Natural Resource Partners L.P. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The Partnership owns and leases U.S. mineral properties, principally coal, and also has oil and gas interests, infrastructure assets, and a 49% equity interest in OCI Wyoming. It generally does not operate mines.
Financial performance
Amounts below are in millions, except per-unit data. Income statement comparisons are with the corresponding 2013 period.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue and other income | $90.6 | $86.8 | $170.9 | $181.1 |
| Income from operations | $50.4 | $55.3 | $102.8 | $117.9 |
| Net income | $31.4 | $41.1 | $64.0 | $89.0 |
| Net income per limited partner unit | $0.28 | $0.37 | $0.57 | $0.80 |
| EBITDA, non-GAAP | $77.2 | $76.1 | $148.9 | $156.7 |
| Distributable cash flow, non-GAAP | $64.9 | $90.7 | $103.9 | $135.1 |
Operating margin, calculated as income from operations divided by revenue and other income, was approximately 55.7% in Q2 (63.7% in 2013) and 60.2% for the first half (65.1% in 2013). Net income fell despite higher Q2 revenue, reflecting lower coal-related revenue, higher interest expense and a $5.6 million aggregates-contract impairment.
- Revenue mix: First-half coal-related revenue declined 26% to $107.7 million; non-coal sources contributed 37% of revenue and other income, up from approximately 20% in the first half of 2013. Oil and gas revenue rose to $27.9 million, largely from Williston Basin interests acquired in 2013. OCI equity income increased 28% to $19.2 million.
- Cash flow: First-half operating cash flow was $99.6 million, down from $123.6 million. Investing used $4.8 million; financing used $117.3 million, including $79.6 million of partner distributions and $53.5 million of net debt repayments. Cash declined by $22.5 million to $70.0 million.
- Debt and liquidity: Total debt was $1.114 billion at June 30, versus $1.165 billion at year-end 2013. Current assets were $115.0 million and current liabilities $122.5 million. Management reported $285 million available on Opco’s revolver and $18 million on the oil-and-gas facility, and said cash plus borrowing capacity was sufficient for current needs. Debt covenants were reported in compliance.
- Distribution and units: The Partnership paid $0.35 per unit in May and declared another $0.35 distribution for August 14, 2014. It sold 1.06 million units through its ATM program in the first half for $17.0 million gross proceeds; further ATM sales were reported after quarter-end.
Changes, outlook and key risks
- Coal royalty production declined 16% in the first half, while the combined average royalty per ton decreased 6%. Appalachian coal royalties fell 28%; Illinois Basin royalties increased 4%. The 2013 comparison also included an $8.1 million reserve-swap gain that did not recur.
- Management expected weak thermal coal markets in most regions and did not anticipate a 2014 recovery in metallurgical coal prices. It cited possible further metallurgical production reductions. Illinois Basin production was viewed as comparatively resilient.
- Management expected continued development and production growth in oil and gas interests if commodity markets remained strong. OCI Wyoming performed in line with expectations; international soda ash sales improved, partly offset by weaker-than-expected domestic volumes. No formal earnings or distribution guidance was provided.
- Coal-related exposure includes proposed EPA rules on power-plant emissions, permitting constraints and citizen lawsuits concerning mine discharges. Lessee production, coal prices and rail-service issues may affect royalties. Cline Group and Alpha Natural Resources together generated over 36% of first-half revenue and other income.
- Contingencies: Anadarko demanded accelerated payment of contingent consideration tied to the OCI Wyoming acquisition. The Partnership disputed that payment was due immediately; it had accrued $14.5 million remaining, but stated that an adverse outcome could require additional consideration up to a net present value of $50 million. James River Coal’s Chapter 11 case could lead to lease rejection or impairment; the Partnership reported approximately $35 million of net book value associated with those properties and did not expect a material revenue impact.
- Other unusual items include the $5.6 million impairment of an above-market aggregates contract and the prior-year reserve-swap gain. The Partnership also disclosed related-party transactions, including coal leases and services involving Cline affiliates.
Most important facts for investors to verify
- Whether coal production and royalty pricing stabilize, particularly in Appalachia and metallurgical coal properties.
- Whether debt repayments, interest expense and distributions remain supportable from operating cash flow and available liquidity.
- The resolution and potential amount of Anadarko’s contingent-consideration claim, and any developments in the James River bankruptcy.
- Whether OCI Wyoming distributions, oil and gas production growth, and ATM unit issuance develop as management expected, including the associated effect on cash available per unit.