Natural Resource Partners L.P. — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing also provides unaudited quarterly results, including fourth-quarter 2012. NRP is a U.S. mineral-rights owner and lessor; it does not operate mines. Its revenues depend largely on lessees’ production, mineral prices and lease terms.
Business context and financial performance
- NRP reported approximately 2.4 billion tons of proven and probable coal reserves and approximately 500 million tons of aggregate reserves. Lessees produced 54.4 million tons of coal in 2012.
- Full-year revenue was $379.1 million, up 0.4% from $377.7 million in 2011. Coal royalties were $260.7 million, down 7%; coal production rose 11%, but average coal royalty revenue per ton fell 16%, to $4.79.
- Net income was $213.4 million versus $54.0 million in 2011; diluted net income per limited partner unit was $1.97 versus $0.50. The comparison is significantly affected by $161.3 million of asset impairments in 2011, versus $2.6 million in 2012.
- Fourth-quarter 2012 revenue was $102.4 million and net income was $60.1 million, compared with fourth-quarter 2011 revenue of $93.1 million and a net loss of $16.9 million. Fourth-quarter 2012 included a $2.6 million impairment.
- Operating cash flow was $271.4 million, down from $305.6 million. Management’s non-GAAP distributable cash flow was $246.7 million, versus $280.0 million. NRP paid $2.20 per unit in 2012, compared with $2.17 in 2011; the quarterly distribution remained $0.55 throughout 2012.
- Cash and cash equivalents were $149.4 million at year-end. Total debt was $984.3 million, including $87.2 million current and $897.0 million long-term debt; year-end 2011 total debt was $867.1 million. The $300 million revolving facility had $152 million of unused capacity, and NRP reported compliance with debt covenants.
Material changes and notable items
- Central Appalachian coal royalties declined 21% to $156.4 million, reflecting weaker prices and lower production. Total Appalachian royalties fell 12%. Illinois Basin royalties rose 20% to $49.5 million, and Southern Appalachian royalties rose 150% to $29.3 million.
- Oil and gas royalties fell 35% to $9.2 million, primarily due to low gas prices and reduced drilling on Louisiana properties. Aggregate royalties were nearly flat at $6.6 million despite an 11% production decline.
- NRP spent approximately $240 million on 2012 acquisitions, including Oklahoma oil and gas mineral acres, Illinois coal transportation infrastructure and reserves, Virginia metallurgical coal reserves, and Marcellus and frac-sand overriding royalties. Asset-sale gains included $13.6 million in 2012.
- After year-end, on January 24, 2013, NRP acquired interests in OCI Wyoming for $292.5 million. Funding included a $200 million term loan, $76.5 million of equity and general-partner interests, and cash. The transaction added exposure to trona mining and soda ash operations, including a $14.5 million annual priority distribution to OCI Co and up to $50 million of contingent consideration. These post-year-end transactions are not part of 2012 operating results.
Outlook, risks and contingencies
- Management expected lower coal royalties in 2013 because of lessee production cutbacks and continued softness in steam and metallurgical coal markets; it expected the new OCI Wyoming interest to partly offset the decline. No specific revenue or earnings guidance was provided.
- Management cited low natural gas prices, reduced steel demand and falling metallurgical coal prices, as well as higher coal stockpiles and announced coal-fired power plant closures. More than 90% of reported coal reserves were leased to third parties.
- Regulatory and permitting uncertainty—particularly for Central Appalachian valley fills and water permits—could delay or restrict lessee operations. Air-emissions rules, greenhouse-gas regulation, mine-safety enforcement and environmental litigation could also reduce coal demand, raise lessee costs or constrain production.
- Revenue concentration is material: Cline Group entities generated 24.4% of 2012 revenue and Alpha Natural Resources 21.4%; Foresight’s Williamson mine alone generated 12.4%. Lessee financial distress, mine closures or interruptions could reduce royalties and distributions.
- NRP intended to refinance a $35 million senior note due in June 2013. Scheduled principal repayments on other notes rise beginning in 2013. The post-year-end $200 million term loan is floating rate and matures in January 2016, with principal payments of $10 million in 2014 and $20 million in 2015.
- NRP is generally not responsible for mine operating, reclamation or environmental costs under its leases, but the filing notes potential exposure as a surface-interest owner and possible liability if lessees cannot meet obligations. Management said ordinary-course legal proceedings were not expected to materially affect financial position, liquidity or operations; it reported no material environmental charges against NRP.
- Related-party dealings include leases and transportation arrangements with Cline affiliates, and services and expense reimbursements through general-partner affiliates. The filing describes conflicts procedures, but the partnership agreement gives the general partner broad discretion in resolving conflicts.
Most important facts for investors to verify
- Whether the expected 2013 coal-royalty decline is borne out, particularly in Central Appalachia and at the Williamson mine.
- Whether NRP refinanced the $35 million June 2013 note and can meet rising scheduled debt service while preserving liquidity and distributions.
- OCI Wyoming’s realized cash distributions, operating performance, financing costs and any contingent consideration; the acquisition was completed after the 2012 reporting date.
- Lessee concentration, payment capacity and unrecouped minimum royalties, including the $56.6 million of unrecouped minimum payments from Cline affiliates at year-end.
- Any changes in coal permitting, environmental rules or litigation that affect lessee production, and any revisions to reserve estimates or related asset values.