NRP

Business Context and Reporting Period

Company: Natural Resource Partners L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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. It also owns coal transportation infrastructure, aggregate reserves, and oil and gas properties.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 4.2% to $66.7 million, driven primarily by a 7% increase in coal royalties ($52.6 million) despite a 14% decline in total production volume (12.5 million tons). Royalties per ton increased 24% to $4.21 due to higher contract prices.
• Regional Performance: Illinois Basin revenues surged 61% due to increased production and pricing. Conversely, Northern Powder River Basin revenues fell 27% due to ownership variations and a temporary labor stoppage.
• Expense Increases: General and administrative expenses rose significantly to $7.5 million (from $4.1 million) primarily due to accruals under the long-term incentive plan linked to unit price fluctuations. Interest expense increased to $8.1 million due to new debt financing for acquisitions.
• Capital Structure: Total debt increased by approximately $152 million. In March 2009, the company issued $200 million in senior notes ($150 million at 8.38% and $50 million at 8.92%) to pay down the revolving credit facility and fund the Macoupin acquisition.
• Acquisitions: Significant investing cash outflows of $96.8 million occurred, primarily for the acquisition of coal reserves and infrastructure (including the Macoupin Energy acquisition for $143.7 million).

Guidance, Outlook, and Risks

• Market Conditions: Management notes that commodity prices, including coal, have declined. While royalties per ton have increased due to contract rollovers, production volumes have been reduced by the difficult economic environment and low natural gas prices.
• Liquidity: The company maintains $101 million in cash and a fully available $300 million revolving credit facility. However, management cautions that access to capital markets may be severely restricted due to the global financial crisis, potentially limiting future acquisitions.
• Regulatory Risks: Increased EPA involvement in the Section 404 permitting process in Appalachia has created uncertainty and delays. Adverse outcomes could negatively impact future coal mining and royalty revenues in the region.
• Metallurgical Coal Exposure: Approximately 32% of coal royalty revenues are from metallurgical coal. The global reduction in steel demand has caused temporary production cessations at several mines, though management believes prices have bottomed.
• Distributions: A distribution of $0.54 per unit was declared for Q1 2009, payable May 14, 2009.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the 3.75:1 leverage ratio covenant, noting the 2% penalty interest clause if exceeded.
• Production Volumes: Monitor the trend of declining production volumes in Appalachia and the Powder River Basin against rising royalty rates.
• Related Party Transactions: Review the $20 million payable to Macoupin Energy (Cline affiliate) and the $10.5 million in unrecouped advance minimum royalties from Cline affiliates (Williamson and Gatling).
• Regulatory Permitting: Track the status of Section 404 permits in West Virginia and Kentucky, as delays could materially affect Appalachian revenue.
• Capital Market Access: Assess the company's ability to refinance or raise new capital given the stated restrictions in the current financial market environment.