Simplistically, the issues are met coal versus thermal coal, Central Appalachia versus Illinois Basin, high debt versus reasonable debt, and throw some Australian problems in.
Met coal pricing has been getting hammered for over a year now, and demand isn't that great. WLT is essentially 100% met coal, ANR is about 20% met coal, I don't see the percentage for ACI, but it has a lot of met coal mines, and BTU has a huge met coal operation in Australia. ARLP is purely thermal coal.
CAPP coal is dying because of high costs, and because utilities that have installed scrubbers can use cheaper Illinois Basin coal. ANR is big in CAPP (probably overlaps somewhat with its met coal operation); ACI has lots of CAPP. My geography isn’t good enough to tell if BTU’s Eastern operations are in CAPP or NAPP, but it spun most of its Illinois Basin operations off years ago with Patriot. ARLP has some operations in Northern App, but it closed its only CAPP mine a year ago. Other than that, it’s all in the Illinois Basin, which is the hottest place to be in coal just now.
WLT’s debt is greater than 4 times its equity; through careful planning, very little principal is due in the next few years, but the interest expense is killing WLT. ACI’s debt is more than 2 times equity. BTU’s debt is about 1 ½ times equity. And ANR’s debt is about equal to its equity. I could probably figure out the multiple of debt to EBITDA for each of the companies, but I didn’t bother – the multiple is high is all cases. ARLP’s debt is slightly less than equity, and it’s just slightly more than 1 times EBITDA.
And finally, BTU’s biggest problem is Australia – its operations there are mostly met coal, plus there have been currency problems as well.
ARLP is the biggest miner in the Illinois Basin, and its mines are low cost (other than Foresight, which is also in the IB, ARLP has the lowest cost mines I have seen on an overall basis. It’s purely thermal coal and it has good relationships with enough utilities that it has been able to lock in sales of its coal at reasonable prices. And it’s doing great.
So no met coal, no CAPP coal, no crazy leverage, and no Australia.
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.
No, it's KMP unit holders that have the tax problem. Because KMR is taxed as a corporation, KMI is able to do a tax-deferred stock-for stock corporate reorg for KMR. Of course, KMI can't get a tax basis step up at the KMP partnership level for the i-units owned by KMR, so it had no incentive to structure the deal as taxable to KMR holders.
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.
Of course you're right about the deferred tax asset being discounted in the market. The deferred tax asset isn't worth anything to AI itself; it could just as easily avoid all taxes by re-electing REIT status. It doesn't need the loss carryovers to accomplish that result. The real value of the deferred tax asset is that it allows AI to remain a C Corporation and pay out qualified dividends. So the real economic benefit of the loss carryovers, etc is for the shareholders.
The deferred tax asset is valued using a tax rate of somewhere between 35% and 40% (depending on what state tax rate they use, which they don't disclose clearly). The value of qualified dividends is worth at most 20% to shareholders, even in the highest tax brackets (39.6% vs 20%), so I think it's appropriate to adjust the value of the DTA by at least half, in economic terms, even if this isn't GAAP. That would get you to an adjusted book value of around $ 28, which is still a little high, since the qualified dividends will only be realized over a period of years.
And at June 30, the DTA was worth around $ 7.60 per share. They apparently used a lot of it in the first half, which was good to see.
I suspect the company knew exactly what it was doing, both in March and today, in issuing shares at the prices it did.
CLF announced today that it will idle its Pinnacle mine, located in Welch, WV. That's an NRP property. The company issued a 60-day WARN act warning today, saying the workers might be out of work for at least 6 months starting August 25.
The confusing part - CLF says it produced 2.8 MM tons of met coal at the mine in 2013. NRP's 10-K shows that it collected royalties on 1.1 MM tons of met coal from the mine during 2013. So I'm guessing the mine's reserves are owned by several owners, 1 of which is NRP.
Using NRP's average 2013 met coal royalty rate of $ 5,11/ton, that would be a reduction in royalties of $ 5.6 MM at some point. I have no idea how long NRP's lease lasts, and whether CLF is required to make any minimum royalty payments, so unless either company gets more specific in its disclosure, we can't know the impact until next year's 10-K is issued.
The Pinnacle mine is part of a larger complex, and CLF previously closed other mines in the complex. I think this mine is the last one in the complex that is still operating.
CLF also leases met coal reserves from NRP in Alabama. CLF will continue operations there, at least for the prsent.
KMR issues fractional shares. KMR has zero cash; it cannot pay cash in lieu.
Some brokerages have a problem with fractional shares so they sell them and credit you with the cash. But that's a brokerage decision, not KMR. I own KMR thru Schwab and Schwab has no problem with the fractions (althouigh some times, they're a few days late) but every quarter or 2, some holder complains on this board about his broker cashing them out. It's a brokerage issue.
