Business context and reporting period
Natural Resource Partners L.P. filed this Form 10-K for the fiscal year ended December 31, 2013; quarterly figures include the fourth quarter. The partnership owns and leases U.S. mineral reserves and related infrastructure, principally coal, and does not operate mines. It reported approximately 2.3 billion tons of coal reserves and pursued diversification into soda ash and oil and gas.
Financial and operating performance
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenues and other income | $358.1 million | $379.1 million |
| Operating income | $236.2 million | $267.2 million |
| Net income | $172.1 million | $213.4 million |
| Net income per limited partner unit | $1.54 | $1.97 |
| Cash from operations | $247.1 million | $271.4 million |
| Distributable cash flow (non-GAAP) | $309.4 million | $298.9 million |
| EBITDA (non-GAAP) | $316.7 million | $328.1 million |
| Cash and cash equivalents at year-end | $92.5 million | $149.4 million |
| Total debt at year-end | $1,165.2 million | $984.3 million |
- Coal royalty revenue fell 18.4% to $212.7 million; coal production declined 2% to 53.3 million tons, while average coal royalty revenue per ton fell 17% to $3.99.
- Operating margin was approximately 66.0% in 2013 versus 70.5% in 2012; net margin was approximately 48.1% versus 56.3% (calculated from reported figures).
- Non-coal sources contributed approximately $145.5 million, or 40.6% of revenue and other income. OCI Wyoming contributed $34.2 million of equity income and $72.9 million of cash distributions. Oil and gas revenue rose 86% to $17.1 million.
- Investing activities used $302.8 million, chiefly for acquisitions. Financing activities used $1.2 million; the partnership paid $249.0 million in distributions during 2013.
- At December 31, Opco had $280 million of available revolving-credit capacity; the oil-and-gas facility had $16 million available. The filing reports $81.0 million of Opco senior-note principal payments due in 2014 and $99.0 million remaining on a term loan due in January 2016.
Material changes versus the prior comparable period
- Total revenue and other income decreased 5.5%, while net income declined 19.3% and operating cash flow declined 9.0%. Higher interest expense ($64.4 million versus $54.0 million) and general and administrative expense ($36.8 million versus $29.7 million) weighed on results.
- Appalachian coal royalties fell $55.7 million, primarily reflecting weaker Central Appalachian production and lower realized royalty revenue per ton. Illinois Basin royalties rose 13% as production increased.
- The 49% non-controlling interest in OCI Wyoming, acquired in January 2013 for $292.5 million, and two Williston Basin working-interest acquisitions for a combined $72.0 million expanded the non-coal portfolio. These investments were funded in part with new debt and a January equity issuance.
- Distributable cash flow increased 3.5% despite lower operating cash flow, aided by OCI distributions. The partnership changed its DCF presentation in 2013 to stop deducting reserves for next-year debt principal payments and recast prior-year comparisons; DCF is non-GAAP and not comparable across companies by definition.
Outlook, commentary, risks and unusual items
- Management expected coal royalties to represent a smaller share of revenue in 2014 and forecast a significant decrease in coal royalty revenue, citing depressed prices and lower expected production from lessees moving operations off its properties. It projected a substantial decline in 2014 distributable cash flow but did not provide a clear numerical forecast in the supplied filing text.
- Management said coal markets remained uncertain: Central Appalachian steam coal faced competition from natural gas and Illinois Basin supply; management did not anticipate a recovery in metallurgical coal prices during 2014. It expected approximately $42.5 million of OCI Wyoming distributions in 2014.
- The board declared a fourth-quarter 2013 distribution of $0.35 per unit, down $0.20, or 36%, from the prior quarter’s $0.55. Management estimated the cut would save approximately $89.6 million annually and support debt reduction and liquidity.
- Key risks include continued coal-price weakness, environmental rules and permitting delays, mine and power-plant closures, dependence on major lessees, commodity-price volatility, acquisition and financing needs, and operational or environmental liabilities from non-operated oil-and-gas interests. Foresight Energy and affiliates and Alpha Natural Resources accounted for 24.7% and 15.4% of 2013 revenue, respectively; Foresight’s Williamson mine alone contributed about 13%.
- NRP accrued $15 million of contingent consideration related to OCI Wyoming. Anadarko raised whether the 2013 restructuring accelerated payment; NRP disputed that interpretation. If Anadarko prevailed, additional payment could bring total contingent consideration up to $50 million.
- Unusual 2013 items included an $8.1 million non-cash gain on a reserve swap and approximately $10.4 million from a right-of-way condemnation. The filing reported $0.7 million of asset impairments in 2013, compared with $2.6 million in 2012 and $161.3 million in 2011.
- The financial statements received an unqualified audit opinion and management and the auditor reported effective internal control over financial reporting. The auditor’s opinion on OCI Wyoming amounts relies on the report of OCI’s other auditors.
Most important facts for investors to verify
- Whether 2014 coal production, realized royalty rates, and coal prices tracked management’s stated downside expectations.
- Whether the reduced distribution and OCI cash distributions supported debt service, scheduled principal payments, and liquidity as intended.
- The status and ultimate cost of the Anadarko contingent-consideration dispute, including any amount beyond the $15 million accrued.
- Exposure to Foresight, Alpha, and the Williamson mine, including lessee creditworthiness, production plans, and minimum-royalty recoupment.
- Whether OCI Wyoming’s operating performance and distributions met expectations, and whether diversification earnings offset further coal weakness.
- Potential effects of permitting, environmental litigation, and emissions rules on lessee operations and NRP’s royalty stream.