Business Context and Reporting Period
Company: Natural Resource Partners L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The Partnership owns, manages, and leases coal properties in Appalachia, the Illinois Basin, and the Western United States. It does not operate mines but leases reserves to operators for royalty payments. It also owns coal transportation/preparation equipment, aggregate reserves, and oil and gas properties.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|
| Total Revenues | $63.96 million | $190.18 million | $215.84 million |
| Net Income | $30.65 million | $81.15 million | $121.54 million |
| Net Income per Unit (Limited Partners) | $0.36 | $0.77 | $1.40 |
| Operating Cash Flow (9 Months) | $138.80 million | ||
| Distributable Cash Flow (9 Months) | $114.62 million | ||
| Total Debt (Gross) | $652.82 million (as of Sep 30, 2009) | ||
| Cash and Equivalents | $60.88 million (as of Sep 30, 2009) | ||
| Credit Facility Availability | $278 million (of $300 million facility) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues for the nine months ended September 30, 2009, decreased by 12% compared to the same period in 2008. Coal royalty revenues dropped 11% to $148.3 million, driven by a 22% decline in total coal production (35.5 million tons vs. 45.5 million tons).
- Production Drivers: Production declines were observed across all regions, particularly in Appalachia (-21%) and the Northern Powder River Basin (-37%). Causes included mine closures, temporary idling due to costs, difficult regulatory environments, and lower demand for metallurgical coal.
- Expense Increases: General and administrative expenses rose significantly to $17.9 million (9 months 2009) from $12.8 million (9 months 2008), primarily due to accruals under the long-term incentive plan linked to unit price fluctuations. Interest expense increased due to new debt incurred for acquisitions.
- Acquisitions: Significant asset additions occurred in 2009, including the Macoupin acquisition ($143.7 million), Gatling Ohio (equity issuance), and the Colt agreement ($255 million total, with initial closing).
Outlook, Risks, and Management Commentary
- Market Outlook: Management expects gradual improvements in the remainder of 2009 but does not anticipate material improvement. The difficult economic environment and low natural gas prices continue to impact coal demand.
- Regulatory Risks: The filing highlights significant risks from the EPA's new permitting processes in Appalachia, increased MSHA enforcement, and potential climate change legislation (e.g., Waxman-Markey cap-and-trade). These factors could increase costs and delay mine openings.
- Liquidity Strategy: The Partnership has $278 million available under its credit facility and $61 million in cash. Holders of Incentive Distribution Rights (IDRs) agreed to forego approximately $14.7 million in distributions for Q3 and Q4 2009 to preserve liquidity for acquisitions.
- Future Commitments: The company anticipates funding an additional $257 million over the next 27 months for the Colt and Blue Star acquisitions as milestones are met.
Investor Verification Checklist
- Acquisition Milestones: Verify the progress of the Colt (Deer Run Mine) and Blue Star acquisitions, as future funding obligations ($257 million) depend on specific development milestones.
- Regulatory Impact: Monitor the implementation of the EPA's new Appalachian permitting memorandum and the status of federal climate change legislation, as these directly threaten production volumes and costs.
- Debt Covenants: Confirm continued compliance with leverage ratios (3.75:1.0) under the credit facility and senior notes, especially given the recent increase in debt load.
- Related Party Transactions: Review the concentration of revenue from Cline affiliates (Williamson Energy, Gatling, etc.), which accounted for a significant portion of total revenues.
- Production Recovery: Assess whether the "gradual improvements" noted by management materialize in Q4 2009, particularly in the metallurgical coal sector.