shareholders. There is no "deemed" ownership pass-through to you because you own KMI. Your interest in the KMP activity is gone. So you have satisfied the second requirement as well.
But there's an easier answer. Even if everything I just wrote is wrong, you are allowed to use the PAL carryovers to offset the ordinary income portion of your KMP gain. The ordinary income portion of the gain represents depreciation recapture, which to you is passive income. So your PAL carryovers can be used to offset the ordinary portion of your gain under any circumstances. If your PAL carryover exceeds your ordinary gain (I can't think that bthis is even a possibility), then you need the "complete disposition" rule to use the rest of the carryovers.
And if you ask me for a specific cite from the IRS to support this. I probably can't give you one, not this early in the morning at least.
Based on the current structure of the deal, you will have nothing to report for 2014, except possibly a few dollars gain for any factional shares that you might be entitled to.
The KMR/KMI deal is currently proposed as a tax-deferred reorganization. Nothing taxable to report. Technically, there is a requirement to attach a statement to your tax return saying that one of your investments was involved in a tax-deferred reorganization, but that's just a technicality. No immediate tax.
If you have owned KMR for 4 years, you probably own some fractional shares. In addition, when the deal closes you will be entitled to a number of shares that may end up with a fraction. KMP doesn't do fractions, so they will pay you the cash equivalent. Since it has to be less than 1 share, at current prices, you might get as much #$%$ 99 of cash for the fractional shares, but no more. This small amount will be taxable.
And starting in 2015 you will be taxed on some or all of the KMI dividends you receive, depending on whether they are all taxable or if some of them are return of capital. But you didn't ask that.
No the gain is not treated as earned income to you (there is no self-employment tax, for example, on the gain). Since it isn't earned income, you can't use the income as the basis for any IRA contribution.
CLF owns the mine (machinery, etc.); NRP owns the reserves. So if CLF sells the mine, the new owner would either step into CLF's shoes as the lessee or else it would have to negotiate a new lease of the reserves from NRP. Since no lease lasts forever, NRP will have to negotiate a new lease with either CLF or its successor at some point. NRP has not disclosed when the CLF lease is up.
As to making steel using natural gas, I know even less about making steel than I do about mining coal. US Steel referred to switching to a new steel making process called Direct Iron Reduction, or DRI. On Wikipedia, I read that the DRI process uses natural gas or coal to convert iron ore into sponge iron, which can then be converted into steel. Wikipedia says the process got started in places where coking coal was unavailable, and its use has expanded. It says it is most competitive with the blast furnace method of making steel "when it can be integrated with electric arc furnaces to take advantage of the latent heat produced by the DRI product." Like you, I always thought that you could only make recycled steel with natural gas, but Wikipedia (and the US Steel 10-K) seems to indicate otherwise. I am more impressed by the US Steel statements.
You know, following any part of the coal industry could become a full-time job if I let it.
In June, CLF issued a WARN notice that it might close the Pinnacle mine, an NRP property.
In NRP's 10-Q, they mentioned that CLF had just reversed its decision. I just accepted that as evidence that CLF would keep operating the mine. I don't follow CLF.
So this morning I tracked down the CLF announcement - here's what they said "Reversing a decision made by the previous management team and to facilitate unlocking the value of its assets, the Company has determined that it no longer intends to idle the Pinnacle mine." "Facilitate unlocking the value of its assets"? That didn't sound like CLF was interested in operating the mine; it sounded like they wanted to sell it. So I did more reading.
Early this month, CLF changed management after a fairly bitter proxy battle. I was vaguely aware of this, but not the details other than the challenger wanted to abandon the Bloom Lake iron ore debacle. It turns out that they also want CLF to sell or close its non-core operations, including the met coal mining operation. So the reversal of the WARN notice was to facilitate a sale of the mine, if possible. Not really a good sign, until a buyer is identified and its intentions become known.
SXC is also trying to sell a small met coal mine and based on the write-downs it has taken, the buyers aren't terribly interested. Ans the SXC mine has contracted for the sale of most of its coal, so any buyer has a guaranteed market for its coal for a few years. They say the potential buyers are strategic, not financial.
Anyway, I suspect NRP's royalties from the Pinnacle mine will decline quite a bit over the next year or 2.
Reading about CLF led me to US Steel. Its 2013 10-K talks a whole lot about reducing its reliance on met coal and shifting to natural gas. This involves a different method to make steel but it looks like US Steel is all for it. Another nail in the coffin.
I think we both may be right. Dierking's claim was based on global met coal mining. I was talking about the US. I still think that there aren't any significant US met coal miners operating at a profit currently. And I think that you will see a lot of the WARN'd mines suspend operations, at least temporarily.
