Natural Resource Partners L.P. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; filed August 6, 2010. NRP owns and leases U.S. mineral properties, principally coal, to operators and also earns revenue from processing, transportation, oil and gas, and other interests. It does not operate mines.
Financial results and liquidity
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Total revenue | $79.6 million | $59.5 million | $143.1 million | $126.2 million |
| Operating income | $52.0 million | $27.7 million | $92.9 million | $69.1 million |
| Net income | $41.6 million | $17.1 million | $71.8 million | $50.5 million |
| Net income per limited partner unit | $0.38 | $0.07 | $0.63 | $0.40 |
| Distributable cash flow (non-GAAP) | $63.8 million | $49.1 million | $97.6 million | $84.6 million |
- Q2 operating margin was approximately 65.3%, versus 46.5% a year earlier; first-half operating margin was approximately 64.9%, versus 54.7%.
- For the first half, cash from operations was $113.6 million; investing cash outflow was $112.5 million, largely for acquisitions; financing cash outflow was $5.3 million. Cash declined $4.2 million to $78.4 million.
- At June 30, total debt was $641.3 million, including $31.5 million current maturities; long-term debt was $609.8 million. The $300 million revolving facility had $35 million drawn and $265 million available. NRP reported compliance with debt covenants.
- Current assets were $115.5 million and current liabilities $58.8 million. Deferred revenue was $87.7 million, up from $67.0 million at year-end, primarily because Cline minimum royalties had not yet been recouped through production.
- NRP paid a quarterly distribution of $0.54 per unit in May and declared another $0.54 distribution in July, payable August 13, 2010.
Changes versus the prior comparable period
- Q2 revenue rose 33.8% and net income rose 143.5% year over year. First-half revenue increased 13.4% and net income increased 42.2%.
- Coal royalties rose 24.7% in Q2 to $57.8 million and 6.1% in the first half to $105.0 million. Higher realized prices and royalty rates, including a greater share of metallurgical coal in some regions, outweighed lower first-half coal production: 22.6 million tons versus 24.3 million.
- First-half aggregate royalties and bonuses were weaker, reflecting lower production and a reduced bonus associated with the prior-year downturn. Other revenue sources increased to about 26% of first-half revenue from 19%, including a non-recoupable Cline minimum royalty and initial BRP oil and gas revenue.
- Q2 operating costs fell to $27.6 million from $31.8 million, chiefly as depreciation, depletion and amortization declined. The prior-year comparison included an $8.2 million one-time charge for a terminated lease following a mine closure. First-half interest expense increased to $21.1 million from $18.8 million, in part due to higher-rate notes issued in 2009.
- In April, NRP issued 4.58 million common units at $25.17 per unit. The cash flow statement reports $110.4 million in issuance proceeds; management describes net proceeds of approximately $110.2 million excluding the general partner contribution (approximately $112.5 million including it).
Outlook, commentary and risks
- Management said it believed available liquidity was sufficient for current capital needs. It expected to fund approximately $205 million of remaining Colt reserve purchases over two years, including about $125 million anticipated in Q4 2010 subject to mine-development milestones. NRP expected to use available credit and potentially debt or equity markets; no formal earnings or production guidance was provided.
- In June, NRP formed BRP LLC with International Paper, contributing $42.5 million. NRP controls the venture, holds a 51% income interest, and receives a preferential cumulative annual distribution before profit sharing; International Paper holds 49% after that preference. Acquisition accounting and allocation of acquired assets were not yet final.
- NRP said the Cline Group temporarily idled certain sections of its Gatling, West Virginia mine; a restart date was unknown, although Cline indicated it would continue quarterly minimum payments. Greenfield mine schedules remain uncertain and delays could defer production-based revenue.
- Management cited increasing permitting and regulatory uncertainty in Appalachia, greater MSHA scrutiny and potential compliance costs, and possible adverse effects from future greenhouse-gas regulation on coal demand. Coal-price declines could reduce both economic production and royalties per ton. About 40% of first-half coal royalty revenue was from metallurgical coal; Appalachia represented 63% of total first-half revenue.
- The Cline Group generated 19% of revenue in both Q2 and the first half. Related-party transactions include leases, transportation, processing and minimum royalties. NRP also disclosed $6.6 million in receivables from Cline affiliates.
- A change in intangible-asset amortization beginning April 1 increased Q2 amortization expense by $2.8 million, or approximately $0.04 per unit; management expected the impact to continue but vary with production. Legal matters were described as ordinary-course and not expected to have a material effect; NRP reported no material environmental charges or known contamination requiring remediation.
Important facts for investors to verify
- Whether Colt mine milestones are achieved on schedule and whether the anticipated $205 million commitment, including the expected Q4 payment, is funded without stressing liquidity or distributions.
- Production, realized royalty rates and prices by region, especially the contribution from metallurgical coal and the effect of the Gatling mine idling.
- How much deferred minimum royalty revenue is eventually recouped against production, and how that affects future cash flows and reported revenue.
- BRP’s final purchase-price allocation, operating performance and preferential distribution terms, alongside the effect of the new amortization method on future earnings.
- Debt covenant headroom, scheduled principal payments, refinancing needs, and the sustainability of distributions relative to distributable cash flow, a non-GAAP measure.
- Exposure to Cline and other related parties, including concentration, receivable collection and the terms of related-party arrangements.