Natural Resource Partners L.P. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; filed May 7, 2013. Unless otherwise noted, dollar amounts below are in millions.
Business context
NRP owns and leases U.S. coal, aggregate, and oil and gas mineral interests, generally earning royalties without operating the mines. In January 2013, it acquired non-controlling interests in OCI Wyoming, which mines trona and produces soda ash, diversifying its revenue base.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $94.3 | $91.9 | +2.7% |
| Operating income | $62.5 | $64.8 | -3.5% |
| Net income | $47.9 | $51.3 | -6.6% |
| Net income per limited partner unit | $0.43 | $0.47 | -8.5% |
| Operating margin | 66.3% | 70.6% | Down 4.3 percentage points |
| Net cash from operations | $43.9 | $49.5 | -11.3% |
| Distributable cash flow (non-GAAP) | $44.5 | $49.5 | -10.1% |
Revenue benefited from $7.0 million of OCI equity income and an $8.1 million gain on an Illinois coal reserve swap. These were partly offset by a $5.5 million decline in coal royalties and a $7.1 million decline in minimums recognized as revenue. Coal royalties fell 9.1%; production rose 14%, while average gross royalty per ton fell 20% to $3.94. Central Appalachia coal royalties declined 37% amid weak coal markets.
Operating expenses rose to $31.8 million from $27.0 million, including higher depreciation, depletion and amortization and general and administrative expense. G&A increased to $11.6 million from $9.0 million, principally due to higher long-term incentive plan accruals. Interest expense increased to $14.7 million from $13.6 million, reflecting the acquisition term loan.
At March 31, cash was $76.2 million and total debt was $1,147.6 million, including $58.9 million classified as current; long-term debt was $1,088.8 million. The $300 million revolver had $148 million drawn and $152 million available. NRP reported compliance with debt covenants. It had $348 million of variable-rate debt; a 1 percentage-point rate increase would add approximately $3.5 million of annual interest expense, assuming balances were unchanged.
Investing cash outflow was $292.4 million, chiefly the OCI acquisition. Financing cash inflow was $175.2 million, including $200 million of term-loan proceeds and $75 million from unit issuance, offset partly by debt repayments and $63.1 million of partner distributions. Cash declined by $73.3 million during the quarter. The quarterly distribution was $0.55 per unit; the same amount was declared after quarter-end for payment in May.
Material changes and transactions
- NRP paid $292.5 million for a 48.51% general partner interest in OCI LP and 20% of OCI Co common stock plus all its preferred stock. The acquisition was funded with a $200 million, three-year term loan, a $76.5 million unit placement (including the general partner contribution), and approximately $16 million of cash.
- OCI contributed $7.0 million of equity and other unconsolidated investment income in Q1. NRP also received $20.6 million in cash distributions from OCI after quarter-end.
- The OCI purchase-price allocation remained preliminary. The agreement allows up to $50 million of additional contingent consideration if specified performance criteria are met in 2013, 2014, or 2015.
- NRP issued 3,784,572 common units in a private placement, increasing units outstanding to 109,812,408 at March 31.
- NRP changed its distributable-cash-flow presentation: starting in Q1 2013, it no longer deducts reserves for future or actual principal payments. Prior-year DCF was recast for comparison; the change does not alter its stated debt repayment or refinancing intentions.
Outlook, commentary and risks
Management said cash, revolver availability and subsequent OCI distributions were sufficient for current obligations, including the quarterly distribution. NRP intended to refinance $42.9 million of senior-note principal due in Q2 2013 through its revolver and said it planned to refinance some or all principal payments coming due over the next 12 months or until coal markets improve. The filing provides no quantified full-year earnings or revenue guidance.
Management described weak steam-coal markets, lower metallurgical-coal prices and demand, utility stockpiles, and announced coal-fired power plant closures as pressures on coal production and royalties. It noted that regulatory and permitting requirements, including an April 2013 court ruling affirming EPA authority to retroactively veto certain Clean Water Act permits, could increase uncertainty and costs for mining operators. MSHA enforcement and citizen litigation were also cited as industry pressures.
Revenue concentration is significant: Alpha Natural Resources generated 14% of Q1 revenue and the Cline Group 32%. Cline’s reported share included the reserve-swap gain; excluding it, Cline represented approximately 23% of revenue. NRP also disclosed related-party dealings with Cline affiliates and entities connected to Quintana Capital. Management said ordinary-course legal proceedings were not expected to materially affect the Partnership and reported no material environmental charges or known contamination requiring remediation as of quarter-end. Forward-looking results remain subject to market, operating, regulatory and financing risks.
Investor verification priorities
- Verify the final OCI purchase-price allocation, investment valuation and any contingent consideration exposure of up to $50 million.
- Assess OCI’s cash distributions and earnings contribution against the acquisition’s financing costs and scheduled term-loan principal payments.
- Monitor coal-market conditions, production, royalty rates and the concentration of revenue among Alpha and Cline; distinguish recurring revenue from the one-time $8.1 million reserve-swap gain.
- Confirm execution of the planned $42.9 million refinancing and monitor debt maturities, variable-rate exposure, covenant headroom and available revolver capacity.
- Reconcile reported DCF with operating cash flow and partner distributions, noting the revised presentation no longer reserves cash for debt principal payments.
- Review related-party transactions, including Cline-affiliate receivables and the terms of reimbursements to general-partner affiliates.