My overall conclusion is that within a year and probably much sooner, NRP will do a significant acquisition of non-coal assets. This might involve some sort of development of the BRP properties, although not much has come of that so far. But they will do something, and most likely something bigger than the OCIW investment.
I think NRP has to do this because its current operations will barely cover the 2014 distribution at best, and then it's all downhill. Unless coal stages a comeback, which I don’t expect.
It also wouldn't surprise me to see NRP do a deal with OCIR and its GP to monetize all or a part of its investment in OCIW, or at least make it marketable. In 2013, OCIW has been able to dividend up previously accumulated earnings to NRP, plus the 1-time special refinancing distribution, both of which bumped up reported DCF. Neither of these events can recur. So NRP can wait for its regular quarterly distributions, or accelerate the return of money with a full or partial sale. Also, this would raise capital for new non-coal investments.
That’s the conclusion. My reasoning is in the next post.
So I have some time to waste.
First, the really dumb part.
I shouldn't have complained about the 10.5% discount that Mr. Cline and Mr. Robertson got in buying the private placement earlier this year. In researching the matter, the company had disclosed that it couldn’t do a secondary under its shelf offering because of the timing of the deal. The OCIW deal closed on January 23, 2013 which was after the year end but before the 10-K was issued. Because the 10-K had not been issued, the company said it couldn’t do one of the overnight secondaries, which is why they did the PIPE private placement. I’m still not sure why they couldn’t have done the deal with all debt and a follow-on secondary at a later date, but that’s just nit picking. I don‘t know if the private placement was required by the financing arrangement, so I promise not to complain about the PIPE any more. Just like the other things I mentioned, they are all in the past, and are reflected in the stock price.
Now on to the future, which will probably take up another few messages.
What do you think of the idea of KMP buying NRP?
1. If KMP wants to own coal reserves and handling facilities, it will take a long time to get critical mass on its own. Buying NRP would get them where they want to be a lot faster.
2. Even if they were to bid $ 25 for NRP (9% yield), its own units trade at a 6.6% yield, so there's a pick up.
3. In August, KMP issued senior notes due in 2019 at a cost of 2.65% compared to NRP's 9% cost on 2018 notes in September. So I assume KMP could refinance most of NRP's debt at much more attractive rates.
4. Within the KMP family, coal wouldn't stink as much. It would only be about 5% of the enterprise value of KMP.
5. KMP has a history of buying out MLPs in recent years - CPNO (no GP in that deal) plus GP interests in others.
6. I would think NRP is a motivated seller.
I'll post more fully tomorrow. I really think NRP needs to do a pretty big deal (bigger than OCIW, anyway) within the next year. But I was focusing on how NRP could grow. Your posts made me think that NRP might be someone's else's target for growth.
I see that the TVA has announced that it is closing 2 of the 3 coal-fired units at its Paradise facility. Doing some internet searches, I see that ARLP signed a 20-year agreement to supply some of the coal to this facility around 2004. ARLP shares this supply contract with a company I never heard of and can't find on the internet, so I assume they've been bought out by someone else.
The closing will take some time. TVA says it will build a natural gas-powered plant to replace the 2 units, and when that's complete in 2 - 4 years, they will close the 2 coal-fired units. Someone on the NRP board saw that this might take 10 years, which would be the end of the contract anyway. So this isn't an immediate issue, I think. Also, the contract is good until 2024, although I don't know the minimum amounts TVA is required to buy. I'm guessing it's around 3 million tons per year, but that is nothing more than a guess based on some language in ARLP's 10-K.
I can't find much more than this on the internet. The local papers in KY and TN (the internet versions) are no help; they basically have the syndicated stories that are everywhere. Is there anyone local on this board that might know anything more?
The news articles I read did not mention a 10-year shutdown period. They said it would take from 2 to 4 years to build the replacement plant to be run on natural gas, and then 2 of the coal units would be shut down.
None of the companies give a whole lot of detailed disclosure about their contracts. Nonetheless, I suspect ARLP has a pretty strong contract for approximately 3 million tons a year with TVA. The original articles from 2003/2004 that discussed the 20-year contract said that the long contracts were needed in order to help the coal companies get financing for their development. So I assume the contracts are pretty firm; maybe not quite "take or pay", but close.
