NRP

Business Context and Reporting Period

Company: Natural Resource Partners L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Model: 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

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 35% for the three months and 37% for the nine months ended September 30, 2008, compared to the same periods in 2007. Coal royalty revenues were the primary driver, up 31% (Q3) and 33% (YTD).
• Profitability: Net income increased 64% for the quarter and 65% year-to-date, driven by higher royalty rates per ton despite relatively flat production volumes in Appalachia.
• Regional Performance:
  • Appalachia: Royalty revenues increased 29% (Q3) and 28% (YTD) due to higher prices, though production volumes declined slightly due to regulatory and labor challenges.
  • Illinois Basin: Royalty revenues tripled (161% Q3 increase; 203% YTD increase) and production more than doubled as the Williamson property operated near full capacity.
• Operating Expenses: Depreciation, depletion, and amortization increased significantly (31% Q3; 31% YTD) due to higher production on newly acquired properties with higher depletion rates. General and administrative expenses decreased due to a reversal of incentive plan expenses caused by a drop in unit price.

Guidance, Outlook, Risks, and Unusual Items

• Capital Markets Risk: Management highlights significant risk regarding the global financial crisis. Access to debt and equity capital markets has diminished, and costs have increased. While the company has over $250 million in available credit facility capacity, there is uncertainty regarding the ability of lenders to honor commitments or refinance debt.
• Regulatory Environment: Recent judicial decisions in West Virginia regarding Clean Water Act permits have created regulatory uncertainty for Appalachian mining, which could negatively impact future production and revenues.
• Commodity Prices: While physical delivery prices for coal remain high, management notes that financial market prices have declined. Metallurgical coal prices are expected to remain high for the near term.
• Acquisitions: The pace of acquisitions has slowed in 2008 due to the credit crisis and high seller expectations. The company is prepared to move quickly when markets stabilize.
• Distributions: A distribution of $0.525 per unit was declared for the third quarter, payable November 14, 2008.

Investor Verification Checklist

• Credit Facility Availability: Verify the status of the $300 million revolving credit facility and the likelihood of lenders honoring the "accordion" feature to increase capacity to $450 million given current market conditions.
• Lessees' Financial Health: Assess the financial stability of major lessees (e.g., Williamson Energy, Taggart Global) to ensure they can maintain production and meet royalty obligations amidst tight credit markets.
• Regulatory Impact: Monitor the outcome of pending litigation in West Virginia and Kentucky regarding mining permits, as adverse rulings could materially affect Appalachian revenue streams.
• Debt Maturity Profile: Review the schedule of principal payments on senior notes, particularly the $225 million 5.82% notes where principal payments do not begin until 2010, and the refinancing needs for notes maturing in 2013.
• Deferred Revenue: Confirm the amount of advance minimum royalties ($5.2 million from Williamson and $7.1 million from Gatling) that have not yet been recouped and recognized as revenue.