Because some fool placed a order for 179 units without checking the price he was being charged. That was at $4:31. Then, an hour later, someone sold/bought 20 units at the closing price of $ 47.89. So not too meaningful, although at the time you posted, that may not have been apparent.
I'll make you a little less unhappy. Unless you sell your KMP units now, you don't have to include the end-of-year gain on sale of KMP units until April 2014 in all likelihood.
First, the deal hasn't closed, so there is nothing taxable yet unless you sell. So September 15 shouldn't be affected by all this anyway.
Next, if you filed a 2013 tax return, and it showed zero tax liability, you do not have to pay any estimates this year even if you win the lottery. You just have to come up with the money next April, assuming the deal closes this year. See the instructions to Form 2210, Page 2 (Exceptions to the Penalty).
If you filed a 2013 tax return and it showed a tax liability, you have to pay in that amount in estimates for 2014 in order to avoid a penalty. So if you had a tax liability for 2013 but were not bothering to pay estimates, make a September 15 payment based on your 2013 tax, with a catch-up for the 2 quarters you missed. Same for January. Then, assuming the deal closes this year, you can pay the balance of the tax you owe in April.
This only applies for Federal. I have no idea what state you live in, but most states follow the Federal rules. If you are not subject to the Alternative Minimum Tax, you may want to pre-pay your state estimates by December 31 in order to get a deduction this year when your income is higher.
You raise an interesting point, and I assume you've read some statistics/stories that say only half of met coal miners are losing money. I would have thought that every US met coal miner lost money in Q2. Some are easy to track: WLT is all met coal, so that's easy. CLF tells you they lost money at the gross profit level on met coal, even before SG&A, interest expense, etc. Others don't give you much specifics: ANR's Eastern coal division mines both thermal and met coal and it discloses average sales price per ton for each type of coal but not costs per ton for each type. So I can only guess. But ANR's sales price for met coal has dropped from $ 131/ton in 2012 to $ 99/ton in 2013 to $ 87/ton this year. Unless ANR was minting money in 2012, I can't see how it could possibly be profitable today on met coal. I didn't bother looking at the others. All the Q2 earnings releases I read said that US met coal prices had stabilized or at least the price drops had slowed down, and I didn't think anyone was making money.
If you look at strictly cash expenses of mining (ignore depreciation and depletion), and ignore any SG&A expenses or interest expense, I could see how some met coal miners might be cash flow positive. But that's about it, until prices recover.
Anyway, did you see something that said that not all met coal miners were losing money? I'd be interested in reading it because it looks like the market has begun valuing met coal miners as though a recovery is in sight.
You were right the first time. The $ 89.75 value was just an estimate based on Friday's closing price for KMI. The current value of the KMI shares you will get in the exchange exceeds the current price of KMR. Normally, the discount is because the deal might not close. In this case, if the deal doesn't close, both KMI and KMI will tank big time, at least back to where they traded last week. So the risk of the deal not closing is on both stocks.
If you really like KMI and want to buy more, you will get a small discount by buying KMR. You will also get at least 1 extra stock dividend from KMR in the meantime which will get you more KMI shares. On the other hand, I don't see the overall benefit of the deal to KMI so I think I will probably sell the rest of my KMR at some point. I sold about half on Monday and haven't changed my mind yet.
Just go to Seeking Alpha and search for KMP. Hedgeye wrote a piece today mentioning their success with LINE and BWP (I think there's some revisionist history going on as to BWP) and saying their KMP short hasn't worked so far but that KMI is still way overvalued. They quote Kaiser a bit in the article. It wasn't hard to find. There may be other articles as well.
No, except for any cash in lieu of fractional shares. Your KMR tax basis carries over to your KMI shares. Both KMI and KMR are taxed as corporations which is why tax-deferred reorg treatment is available.
In the past 6 months, US Steel is up 35%. AK Steel is up 49%. The steel recyclers such as Nucor are also up but not by much. Someone apparently thinks that steel is going to make a comeback, although you wouldn't know it yet from the Q2 results.
And if steel recovers, how far behind can met coal be? If you wait to see the actual recovery, you will miss making some money. It's hard to see a recovery, but the steel companies' stock prices say the recovery is on tis way.
I'll stay on the sidelines on this one. Thermal coal is risky enough for me, even in the Illinois Basin. But someone will make some money investing in met coal miners, I think.
And did you see my KMR today? Or KMP/EPB/KMI for that matter, but I only own KMR of that group.
KMI has decided to acquire KMP/KMI/EPB. In KMI's case, the reason seems to be that the group has grown too large for the MLP structure. But I suspect ARLP/AHGP could be combined at either level at a price that is attractive to both companies' unitholders. Maybe a short-term reduction in the distribution to ARLP holders, but with the elimination of the IDRs, the growth rate in the distribution could sky rocket.