Natural Resource Partners L.P. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance sheet compared with December 31, 2013. NRP owns and leases mineral properties and related infrastructure, and has interests in oil and gas assets and OCI Wyoming. It generally leases mineral reserves to operators rather than operating mines itself. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenues and other income | $80.3 | $94.3; down 15% |
| Coal-related revenues | $52.4 | $77.8; down 33% |
| Income from operations | $52.4 | $62.5 |
| Net income | $32.6 | $47.9; down 32% |
| Net income per limited partner unit | $0.29 | $0.43 |
| Net cash from operating activities | $38.6 | $43.9 |
| Distributable cash flow (non-GAAP) | $38.9 | $44.5 |
| EBITDA (non-GAAP) | $71.7 | $80.6 |
Operating margin was approximately 65% versus 66% a year earlier; net margin was approximately 41% versus 51%. Interest expense rose to $19.9 million from $14.7 million, principally reflecting the 9.125% senior notes issued in September 2013. General and administrative expense declined to $5.9 million from $11.6 million, largely due to lower long-term incentive plan expense.
At March 31, cash was $54.8 million, down from $92.5 million at year-end. Current assets were $105.7 million and current liabilities $125.4 million, a working-capital deficit of approximately $19.7 million. Total debt was $1.126 billion, including $81.0 million classified as current; long-term debt was $1.045 billion. Debt fell about $39.0 million from year-end, primarily from scheduled principal payments. NRP reported compliance with debt covenants.
Cash used in investing activities was $1.5 million, versus $292.4 million in Q1 2013, when the OCI Wyoming investment drove acquisition spending. Financing activities used $74.8 million, including $41.2 million of loan repayments and $40.2 million of partner distributions. NRP declared a $0.35-per-unit quarterly distribution, 36% below the distribution declared for Q3 2013.
Material changes and management commentary
- Coal revenue weakness reflected lower Appalachia production and royalties, lower realized prices, reduced override revenue and minimums recognized, and the absence of an $8.1 million reserve-swap gain recorded in Q1 2013. Coal production fell 11% and average gross royalty per ton fell 10%.
- Non-coal sources rose to 35% of revenue and other income, from approximately 17% a year earlier. OCI Wyoming equity income increased 39% to $9.8 million; oil and gas revenue rose $8.3 million, mainly from Williston Basin interests acquired in 2013. Aggregate-related revenue increased 15% to $3.4 million.
- Management said exceptionally cold weather, higher natural gas prices, and low utility coal inventories could support steam-coal markets during 2014, but significant improvement in lessee steam-coal prices had not yet materialized. It did not anticipate metallurgical coal prices recovering in 2014, citing oversupply and a benchmark price of $120 per metric ton.
- OCI Wyoming performed in line with expectations. International sales were stronger than anticipated, while weaker domestic sales and higher natural gas costs weighed on results. Management expected continued oil and gas development and production growth in 2014 if commodity markets remained strong.
Liquidity, outlook, risks, and contingencies
- NRP reported $280 million of available capacity under Opco’s revolving credit facility and $14 million under NRP Oil and Gas’s facility, in addition to $54.8 million cash. Management considered liquidity adequate. It cited approximately $81 million in annual Opco principal payments for the next several years, including about $40 million remaining in 2014; other significant debt maturities begin in 2016.
- Management intends to reduce leverage using operating cash flow and ATM equity issuance, while preserving capacity for potentially accretive acquisitions. Through May 7, the ATM program had issued 564,306 units for $9.1 million gross proceeds. Further equity issuance may dilute unitholders.
- Anadarko asserted that the 2013 OCI Wyoming reorganization accelerated contingent consideration and demanded payment. NRP disputes the claim. NRP had accrued $15 million; if Anadarko prevails, the additional payment could exceed that accrual, up to the net present value of a $50 million maximum. Discussions were continuing.
- James River Coal filed for Chapter 11 on April 7, 2014. NRP’s properties leased to James River had a net book value of approximately $35 million. Lease treatment and potential impairment were unresolved; James River represented about 1% of Q1 revenue and other income, and management did not expect a material revenue impact.
- Coal-market exposure includes weak metallurgical coal demand and potential declines in coal consumption. NRP also cited proposed and existing environmental regulations, permitting delays, court decisions, and citizen lawsuits that could raise costs for lessees or create uncertainty about landowner liability. NRP reported no material environmental charges or known contamination requiring remediation at quarter-end.
- Revenue is concentrated: Cline and Alpha together accounted for over 36% of Q1 revenue and other income; Cline’s Williamson mine alone contributed approximately 11%. OCI Wyoming contributed over 12%. This concentration, lessee financial health, commodity prices, and production changes are key sensitivities.
- NRP had $121 million of variable-rate debt; a 1 percentage-point rate increase would raise annual interest expense by approximately $1.2 million, assuming unchanged balances. The filing reported no material change in previously disclosed risk factors. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether coal production, realized prices, and royalties—especially in Appalachia and metallurgical coal—stabilize or continue to weaken.
- Progress on debt repayment, the 2014–2016 maturity schedule, covenant headroom, and the sustainability of the $0.35 quarterly distribution.
- Outcome and potential financial impact of Anadarko’s contingent-consideration claim, including any amount above the $15 million accrual.
- James River lease decisions and any resulting impairment, along with credit and operating conditions at major lessees.
- OCI Wyoming performance and cash distributions, and growth, capital needs, and borrowing-base changes in oil and gas assets.
- Effects of environmental rules, permitting actions, and litigation on lessees and NRP’s properties; the filing provides management views, not a quantified estimate of potential impacts.
Comparative revenue categories were reclassified for presentation; management stated the reclassification did not change total revenue. Non-GAAP distributable cash flow and EBITDA are company-defined measures and should not be treated as substitutes for GAAP cash flow or income.