My calculations of AHGP’s IDRs show that AHGP should be able to grow its distribution almost exactly 26% faster than ARLP for the next year or 2. So if ARLP raises its distribution by 10%, AHGP’s distribution should grow by 12.6%; if ARLP raises its distribution by 50%, AHGP’s distribution increases 63%, and so forth. While this sounds good for an investor in AHGP, it’s actually much slower growth than most other GP’s that are in the 50/50 splits. Unless ARLP issues more units (which is extremely unlikely), the 26% distribution outperformance is it for the near future. Eventually, as the distribution grows, the relative outperformance by AHGP will shrink.
The reason for the slowing growth at AHGP is that it actually runs ARLP to the benefit of ARLP, not simply for its own benefit. Most GPs follow the KMI/KMP model – maximize current distributions (with the GP getting 50% IDRs), which forces the MLP to regularly issue new units to finance growth. These new units already carry 50% IDRs, so the GPs benefit both from the growth in the business and the growth in common units outstanding.
AHGP/ARLP has done the opposite. It is the only MLP I know of that regularly distributes less than earnings, DCF or EBITDA or whatever measure of profitability you might choose. So AHGP is not benefitting from the IDR payments it could receive if it forced ARLP to distribute a higher portion of DCF/EBITDA/whatever. Because this accumulation of income at ARLP helps it to finance growth internally, there is less need to issue new units. In fact, ARLP has not issued any significant amount of new units in years (maybe never), so there is no growth in the IDRs on that score. From 2007 until currently, ARLP has increased common units outstanding by only 1%.
So here’s my modest proposal, with apologies to Jonathan Swift: as the GP, AHGP should force ARLP to start distributing 100% of its DCF. In fact, maybe ARLP should make a 1-time current distribution of all the accumulated earnings it has invested in the business over the past few years. Then ARLP should follow that with an equity raise to replenish capital. And finally, ARLP should start buying/building new mines (in the Illinois Basin, of course) and finance that growth 50-50 debt and equity, but especially equity. Then, having established a good track record of maximizing the IDRs, AHGP should sell itself to ETE, WMB or maybe KMI.
First, the KMR Gain/Loss calculator doesn't know or care that you reported any distributions as capital gains because your basis went to zero. You have to make that adjustment yourself. So if you reported any capital gain income for distributions received, add that amount back to the adjusted tax basis shown on the calculator.
But the calculator itself is just an estimate, so only use it (and any adjustments you make) to estimate the tax impact. The calculator, for example, is only current up through 2013, and there will be adjustments for 2014 as well. Furthermore, the calculators can be wrong. When I checked the calculator for ETE in 2013, it showed my ordinary income amount as greater than the sales proceeds, which is nonsense. When I actually sold some ETE in 2013, my K-1 showed a much more reasonable amount as ordinary gain. Like I said, only use the calculator for estimating the tax hit.
Also, based on my experience with the ETE Gain/Loss Calculator, it didn't reflect the passive loss carryover, so I suspect you'd have to adjust for that as well. I own KMR, so I can't check the KMP Gain/Loss Calculator to see if it does anything with carryovers, but I doubt it.
Take a look at ARLP's earnings release this AM. Great numbers for any mining company, but unbelievable for a coal miner. Volume way up, pricing stable, and a huge bottom line.
And just so this post has something to do with NRP, ARLP is a lessee of NRP's. Not a big enough lessee to matter a whole lot, but a lessee nonetheless. Unfortunately, while NRP mentioned many of its mines as having had strongs quarters, the 1 mine leased from NRP (ARLP calls it Mettiki, NRP calls it Beaver Creek) is not mentioned as having had a strong Q.
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.
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?
Actually, the modest proposal was meant as satire. Jonathan's Swift's original modest proposal, written during a time of hunger and poverty in Ireland, was to suggest that poor people should sell their children as food for rich people. His idea was to shame the wealthier people into doing something about poverty. It didn't work, by the way. Swift got famous, but the poor people didn't get anything. So I wasn't really serious.
But the more I think of it, I think maximizing the distribution would benefit ARLP as well. All investors care about these days is yield, and to a lesser extent, growth in that yield. So if ARLP were to maximize the yield, even at the cost of hurting/destroying the balance sheet, I think the higher distribution would result in a higher price. Take a look at FELP, which went public a few weeks ago with $ 1.4 billion in debt and zero capital, post the IPO. It's also in coal, and people ignore the ugly balance sheet and just focus on the DCF and promised distribution growth.
