NRP

Business Context and Reporting Period

Company: Natural Resource Partners L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2006
Business Overview: The Partnership owns and manages coal properties in Appalachia, the Illinois Basin, and the Western United States. It does not operate mines but leases reserves to operators in exchange for royalty payments. As of March 31, 2006, the Partnership had 176 leases with 68 lessees covering approximately two billion tons of proven and probable reserves.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 28% year-over-year, driven primarily by a 20% increase in coal royalty revenues ($39.1 million vs. $32.5 million). This was due to a 9% increase in production volume and higher average royalty rates per ton.
• Regional Performance:
  • Appalachia: Revenues rose 16% to $34.6 million; production increased 5%.
  • Illinois Basin: Revenues surged 54% to $2.0 million; production increased 33%.
  • Western (Northern Powder River Basin): Revenues increased 61% to $2.5 million; production increased 45%.
• Expenses: Total operating expenses increased 10% to $14.9 million. General and administrative expenses rose 24% to $4.1 million, partially due to a one-time $0.66 million charge for the adoption of FAS 123R (Share-Based Payment) and increased incentive compensation accruals.
• Interest Expense: Increased 47% to $3.6 million due to additional borrowings on senior notes in late 2005 and early 2006.
• Acquisitions: The Partnership closed the second phase of the Williamson Development acquisition for $35 million in January 2006.
• Dispositions: Sold timber and surface acreage in Virginia for $3.9 million, recognizing a gain of $2.2 million.

Guidance, Outlook, and Risks

• Outlook: Management expects coal royalty revenue per ton to increase at a slower rate in the coming years as prices stabilize. Future revenue growth is expected to rely more heavily on acquisitions of new reserves rather than price increases. The Williamson Development property in Illinois is expected to reach full production in 2007.
• Distributions: On April 18, 2006, the Partnership announced an increase in quarterly distributions to $0.79 per unit (from $0.7625), payable May 12, 2006.
• Capital Resources: The Partnership maintains a $175 million revolving credit facility with $10 million outstanding as of March 31, 2006. It has approximately $290.2 million available under its shelf registration statement for future debt or equity offerings.
• Risks:
  • Commodity Price Risk: Revenue is dependent on coal prices and lessee production. If prices fall or lessee costs rise, mining may become uneconomic.
  • Interest Rate Risk: The Partnership has $10 million in variable-rate debt; a 100 basis point increase in LIBOR would increase annual interest expense by $100,000.
  • Environmental Liability: While lessees are generally indemnified, the Partnership may face liability for surface conditions on some properties.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the 3.75:1 debt-to-EBITDDA ratio and 4.0:1 EBITDDA-to-fixed-charges ratio required by the credit facility.
• Acquisition Timeline: Confirm the closing date and final terms of the third phase of the Williamson Development acquisition (anticipated July 2006).
• Production Constraints: Monitor lessee production levels for constraints related to labor shortages, permitting issues, and rail transportation, which may limit volume growth despite high prices.
• Accounting Impact: Review the ongoing impact of FAS 123R adoption on quarterly general and administrative expenses and net income per unit.
• Major Lessee Concentration: Note that Lessee A and Lessee B accounted for 10% and 13% of revenues respectively in Q1 2006.