Natural Resource Partners L.P. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The Partnership owns and leases mineral properties and infrastructure, holds oil and gas interests, and owns a 49% interest in OCI Wyoming. It generally does not operate its coal mines; VantaCore, acquired after quarter-end, adds operated construction-materials businesses.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue and other income | $91.6 million | $82.2 million | $262.5 million | $263.4 million |
| Income from operations | $55.0 million | $51.6 million | $157.9 million | $169.5 million |
| Net income | $36.2 million | $36.1 million | $100.2 million | $125.1 million |
| Net income per limited partner unit | $0.32 | $0.32 | $0.89 | $1.12 |
| Operating margin | 60.1% | 62.8% | 60.1% | 64.3% |
| EBITDA (non-GAAP) | $78.3 million | $72.9 million | $227.2 million | $229.5 million |
| Distributable cash flow (non-GAAP) | $57.8 million | $104.6 million | $161.6 million | $239.7 million |
For the nine months, operating cash flow was $157.1 million, down from $189.5 million. Investing cash use was $9.7 million versus $281.1 million, largely reflecting the prior-year OCI Wyoming acquisition. Financing cash use was $161.8 million, including $119.3 million of partner distributions and $69.2 million of net loan repayments. Cash at September 30 was $78.1 million, compared with $92.5 million at year-end 2013.
Total debt was $1.098 billion, versus $1.165 billion at December 31, 2013. Current assets were $123.5 million and current liabilities $128.1 million, a $4.5 million working-capital deficit. The Partnership reported compliance with debt covenants. Opco had $293 million of revolving-credit availability and NRP Oil and Gas had $18 million available at quarter-end, before subsequent acquisition-related borrowing and facility changes.
The declared quarterly distribution was $0.35 per unit; a further $0.35 distribution was declared after quarter-end.
Material changes and drivers
- Quarterly revenue rose 11%, while nine-month revenue was essentially flat. Nine-month coal-related revenue fell 17% to $172.9 million, including lower Appalachian production and royalties; coal represented 66% of revenue and other income, down from 79%.
- Non-coal sources increased to 34% of nine-month revenue and other income, from about 21%. Oil and gas revenue rose to $37.5 million from $9.7 million, mainly due to Williston Basin working interests acquired in 2013. OCI Wyoming investment income increased to $28.9 million from $22.2 million.
- Despite higher Q3 revenue, nine-month net income declined 20%, principally alongside weaker coal revenue and higher interest expense. Interest expense increased $13.1 million year over year for the nine-month period, reflecting the 9.125% senior notes issued in 2013.
- Q3 coal revenue included a $5.7 million reserve-swap gain. Nine-month 2014 results also included a $5.6 million impairment of an above-market aggregates contract.
- Distributable cash flow declined substantially year over year; the 2013 comparison included $38.1 million of OCI Wyoming distributions in Q3, including a one-time special distribution.
Outlook, transactions and risks
- Management described coal markets as challenging: thermal coal prices remained depressed, and metallurgical coal faced oversupply and reduced Chinese demand. Management expected weak thermal markets in most regions and no metallurgical price recovery in 2014; prolonged weakness could lead lessees to reduce production or close mines and could cause impairment.
- Management said OCI Wyoming performed in line with expectations and noted improving international soda ash conditions. Oil and gas prices had weakened. No specific full-year earnings or revenue guidance was provided.
- On October 1, 2014, the Partnership completed the $205 million VantaCore acquisition, funded with $169 million borrowed under Opco’s revolver and approximately 2.4 million common units issued to sellers. Management identified new operating, integration, personnel, control and liability risks from the acquisition.
- A $340 million Kaiser-Francis oil and gas acquisition was agreed to after quarter-end, with closing expected in November subject to conditions. The Partnership paid a $25 million deposit; funding plans included an $8.5 million-unit public offering, additional $125 million of 9.125% notes, and expected oil-and-gas facility borrowing. The amended borrowing base was expected to rise to $137 million.
- OCI Wyoming contingent consideration: $14.5 million remained accrued at September 30. Anadarko claimed a 2013 reorganization accelerated payment and disputed the Partnership’s position. If Anadarko prevails, additional consideration could exceed the recorded contingency, up to a stated net present value of $50 million.
- James River Coal’s Chapter 11 proceeding left some leased properties subject to possible lease rejection or impairment; management did not expect a material revenue impact from the remaining leases. EPA rules, permitting constraints and citizen suits involving mine discharges were cited as risks to coal operators and potentially property owners.
- Revenue concentration remains significant: Cline affiliates and Alpha Natural Resources accounted for 39% of nine-month revenue and other income combined. The Williamson mine alone contributed about 12% for the nine months. The filing also describes related-party transactions, including a $20 million portion of the October notes sold to Cline Trust Company.
Important facts for investors to verify
- Whether coal-market weakness, particularly in Appalachia and metallurgical coal, further affects production, royalty rates, lessee solvency or reserve impairment.
- Final terms, financing, integration and performance of VantaCore and the Kaiser-Francis acquisition, including the effects of added debt and unit dilution.
- Resolution of Anadarko’s contingent-consideration claim and the potential exposure beyond the $14.5 million accrued amount.
- Cash available for distributions after debt service and acquisition spending; nine-month distributable cash flow was $161.6 million versus $239.7 million a year earlier.
- Exposure to major lessees and related parties, and the effect of commodity prices, regulatory developments and environmental litigation.