Natural Resource Partners L.P. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 27, 2015. NRP owns and leases U.S. mineral interests and related infrastructure, spanning coal, oil and gas, aggregates, and trona/soda ash. It acquired VantaCore in October and Sanish Field oil and gas interests in November 2014 as part of a stated diversification strategy.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue and other income | $399.8 million | $358.1 million |
| Operating income | $188.9 million | $236.2 million |
| Net income | $108.8 million | $172.1 million |
| Net income per limited partner unit | $0.94 | $1.54 |
| Cash from operations | $210.8 million | $247.1 million |
| Distributable cash flow (non-GAAP) | $217.7 million | $309.4 million |
| Adjusted EBITDA (non-GAAP) | $300.3 million | $340.3 million |
| Total debt at year-end | $1.475 billion | $1.165 billion |
| Cash at year-end | $50.1 million | $92.5 million |
Revenue increased about 12%, but operating income fell about 20% and net income about 37%. Calculated operating and net margins were approximately 47% and 27%, respectively, versus 66% and 48% in 2013. These comparisons reflect acquisition timing and higher expenses, including impairments and interest. Operating cash flow declined about 15%; investing outflows rose to $520.5 million, principally for acquisitions. Adjusted EBITDA and distributable cash flow are non-GAAP measures.
- Coal-related revenue was $226.7 million, down 17%; coal royalty revenue fell 13%, with Appalachia down 19%. Coal production declined 5% and average royalty per ton fell 9%.
- Non-coal sources rose to 43% of revenue and other income from 23% in 2013. Oil and gas revenue increased to $59.6 million; aggregates-related revenue was $54.1 million, including $42.1 million from VantaCore after acquisition.
- OCI Wyoming equity income was $41.4 million, up 21%, while cash distributions received were $46.6 million versus $72.9 million in 2013, which included a $44.8 million special distribution.
- Asset impairment expense was $26.2 million, compared with $0.7 million in 2013. Interest expense rose to $80.2 million from $64.4 million.
- Distributions paid were $1.40 per unit for 2014 versus $2.20 in 2013. The quarterly rate was reduced to $0.35 beginning with the first quarter of 2014; the filing reports a $0.35-per-unit distribution declared in January 2015.
At year-end, NRP reported $100 million of available capacity under Opco’s revolver, $27 million under the NRP Oil and Gas facility, and $50.1 million cash. Current liabilities exceeded current assets by $11.8 million. The partnership reported compliance with debt covenants, but refinancing risk is material: Opco’s $200 million revolver and $75 million term loan mature in 2016; approximately $81 million of Opco principal payments are due annually through 2018; and NRP’s $425 million 9.125% notes mature in 2018. Variable-rate debt was $385 million; a 1 percentage-point rate increase was estimated to add about $3.9 million in annual interest expense.
Material changes, outlook, and risks
- Acquisitions: Sanish Field interests cost $339 million; VantaCore was acquired for approximately $201 million in cash and units. These expanded oil-and-gas and operated aggregates exposure, and increased debt, capital needs, and integration requirements. NRP issued common units and additional 9.125% notes to help fund the transactions.
- Management outlook: Management expected thermal coal markets outside the low-cost Illinois Basin to remain weak in 2015 and did not anticipate a metallurgical coal price recovery that year. Further mine idlings and impairments were possible. NRP had not hedged future oil and gas production and expected revenue to remain exposed to low commodity prices. It planned to control working-interest spending by evaluating wells individually.
- Other outlook: OCI Resources indicated an intended 3%–6% increase in 2015 distributions. VantaCore’s sales are seasonal and depend on local construction and oilfield activity; winter typically brings lower production. NRP expected higher 2015 operating capital expenditures following its acquisitions. No specific consolidated 2015 revenue or earnings guidance is provided in the supplied filing text.
- Key risks: depressed coal and oil prices; environmental regulation and permitting constraints, including proposed emissions rules; lessee/operator performance and customer concentration; acquisition integration and operating risks at VantaCore; reserve-estimate uncertainty; and debt maturities, covenant compliance, and access to refinancing. Foresight and Alpha generated 20.4% and 12.2% of 2014 revenue, respectively; Foresight’s Williamson mine alone represented about 10%.
- Contingencies and controls: NRP disclosed being named in one citizen lawsuit concerning discharges from a reclaimed mine; outcome and potential costs were uncertain. Management and the auditor concluded internal control over financial reporting was effective, but both excluded VantaCore from their internal-control assessment. The financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Refinancing plans and liquidity sources for the 2016 Opco maturities and 2018 note repayment, particularly under weak commodity markets.
- Coal production, royalty rates, mine idlings, lessee credit quality, and the status of the $103 million of coal minimum payments scheduled for 2015.
- Oil and gas realized prices, reserve-based borrowing capacity, production, and required development spending after the Sanish acquisition.
- VantaCore’s post-acquisition performance, integration progress, seasonal cash needs, and 2015 capital requirements.
- Whether OCI Wyoming distributions and the reduced $0.35 quarterly NRP distribution are sustainable relative to distributable cash flow and debt service.
- The filing’s executive-compensation discussion cites 2014 revenue of $388.9 million in one passage, whereas audited statements and the main results discussion report $399.8 million; verify the apparent inconsistency. Also verify acquisition pro forma figures against final purchase accounting, as allocations were preliminary.