Natural Resource Partners L.P. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unless noted otherwise, financial amounts below are in U.S. dollars. The partnership owns and leases U.S. mineral reserves and related infrastructure; it does not operate mines. Its revenue is primarily royalty-based, with growing contributions from other investments and oil and gas interests.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $86.8 million | $90.7 million | $181.1 million | $182.5 million |
| Operating income | $55.3 million | $63.5 million | $117.9 million | $128.3 million |
| Net income | $41.1 million | $49.9 million | $89.0 million | $101.2 million |
| Net income per limited partner unit | $0.37 | $0.46 | $0.80 | $0.94 |
| Operating margin | 63.7% | 70.0% | 65.1% | 70.3% |
- For the first half, coal royalties were $112.7 million, down 8% year over year. Equity and other unconsolidated investment income was $14.9 million, primarily reflecting the new OCI Wyoming investment.
- Operating cash flow was $123.6 million, compared with $132.0 million. Distributable cash flow, a non-GAAP measure, was $135.1 million versus $133.2 million; the partnership changed its calculation to exclude reserves for upcoming principal payments and restated the comparative presentation.
- Cash was $105.2 million at June 30, down from $149.4 million at year-end 2012. Current assets were $152.9 million and current liabilities $87.4 million.
- Total debt was $1.148 billion, up from $984.3 million at year-end, including a $200 million term loan used to help fund the OCI acquisition. The partnership reported $109 million of revolver capacity at quarter-end and stated it was in compliance with debt covenants.
- Investing cash outflow was $281.5 million, mainly for the $292.5 million OCI equity-interest acquisition. Financing cash inflow was $113.6 million, including debt and unit-issuance proceeds, partly offset by $124.7 million in partner distributions.
Material changes versus the prior comparable period
- Revenue was down 4.3% in Q2 and 0.8% for the first half; first-half net income declined 12.1%. Higher depreciation, depletion and amortization, general and administrative expense, and interest expense contributed to lower earnings.
- Central Appalachian coal royalty revenue fell 30% in the first half amid weaker coal prices and lower production. Growth in other regions, particularly the Illinois Basin and Northern Powder River Basin, partly offset the decline. The combined average gross coal royalty per ton fell 23% to $3.92.
- The January OCI acquisition broadened revenue sources, adding $14.9 million of first-half equity income. The investment was restructured in July, leaving NRP with a 49% interest in OCI Wyoming.
- Common units outstanding increased to 109.8 million from 106.0 million at year-end, following issuance of 3.8 million units for $75 million.
Outlook, risks and unusual items
- Management expected steam and metallurgical coal markets to remain soft for the rest of 2013, citing weak demand, lower prices, low natural-gas prices and regulatory pressure. The filing gives no quantified earnings or revenue guidance.
- Management expected Marcellus assets to contribute materially beginning in 2014 and anticipated revenue from the Bakken/Three Forks properties in the second half of 2013. A $35.3 million acquisition of non-operated Bakken/Three Forks working interests was expected to close in August 2013.
- After quarter-end, NRP received $46.0 million in OCI Wyoming distributions, including a one-time $44.8 million special distribution. It used part of the proceeds to prepay $10 million of term-loan principal and intended to use the remainder toward the Bakken acquisition. NRP declared a $0.55-per-unit distribution payable in August.
- A non-cash $8.1 million gain from a coal reserve swap was recorded in the first half. The OCI acquisition agreement also provides for up to $50 million in contingent consideration, subject to performance criteria. Preliminary purchase-price allocation remains subject to possible material adjustment.
- Revenue is concentrated: Alpha Natural Resources and the Cline Group generated over 42% of first-half revenue. Coal-market weakness, lessee operating decisions, environmental regulation, and variable-rate debt are material exposures. A subsidiary was named in a West Virginia citizen-group lawsuit alleging pollution discharges from a reclaimed mine site; the outcome was uncertain. A 1 percentage-point rise in rates would increase annual interest expense by about $3.9 million at the reported variable-debt balance.
Important facts for investors to verify
- Whether coal prices, production and Central Appalachian royalty revenue stabilize, and how lessee concentration affects cash generation.
- The sustainability and source of OCI Wyoming distributions, including the one-time special distribution, and the final acquisition valuation and any contingent payment.
- Completion and performance of the Bakken/Three Forks acquisition and the timing of expected production revenue.
- Debt refinancing needs, covenant headroom, variable-rate exposure and the partnership’s capacity to maintain distributions amid lower coal-market revenues.
- Developments in the West Virginia environmental litigation and any resulting landowner liability.