Assuming you're right about the 10-year shutdown period, none of this matters at all. Even if the shutdown takes place in 4 years based on what I read, it's not a big deal today. Just another nail in coal's coffin. I only got involved in researching this because I was trying to figure out who gets hurt by TVA's action.
This was discussed, but not in great detail on an earlier earnings call from ARLP. ARLP tends to have very long contracts with its utility customers, and eventually the coal prices get to below current market. So when they do re-price their contracts, even in bad times, the new prices they get tend to be higher than the old ones. I'll give you an example, which this weekend maybe has become a big problem for ARLP, although I haven't seen any news release from them yet.
The example - In 2004, the TVA gave ARLP and another unrelated coal company 20-year contracts to supply coal to its Paradise Fossil Plant in Drakesboro, KY for a maximum amount of $ 2.4 billion over the 20-year contracts. At the time, TVA said it had not given out 20-year contracts in at least 20 years (apparently, 5-year contracts are much more common), but that the long contract term was needed to allow the coal miners to invest the necessary money in the mines. At the time, Paradise burned 7 million tons of coal per year.
So that's an example of the kind of long-term contracts ARLP has. Apparently, they don't re-price all that frequently, so when they do, there is generally an increase. So ARLP's average coal price tends to be on the low side, but with extremely consistent increases over the years
Unfortunately, a day or so ago, TVA announced that it intends to shut down 2 of the 3 units at Paradise and replace them with natural gas-fired units. ARLP discloses that TVA is a "greater than 10%" customer but does not say much else about it. It will presumably take some time to close the 2 units, and I assume TVA is still on the hook for something until 2024, but I also assume this is a bit of a problem that ARLP did not anticipate in the earnings call.
BTW, the second coal company that shared the supply contract was called SCB Coal in the 2004 news release that I saw. I can't find any reference to any company of that name any longer, so I don't know who else shares the contract with ARLP
Slight correction/explanation - When NRP invested in OCIW, it disclosed that it had sold $ 75 million of units in a PIPE to related investors. It said that it had sold the units at a 4.5% discount to the average trading price of NRP for the previous 15 days, volume weighted. It just happened that in those 15 days NRP's price had risen quite a bit, so that on the day of closing, the discount given to those investors was 10.5%. It's way too late to be carping about this now, so I will. The idea of the 4.5% discount was presumably to reflect the discount that all MLPs give when they do the overnight secondaries, and that we all have suffered thru with other MLPs that we own. But that discount is off the closing price. Apparently, NRP never did a shelf registration (I haven't checked) so it could not do a normal secondary. But I'd rather suffer thru a secondary than have a related party transaction at any discount.
My point is that the SA article listed only 1 of the buyers (Mr Robertson also bought 832,000 units) and he listed this as a positive, showing insider buys. I just don't see these discounted buys as much of a positive.
I read the Seeking Alpha article that was mentioned today, and something struck me so I looked it up.
The article listed 9 fairly recent insider buys of NRP. Most were for a few thousand units, but, back in January, one was for 756,914 units purchased by Chris Cline. I checked the SEC web site and saw that an entity controlled by Mr Cline purchased 756,914 units on January 23 2013 for $ 15 million, or $ 19.8173/unit. And I was impressed until I checked the historical price of NRP at that time.
NRP traded between $ 22.43 (daily high) and $ 22.01 (low) on January 23. On that day, NRP sold a PIPE (private investment in public entity), selling 3.8 million units for $ 75 million, or $19.8173 per unit, about 10% less than the public price that day. The units apparently were not registered for public sale, so NRP committed to register those units, which I assume was done. Mr Cline was part of the group that bought the PIPE.
Nothing wrong with PIPEs. Lots of companies do them; they let a company do an overnight deal without the bother of an SEC filing. But a 10% discount looks pretty rich. So now I'm not as impressed with Mr Cline's purchase. If they offered to let me buy units today for 10% less than the market price, I'd buy them too.
