Natural Resource Partners L.P. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; filed November 7, 2013. NRP owns and leases U.S. mineral properties, principally coal, and also holds aggregate, oil and gas, infrastructure, and equity investments. It does not operate mines.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue and other income | $82.2m | $94.2m | $263.4m | $276.7m |
| Operating income | $51.6m | $65.6m | $169.5m | $194.0m |
| Net income | $36.1m | $52.0m | $125.1m | $153.2m |
| Net income per limited partner unit | $0.32 | $0.48 | $1.12 | $1.42 |
- Operating margin was approximately 62.8% in Q3 2013 versus 69.7% in Q3 2012; nine-month margin was 64.3% versus 70.1%. Net margin was approximately 43.9% and 47.5%, respectively, compared with 55.2% and 55.4% in the prior-year periods.
- Coal royalties declined 26% in Q3 and 15% for the nine months. Central Appalachia royalties fell 36% and 32%, respectively, amid lower prices and reduced activity. Illinois Basin royalties rose 16% in Q3 and 17% year to date.
- Oil and gas royalties increased 212% in Q3 to $3.9m and 45% year to date to $9.7m. OCI Wyoming contributed $7.2m of equity income in Q3 and $22.2m for the nine months.
- Operating cash flow was $189.5m for the nine months, down from $193.9m. Investing used $281.1m; financing provided $41.9m. Cash declined to $99.7m from $149.4m at year-end 2012.
- Distributable cash flow, a non-GAAP measure, was $104.6m in Q3 and $239.7m for the nine months, up 34% and 13%, respectively. Growth principally reflected cash distributions from OCI, including a one-time $44.8m special distribution. NRP changed its calculation to exclude reserves for future principal payments and recast 2012 for comparison.
- Total debt was $1,145.1m at September 30, 2013, versus $984.3m at December 31, 2012; debt fair value was $1,074.0m. Current debt was $56.2m. Current assets were $139.1m and current liabilities $83.2m.
Material changes and capital allocation
- NRP acquired a 49% interest in OCI Wyoming, a trona mining and soda ash business, for approximately $292.5m. The purchase was funded with a $200m term loan, equity issuance and cash. Additional contingent consideration of up to $50m may be payable depending on performance criteria for 2013–2015; purchase-price allocations remain preliminary.
- NRP acquired non-operated Bakken/Three Forks working interests for $38.3m in August and signed an October agreement to acquire additional Williston Basin interests for approximately $35.5m, subject to adjustments. A $3.6m deposit was placed in escrow; closing was expected in December 2013.
- In September, NRP issued $300m of 9.125% senior notes due 2018, generating approximately $289m net proceeds. Proceeds repaid Opco’s revolver borrowings and $91m of its term loan. Opco’s revolver had $300m of availability; the oil and gas facility had an $8m borrowing base, undrawn at period end. The remaining term-loan balance was $99m, due January 2016.
- NRP paid a quarterly distribution of $0.55 per unit in August and declared another $0.55 per unit for November. Management said the OCI investment was expected to provide about $10m of quarterly distributions, or approximately $40m annually on a normalized basis.
Outlook, commentary and risks
- Management cited depressed Central Appalachian steam and metallurgical coal markets, but expected a gradual recovery in metallurgical coal; the stated Q4 2013 benchmark price was $152 per metric ton, up from $145 in Q3. Illinois Basin production was growing and displacing Central Appalachian coal at some utilities.
- Management said Marcellus assets were not expected to contribute materially until 2014. The filing provides no formal earnings or distribution guidance.
- Management believed cash and available revolver capacity were sufficient for current financial needs, while noting that acquisition pace and oil and gas development spending could affect financing needs. NRP reported compliance with debt covenants at September 30.
- Key risks include coal-price and production declines, regulatory and permitting constraints, and potential effects of proposed greenhouse-gas rules on coal-fired generation. Two lessees, Alpha and the Cline Group, represented over 42% of nine-month revenue and other income. A subsidiary was named in a West Virginia environmental lawsuit concerning reclaimed mine sites; that suit was dismissed, but similar claims create uncertainty about landowner liability. Management reported no material environmental charges or expected material impact from ordinary-course legal proceedings.
- NRP’s 9.125% notes are unsecured and structurally subordinated to subsidiary debt and liabilities. Variable-rate debt was $99m; management estimated a 1 percentage-point rate increase would raise annual interest expense by about $1m, assuming unchanged principal.
Important facts for investors to verify
- Whether coal-market weakness, particularly in Central Appalachia, continues to reduce royalty revenue and production.
- OCI Wyoming’s sustainable distributions after the $44.8m one-time payment, and the timing and amount of any contingent purchase consideration.
- Closing, final purchase accounting and development obligations for the Abraxas and Sundance oil and gas interests.
- Debt covenant headroom, refinancing needs, scheduled Opco principal payments and the effect of the higher-coupon 2018 notes on interest costs.
- Reliability and comparability of distributable cash flow, including the effect of the revised presentation and OCI distributions, when assessing support for the $0.55 quarterly distribution.
- Revenue concentration with Alpha and Cline, related-party transactions, and developments in environmental litigation or regulation affecting reclaimed mining properties.