And I think ARLP (and FELP, for that matter) will be fine for the next few years with the focus on Illinois Basin thermal coal. NRP had 2 problems, 1 of which will eventually solve itself. First, it spent a lot of money, probably over $ 1 billion at this point, on coal reserves in Central App, which is not the place to be for thermal coal. That problem can't be fixed. CAPP thermal coal will essentially be gone within 5 years. And NRP made a big bet on met coal reserves (partly overlaps with the CAPP issue), which should eventually work out, but right now is in the tank. So, because its basic business had these problems, it had to diversify, but it waited way too long. ARLP doesn't have the same urgency, so I'd rather get a higher distribution and use the money to buy oil & gas MLPs on my own.
This week's presentation contained no real news, just a few interesting things and some annoying ones.
Mr. Hogan said to expect new oil & gas investments sooner rather than later, but nothing specific.
The last question that Mr Hogan was asked was inaudible, but from his response, the question had to do with met coal's prospects. Earlier, Mr. Hogan had said that met coal was a long-term turnaround, implying no improvement this year. But he had said that NRP's met coal reserves were higher quality, low vol met coal that miners would be reluctant to stop mining. Anyway, in response to the question, he said that NRP had not heard of any planned closings from its met coal lessees yet (as of June 24, the date of the presentation). So either CLF's announcement later in the week about the possible closing of Pinnacle came as a surprise, or else CLF's warning was just a protective announcement. In either event, Mr. Hogan did not give any hope for an improvement in met coal mining this year - he thinks there is overproduction of met coal to the tune of 18 - 20 MM tons, currently.
He indicated that the 3 mines that Foresight leases from NRP have a capacity of 18.2 MM tons per year, and in 2013 FELP only mined 12.4 MM tons from those mines, so NRP is hopeful for more production.
He indicated that if we have a hot summer (in the areas where coal-fired power plants use coal from NRP's mines), thermal coal pricing could improve. If that is followed by another cold winter, things could get pretty good. That's too many "ifs" in my book, but maybe the temperature volatility that is supposedly caused by global warming may help, which would be ironic.
I was surprised/disappointed at his long-term projections about distributions from OCI Wyoming. After 2014, they are looking for $ 41 MM per year. If that's correct, I think investors in OCIR (like me) \will be disappointed.
1 post to go for the annoying comments.
Thanks, I agree.
Do you know how to simply get the current issue on the new site? You know, where they list all the stocks they cover in a given industry, and then you look at each company's page? The new tutorial doesn't help, and for the past week I've been going to the local library and looking at the paper service, which is a pain.
VALU doesn't work as well as it used to, so this is probably a blessing. But it's frustrating.
Feel free not to be annoyed by the following comments. I was annoyed.
Keep in mind that this presentation was a sales pitch, so I shouldn't be surprised when Mr. Hogan stresses the positives, even if they are pretty weak. But he talked 2 times and had 2 slides showing that NRP's EBITDA margins were 89% (that's EBITDA divided by revenues). My comment - the only reason the margins are that high is because GAAP accounting doesn't let NRP book its share of OCI Wyoming's revenues. So NRP simply books its share of OCI Wyoming's net profit and EBITDA in revenue and EBITDA. That may sound confusing, but what ti means is that NRP shows a 100% EBITDA margin on its share of OCI Wyoming's operations. If NRP were to adjust its revenues to reflect its share of OCI Wyoming's revenue, the EBITDA margin would by a little below 60%. Which is still great, which is why I get annoyed when they report the 89% and don't mention how it got that high.
And lastly, he made a big point about APP steam coal constituting 54% of NRP's revenues in 2005 versus 16% today. He said the reduction was the result of NRP's diversification strategy. And that's true. But the slide also showed that the APP steam coal revenues in 2005 were $ 86 MM, compared to $ 51 MM today. So the drop in % of revenue from APP steam coal was the result of 2 factors, and he chose to mention only 1.
But it's a sales presentation, so these are really small nits. The bigger point is that NRP isn't going under any time soon; it will be around long enough for the next recovery in met coal, whenever that happens.
3 points/questions: 1. Most importantly, has FELP made an announcement that the mine will be closed for a few months? I saw the 2 announcements about the fire, and the company said it would update investors as more information was known, but all I've heard is silence since last Monday. Since the stock jumped later last week, I assumed someone knew the problem wasn't that bad. Have you seen something specific?
2. ARLP also commented on an unnamed competitor in the Illinois Basin (sure sounded like FELP to me). Around the 27 minute mark, ARLP talked about 2015/2016 pricing, and said the IB was strong on demand and a little short on expected production, so they thought pricing would firm up slightly (they said to model flat to slightly higher prices). But, they said if other operators ramp up volume, pricing may suffer. I thought the comment was a little funny, since ARLP/WOR have quite a bit of volume coming on line during 2015/2016, but I thought they were warning that if FELP's production projections come true, things could get a bit ugly. From their comments, I inferred that FELP has already had an effect on pricing. ARLP also indicated the export market has been soft and they were not modeling any improvement in exports in ARLP's pricing projections. They said that if the export market improves, there's a chance for upside in ARLP's pricing projections. My comment is that FELP seems to be the IB producer that is most dependent on exports. If exports are weak, FELP will have to cut domestic prices to move coal. A bit of a concern.