Shame on me for not reading about this sooner. Or if I did, shame on me for forgetting. At my age, this wouldn't be surprising. But this is just another deal where Mr Cline benefits. He sells NRP reserves that can't be mined (the 2 Gatling mine write-offs, with a total loss to the company over $ 100 million); he buys reserves in Hillsboro for $ 7.5 million in 2004, then re-sells those same reserves to NRP for $ 200 million in 2009. I'm sure NRP vetted everything properly, but I really don't like related party transactions. I'm probably just in a bad mood. Don't know why - my NTI is coming back very nicely.
WSJ reports tonight that the TVA is closing 8 plants in 3 locations in Alabama and Kentucky to comply with environmental agreements. NRP discloses that 3 of its mines in Kentucky supply TVA with coal. I have no idea if there's any match between NRP-owned mines and the TVA plants that are closing; NRP's 10-K shows that the mines in question supply a bunch of power plants, including TVA. NRP can't be affected by the Alabama plant closings. More bad news for CAPP (the Kentucky plants). The NRP-owned mines that supply TVA are owned by Arch, Alpha and "various". Let's see if any of them issue any news items tomorrow. Probably not, but we will see.
The article was good for the most part, but the Northern Powder River Basin is not important or even relevant to NRP. It accounts for less than 4% of NRP's coal royalties and 3% of total revenues. NRP also doesn't have a lot of reserves in the NPRB (less than 4% of NRP's total reserves) so the business can't grow much in that area. Finally, the last time NRP added to its Northern Powder River Basin reserves was before it went public in 2002. It simply is not an area of focus for the company.
But the author, who does have a following, is right to take a longer view of things.
Yesterday, CS kind of threw in the towel on its iron ore price projections and CLF, at least for now. They (and the rest of the Street, they say) have been waiting for iron ore prices to tank because of weakness in China and it hasn't happened yet. In fact, they have had a $ 10 price target on CLF, while the stock has gone from at least $ 16 to $ 26, so what do they know? Anyway, yesterday they said the iron ore price weakness probably won't happen until next spring, due to seasonal pricing issues. But they are still bearish longer term on iron ore.
Obviously, the market has figured that out for a while, which is why CLF's stock price has been doing well.
Anyway, I figure that if iron ore prices increase due to Chinese demand, so will met coal prices. This fits into NRP's comment in the Q3 earnings release that met coal prices was firming, and is currently up $ 7 from the Q3 average. So that's a positive for NRP. And NRP needs whatever positives it can get these days.
Last night, NRP filed a reg statement to offer up to $ 75 million of units, not in a secondary, but whenever they can sell some at an acceptable price, thru several investment banks. Not knowing what price is acceptable, I guess maybe 3 - 3.5 million new units. But maybe they won't issue them at all. Not a big deal, but it makes sense on 1 level.
I see this as a commitment to the distribution. I can't see how the 2014 DCF will possibly cover all of the distribution, plus NRP still has $ 80 million of debt principal payments due next year. And they are still trying to buy into new non-coal operations. And, if the BRP properties ever pay off, I assume some money will be needed for development unless they can push that entirely off to lessees. So I figure some equity issuances will be needed.
I hope they don't intend to accept prices below the low $ 20s. Too much dilution is as bad as distribution cuts. But in the big scheme of things, $ 75 million is a non-event.
From Sept 25 thru Oct 18, BRT joint ventures purchased 4 sets of apartments (more actually; I think 1 of the buys had 3 separate buildings in it) totaling 2,000 units, for total purchase prices of about $ 128 million. The purchase prices included various escrows, so the actual units cost less. Mostly, BRT has an 80% interest in the JVs and invested $ 29 million for its part. I assume all of these will be consolidated in BRT's statements, so we'll be picking up a lot of debt. I didn't check, but assume the mortgages were nonrecourse so there's certainly less risk to BRT. But 4 buys in a month is impressive. They haven't announced any buys yet this month, but I'm sure more are coming. Maybe they will reach critical mass?
In 2007, CLMT cut its distribution 30%, from 63 cents to 45 cents. It's only in the last year that the distribution reached the 2007 levels. Considering that CLMT has had negative DCF for the last 2 quarters, another cut is possible. And I own CLMT. I think it's worth the risk. But they have cut the distribution before.
