Natural Resource Partners L.P. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. NRP owns and leases U.S. coal, aggregate and other mineral properties to operators; it does not operate mines. Unless noted otherwise, financial figures below are in millions of dollars.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $91.4 | $79.6 | $176.3 | $143.1 |
| Operating income | $64.8 | $52.0 | $120.7 | $92.9 |
| Net income | $52.4 | $41.6 | $97.6 | $71.8 |
| Net income per limited partner unit | $0.48 | $0.38 | $0.90 | $0.63 |
| Cash from operating activities | $91.6 | $71.7 | $138.7 | $113.6 |
| Distributable cash flow (non-GAAP) | $83.9 | $63.8 | $122.9 | $97.6 |
Q2 revenue rose 15% year over year and six-month revenue rose 23%. Operating margins were approximately 71% for Q2 and 68% for the first half, compared with 65% in both prior-year periods. Coal royalties were $69.8 million in Q2 and $135.2 million for the first half; management attributed much of the increase to higher metallurgical coal prices, especially in Central Appalachia. First-half coal and aggregate production was 26.4 million tons, generating $138.2 million in royalty revenue.
Six-month investing cash outflow was $98.6 million, primarily for mineral acquisitions; financing provided $10.1 million. NRP paid $116.8 million in distributions during the first half and declared a quarterly distribution of $0.54 per unit for payment in August 2011.
Balance sheet, debt and liquidity
- At June 30, cash was $145.7 million; current assets were $182.6 million and current liabilities $59.9 million.
- Total debt was $824.8 million, including $30.8 million current maturities; year-end 2010 total debt was $692.6 million. Long-term debt was $794.0 million. The revolving credit facility had no borrowings and its full $300 million capacity was available.
- NRP issued $250 million of senior unsecured notes during Q2, using proceeds largely to repay revolver borrowings and the balance for acquisitions. It reported a commitment to issue another $50 million of notes in October. The credit facility matures in March 2012; discussions to amend and extend it had begun.
- Management reported compliance with debt covenants at June 30. The filing gives no explicit numerical earnings or distribution guidance.
Changes, outlook and notable risks
- Revenue growth reflected stronger coal royalties and higher metallurgical coal prices, while royalty production increased only 4% for the first half. Central Appalachia coal royalties rose 43%; aggregate royalties also increased, mainly from acquisitions. First-half G&A rose $3.3 million, primarily from higher incentive-plan accruals and added employees; interest expense also increased about $2 million.
- Management expected a lower share of revenue from metallurgical coal in the second half. Oak Grove’s preparation plant was damaged by a tornado, and the mine was not expected to sell coal in Q3. Pinnacle remained closed pending a mine-safety determination; the two mines supplied 13% of first-half metallurgical coal revenue.
- Gatling mine had been idle since April 2010. Its related assets had a $129.6 million carrying value; management said impairment could arise if the mine did not resume operations or coal-sale discussions failed. Contractual minimum royalties for the remaining primary lease term were $66.3 million. An impairment could materially reduce earnings but, according to management, would not affect operating cash flow or distributable cash flow.
- Permitting delays, increased EPA and MSHA scrutiny, mine-safety regulation and higher compliance costs could delay lessee operations and affect royalties. Coal-price declines could reduce both production and per-ton royalties. Alpha Natural Resources and the Cline Group generated over 45% of first-half revenue, creating lessee concentration; the Williamson mine alone accounted for about 9%.
- NRP disclosed a possible $80 million purchase of more than 100 million additional tons of Colt coal reserves over the next year, subject to mine-construction milestones. It also reported June acquisitions of frac-sand royalties for $16.5 million and limestone rights for $16.0 million; the latter included $2.0 million payable upon milestones. A July acquisition of coal and coal-bed-methane reserves for $8.0 million was disclosed as a subsequent event.
- Management said ordinary-course legal proceedings were not expected to have a material effect and reported no material environmental charges or known contamination requiring remediation. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the credit facility was extended before its March 2012 maturity and whether the additional $50 million note issuance occurred as planned.
- Progress and restart prospects at Oak Grove, Pinnacle and Gatling, including any effect on royalties or impairment assessments.
- Colt mine-development milestones, the potential $80 million reserve purchase and timing of related production and minimum-royalty recoupment.
- Exposure to Alpha and Cline, coal-price and permitting developments, and whether diversification through aggregate and other mineral acquisitions reduces concentration.
- Sustainability of the $0.54 per-unit distribution relative to distributable cash flow, debt amortization and acquisition spending; distributable cash flow is a non-GAAP measure.