3. And finally, AHGP is once again yielding slightly more than ARLP. And with the comment that they expected to raise ARLP's distribution 1.5 cents per Q and AHGP's distribution by 2.25 cents per Q, the yield disparity should grow. I still favor AHGP.
And finally finally, I note Mr Craft's comment that it would take more certainty (favorable certianty, that is) in the regulatory approach to raise the distro quicker.
I'd love those numbers, but I think you're a quarter or 2 early. On the last call, management said that Q2 would be impacted (negatively) by a Tunnel Ridge long wall move in May and a long wall move at Mettiki in April. They also reminded everyone that the Annual Miners' Vacation is in June and July and that would affect Q2 as well. I think they were pushing their increased 2014 guidance more towards the second half of the year. Certainly there has to be some catch-up for the slow Q1, but I don't think I get to your numbers. I like them, though.
And yes, unless you believe FELP's growth prospects and its ability to sell the increased production, FELP is way overvalued compared to ARLP. I own both, but FELP isn't a long-term holding for me. FELP is trying to sell its immediate growth prospects, while ARLP's growth seems more in 2015 and 2016 when Gibson South and White Oak come into full production. The catch-up at White Oak once full production starts will be a tremendous pick-up at ARLP's level. It gets all sorts of preferred returns once production starts in full.
I want to see the 10-Q, but 2 preliminary comments, 1 about oil & gas, 1 about coal.
The oil & gas comment is simple. That operation really saved the day for NRP this quarter. But I haven’t seen enough detail as to exactly which properties produced the revenue increase. It looks like the Williston Basin wells were a home run, but NRP only paid $ 75 MM for those interests, so either they were incredibly lucky/smart or else we have to wait to see the production decline rate. But there’s not enough disclosure in the release to say much except that oil & gas did great.
The coal comment is more negative. It was great that NRP made some disclosures about possible mine closings. It was careful to say that the potential mine closings won’t affect 2014 results much because by the time they close, NRP will have collected royalties for 9 months. But what about 2015?
Keep in mind that the following is guess-work because there’s no guarantee that all or any of the mines that issued WARN notices will actually close. But because these mines are all CAPP, and all the growth in the Illinois Basin thermal coal is coming at the expense of CAPP, and because met coal is a disaster right now, I’d say it’s a good guess that the disclosed mines will at least suspend operations for a while.
And we will almost certainly see more CAPP miners issue WARN notices, some of which will affect NRP.
I had previously posted that at least 1 of ANR’s closed mines was on NRP’s property. NRP says 3 of them are NRP properties. 1 of ANR’s mines (NRP calls it Kingston) produced 1.2 MM tons of coal in 2013. ANR also has a piece of Dingess-Rum, which NRP leases to both ANR and Patriot. That property produced 3.2 MM tons of coal in 2013, but I have no way of knowing what portion of this was ANR’s production (except that if it were minimal, NRP wouldn’t have mentioned ANR’s name). And finally, the third mine being closed must have produced less than 1 MM tons of coal in 2013 because NRP did not disclose any other CAPP properties as being leased to ANR. It probably produced much less than 1 MM tons because NRP's disclosed mines produced more than 90% of total production. So all of NRP’s undisclosed mines only produced 5 MM tons in total. So as a pure guess, I’d say NRP loses about 3 MM tons of production from ANR, at above average royalty rates because a lot of the coal is met coal.
CLF’s Pinnacle mine (an NRP property), also the subject of a WARN notice, produced 1.1 MM tons of coal in 2013.
ACI’s Pinnacle mine (an NRP property), also the subject of a WARN notice, only produced 800,000 tons of coal in 2013.
So just considering the current announcements, and assuming that all the WARNed mines actually close, NRP is probably looking at a $ 20 MM reduction in 2015 royalties in CAPP. Some of these mines may not close of course, and I have no idea of the contractual/minimum royalty situation with each mine, so we can’t know the real impact of them on 2015 forecasts until NRP tells us next February. On the other hand, NRP doesn’t have too many major CAPP mines left, so maybe the news can’t get any worse.
Offsetting this is Foresight’s growth in Illinois Basin, where NRP gets a nice royalty rate. Foresight hasn’t issued its 10-Q yet, so I can’t tell how much of its growth is on NRP’s properties. Foresight talked a lot about its new Viking mine on its call yesterday but that is not an NRP property. So if Foresight’s production on NRP’s properties grows by 4 or 5 MM tons in 2015 (a stretch, I think), that would offset the CAPP losses.
As for the rest, I have to wait for the 10-Q.