Business Context and Reporting Period
Company: Natural Resource Partners L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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. Revenue is also derived from aggregate royalties, coal processing fees, transportation fees, and oil and gas royalties.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | $126,220 | $139,647 |
| Net Income | $50,502 | $74,205 |
| Net Income Attributable to Limited Partners | $26,402 | $54,690 |
| Net Cash Provided by Operating Activities | $100,679 | $100,870 |
| Distributable Cash Flow (Non-GAAP) | $84,561 | $92,254 |
| Total Debt (Carrying Value) | $638,515 | $496,057 |
| Cash and Cash Equivalents | $81,495 | $58,341 |
| Available Credit Facility | $300,000 | $300,000 |
Margins: Operating income margin for the six months ended June 30, 2009, was approximately 54.7% ($69,078 / $126,220), compared to 62.9% in the prior year period.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 9.6% year-over-year. Coal royalty revenues, the primary revenue driver, fell 9.3% to $98.9 million due to lower production volumes across all regions, particularly in Appalachia.
- Production Volume: Total coal production decreased 21% to 24.3 million tons. Appalachia production dropped 22%, while the Illinois Basin saw a 5% decline.
- Debt Increase: Total debt increased by approximately $142 million to $638.5 million. This was driven by the issuance of $200 million in senior notes in March 2009 to fund acquisitions and pay down the revolving credit facility.
- Acquisitions: Significant asset additions included the Macoupin acquisition ($143.7 million) in January 2009 and the Gatling Ohio acquisition (equity issuance) in May 2009.
- Net Income: Net income decreased 32% to $50.5 million, primarily due to lower revenues and higher interest expense from increased debt levels.
Guidance, Outlook, and Risks
Management Commentary: Management expects the remainder of 2009 to be similar to the second quarter with no material improvement anticipated. The difficult economic environment and low natural gas prices have impacted coal demand. Metallurgical coal producers have temporarily ceased production due to global steel demand reductions, though prices are believed to have settled near a bottom.
Liquidity: The Partnership maintains $81.5 million in cash and has a fully available $300 million revolving credit facility. However, management notes that obtaining additional capital from credit markets may be severely restricted due to current financial market conditions.
Risks and Contingencies:
- Regulatory Environment: New EPA and MSHA regulations in Appalachia are expected to cause permitting delays and increased costs. The "Waxman-Markey" cap-and-trade legislation (ACESA) passed by the House could impose increasing costs on coal combustion.
- Market Risk: Revenue is highly dependent on coal prices and lessee production levels. A substantial decline in coal prices could reduce the economic viability of mining operations.
- Related Party Transactions: A significant portion of revenue and receivables is derived from affiliates of the Cline Group (e.g., Williamson Energy, Gatling LLC), creating concentration risk.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the 3.75:1 leverage ratio covenant, noting the potential for a 2.00% penalty interest rate on specific senior notes if breached.
- Production Trends: Monitor lessee production reports, particularly in Appalachia, to assess the impact of regulatory delays and mine closures on future royalty revenues.
- Related Party Concentration: Review the financial health of major lessees (Williamson Energy, Gatling) which represent a significant portion of revenue and receivables.
- Regulatory Impact: Track the progress of the Waxman-Markey legislation and EPA permitting changes to evaluate potential long-term cost increases.
- Acquisition Integration: Assess the revenue contribution from the Macoupin and Gatling Ohio acquisitions to determine if they offset declines in legacy assets.