Those numbers are out-of-date as of this AM. CS updated their estimates for the WNR deal, and bumped up the near-term projections. I'll pass on the out years, but for the next few Qs, they show 45 cents for Q4, 74 cents for Q1 2014 and 89 cents for Q2 2014.
The only Q that shows a significant change from what you posted is Q1 2014 where you show 28 cents and today's report shows 74 cents. Are you sure about your number? Most of the changes were up or down by 5%; I'm not sure why Q1 would change that much. Maybe a typo somewhere.
Anyway, as others have posted, the projections depend on so many variables that they are not worth much. Except that they are important in saying that the analysts think today's problems are temporary and good times should return next year.
More importantly, CS thinks the deal is positive for both NTI and WNR, and they are a little surprised that NTI's unit price didn't rise more yesterday. The good points for NTI: remove the overhand (no surprise there); possibility of moving NTI's logistics business to WNRL; maybe dropdowns from a stronger parent company; some synergies, like selling NTI's asphalt thru WNR's system rather than storing it during winter. I guess the market for asphalt in Minnesota during the winter is pretty limited; I hadn't thought of that. I don't know about the practicality of shipping it to Texas, but thyat was 1 potential benefit. I'll settle for the removal of the overhang, and the idea that WNR's purchase validates NTI's value.
So the Buyers were only out of pocket maybe $ 300 million at the start (the footnote says their capital investment was only $ 200 million, so probably they stuffed more of the purchase price down to NTI that I missed. I'd go with the footnote number. That was before NTI made a final buyout of Marathon's earn-out agreement, but I didn't bother looking to see who funded that - memory says it was NTI in the first quarter after the IPO, but I could be wrong.
So compare the $ 200 million or $ 300 million invetment made by the Buyers to the IPO and secondaries proceeds and today's sale, plus the distributions, and the Buyers' rate of return was way more than 100% for 3 year's investment. Throw in the fees they probably charged NTI for everything they ever did, and the investment was a home run.
Not exactly. Per NTI's original S-1, the Buyers did not buy the inventory. A JP Morgan fund did.
First, on page of the S-1, NTI describes its relationship with JPM - "We manage our operations prudently with a focus on maintaining ample liquidity to meet unforeseen capital needs. During December 2010, we entered into a five-year crude oil supply and logistics agreement with J.P. Morgan Commodities Canada Corporation (“JPM CCC”) to supply our refinery’s crude oil feedstock requirements, which helps reduce the amount of working capital required in our refinery operations."
Later, on page 7 of the S-1, they describe the purchase transaction from Marathon. With regard to the inventory, they say "JPM CCC purchased substantially all of the crude oil inventory associated with operations of the refinery directly from Marathon pursuant to an inventory purchase agreement with Marathon."
So, to avoid having money tied up in inventory, the JPM fund purchased the inventory and also agreed to supply NTI with its feedstock oil. Also on page 7, they describe how NTI only takes title to the oil inventory at the moment it is delivered to the refinery - JPM CCC owns it until then.
NTI essentially guaranteed JPM CCC a profit on this by agreeing to pay cost plus fees for the oil when NTI takes title.
So the NTI buyers did not buy the inventory. Further, half of the original purchase price was not paid by the Buyers - it was paid by NTI itself. When NTI went public, it showed $ 290 million of long-term debt on the balance sheet. The footnotes stated that this debt was incurred to pay off part of the Marathon purchase agreement. NTI (you and me, and whatever % the Buyers still owned) have been paying off that debt ever since.
I'll finish in another post - running out of space.
If I recall correctly, when everything started to go downhill last year, WTW blamed lots of factors, 1 of which was Jessica Simpson getting pregnant, which tanked their advertising campaign. So today's Yahoo has a story/picture of her all thin again for her WTW ad. Maybe a sign that things will finally turn around? I didn't know that she had so many fans that they could crater the company by staying away, but now her legions may show up for meetings again.
Unless she gets pregnant again. I hope WTW got some insurance on that.