A question for you, since you say you work at CSI. CSI is a corporation, and Compressco purchased the stock of the corporation. I don't see that you've built corporate level taxes into your projections.
BTW, Compressco already has a taxable corporate subsidiary to hold the operations that don't qualify for MLP treatment, so adding CSI to the structure isn't anything new. I assume the plan is for CSI to move the MLP-qualifying operations over to Compressco at some point but I haven't seen the company discuss this. Have you heard how they plan to address this?
I think you're comparing 2 different things. Exterran Holdings is the corporation that owns a controlling interest in Exterran Partners, which is an MLP. So for Compressco, the comparable would be TETRA Technologies, which owns the controlling interest in Compressco.
Exterran Holdings does have 90% institutional owners, as you said. But TETRA Technologies has 92% institutional ownership. So there's no significant difference at the parent company level.
Exterran Partners has 3 "greater than 5%" owners - Exterran Holdings at 40%, Oppenheimer at 10% (post the recent secondary) and Kayne at 5%. Compressco has 2 "greater than 5% owners - TETRA at somewhere around 43% range, after the recent secondary, and Oppenheimer at 10%. So there's not a whole lot of difference in the institutional ownership at any of the 4 companies, when you compare each level.
I know I'm new here, but I have 1 more post/question to follow.
Easy. Until the end of July, TTI owned 82% of Compressco, so there wasn't much room for institutional ownership. At the end of July, Compressco did a secondary that essentially doubled the number of its units outstanding, and dropping TTI's ownership down to the 40% range. But it's only been that way for 30 days so far. Since then, only 1 fund family (Oppenheimer, which also owns about 10% of Exterran) has filed for its ownership at 10%, but just wait a little while. There will probably be some others that are building their positions. There isn't enough daily volume in Compressco to allow a quick 5% buy.
There's a Reuters story all over Yahoo today about how the fighting in the Ukraine may cause Russia to cut off natural gas supplies to Europe this winter. Personally, I don't see a cut off, but I would think a reduction in supply, together with a spike in prices, might be in store. Anyway, the story talks about how this might help US coal exports to Europe this winter.
I have no idea if the infrastructure is in place to handle significant increases in coal exports, but this could easily help Foresight Energy, one of NRP's biggest lessees, which has been looking to increase its export sales. I don't know if this would be enough to move the needle at NRP, though.
FWIW. Have a good weekend, everyone.
TNH, similar to most major manufacturing facilities, does routine maintenance as needed. But every year or 2, they need to close the facility for a few weeks to (1) do major maintenance (that's the turnaround part) and (2) while the plant is down anyway, they also usually do some expansion projects at the same time. The last turnaround was during Q3 of 2013. So it's only about 1 1/2 years since the last one, which is actually pretty quick. Maybe that's why they are only doing a turnaround of half the facility. I don't think TNH discloses exactly how long the turnarounds last, but Q1 is generally slow, so that's why they probably chose this time to do it.
Like the other poster said, you see the same turnarounds in refinery MLPs and some chemical MLPs, like (formerly) PDH and OCIP. Unless they take much longer than expected, people tend to ignore them. Just expect a lower distribution for Q1 2015 than Q1 2014.
Where did you get your numbers? Before the announcement, KMP's market cap was about $ 36 billion, not $ 80 billion. KMR's maket cap was around $ 10 billion, not $ 77 billion.
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.
If anyone is interested, NRP filed some of the documents relating to the new acquisition with the SEC two nights ago. They did not include the document about the units being issued in the deal, so we can't know the pricing. That document, called the Rollover Agreement, contains the pricing mechanism for the new units. But the basic agreement says that if certain unspecified conditions in the Rollover Agreement are not satisfied, the sellers will get more cash instead of the units. The amount of cash they will get is contained in yet another document that wasn't filed with the SEC. It's funny - the document that explains the amount of cash they would get is called the Updated Exhibit C. The SEC filing doesn't even include a non-updated Exhibit C.
Eventually the other documents will appear.
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.
NRP agrees with you about selling units at the current price. In Q1, they sold 343,000 units at $ 16.25, and in Q2 they sold another 714,000 units at $ 15.98. But they did those sales in small pieces in ATM sales. Many MLPs have abandoned the overnight offerings that come with a 2%-4% price haircut. Then you throw in the investment banking fees and I think you're looking at a $ 15 price net to the company. So an offering of any size may not be attractive.
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?
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.