Natural Resource Partners L.P. — Q2 2012 Form 10-Q
Business and period: Mineral-rights owner and lessor; it does not operate mines. Reports the three and six months ended June 30, 2012, compared with 2011 (prior-year figures were restated for certain income items). Amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Revenue | $90.7 | $96.5 | $182.5 | $181.4 |
| Operating income | $63.5 | $68.7 | $128.3 | $124.5 |
| Net income | $49.9 | $56.2 | $101.2 | $101.5 |
| Net income per limited partner unit | $0.46 | $0.52 | $0.94 | $0.94 |
| Operating margin | 70.0% | 71.1% | 70.3% | 68.6% |
| Net margin | 55.1% | 58.2% | 55.5% | 56.0% |
- Revenue mix and trends: Q2 coal royalties fell 12% to $62.9 million; H1 fell 10% to $122.8 million. H1 coal production was nearly flat at 24.1 million tons, while the average gross coal royalty per ton declined 11% to $5.10. Weak steam-coal demand, low natural-gas prices, lower Appalachian royalties, and mine idling weighed on results; Illinois Basin royalties grew. H1 aggregate royalties increased 17% to $3.4 million, and oil and gas royalties increased 10% to $5.5 million.
- Cash flow: H1 cash from operations was $132.0 million, down from $138.7 million. Investing used $152.8 million, including acquisitions; financing used $72.2 million, including $121.6 million of partner distributions. Cash declined $92.9 million to $122.0 million.
- Distributable cash flow: Management’s non-GAAP measure was $70.7 million for Q2 and $107.1 million for H1, down from $84.9 million and $124.0 million, respectively. The partnership paid a $0.55-per-unit quarterly distribution in May and declared another $0.55 distribution for August.
- Liquidity and debt: June 30 cash was $122.0 million; the $300 million revolving facility had $73 million drawn and $227 million available. Total debt was $917.0 million, including $87.2 million classified as current. The $35 million 5.55% note matures in 2013; management said it intends to refinance it. The partnership reported compliance with debt covenants.
- Balance sheet: Total assets were $1.694 billion and partners’ capital was $624.6 million. Current assets were $168.4 million versus current liabilities of $113.9 million.
Material changes and significant transactions
- Q2 revenue declined 6.1% and net income declined 11.1% year over year; H1 revenue was slightly higher, while net income was slightly lower. H1 interest expense rose to $27.1 million from $23.0 million, reflecting prior-year note issuance and 2012 revolver borrowings.
- Acquisitions included approximately $51.3 million of Oklahoma oil-and-gas mineral rights in H1, Sugar Camp rail-loadout infrastructure for $50 million, and an $8.9 million Sugar Camp overriding royalty. The Sugar Camp lease provides for quarterly recoupable minimum payments of $1.25 million.
- NRP had acquired about 118.1 million of the approximately 200 million tons covered by the Colt coal-reserve agreement. A further purchase of more than 75 million tons for $40 million was expected in Q3 2012 upon completion of a mine milestone.
Outlook, risks, and unusual items
- Management expected further growth in oil-and-gas royalties as drilling develops on the Oklahoma properties and anticipated growth in aggregate royalties from acquisitions and properties moving out of development. The filing provides no quantified earnings or revenue guidance.
- Management described soft steam-coal markets, utility stockpiles, coal-to-gas displacement, planned coal-plant closures, and regulatory permitting and mine-safety scrutiny as pressures on production, mine development, and lessee costs. Coal-price declines could reduce both production and per-ton royalties.
- Alpha Natural Resources and the Cline Group each represented more than 10% of revenue in Q2; together they accounted for over 48% of H1 revenue. Cline affiliates are related parties. NRP reported $66.8 million due from Cline affiliates, including $58.1 million tied to Sugar Camp agreements.
- H1 included $9.6 million of minimum royalties recognized after Gatling Ohio relinquished recoupment rights, approximately $2.5 million of oil-and-gas lease bonuses, and $3.8 million of revenue from selling a right-of-way; cash for the right-of-way was expected in Q3.
- NRP received a Notice of Intent to File a Citizen Suit concerning alleged selenium discharges at a West Virginia property. Management said the specific matter was not material, but warned broader or unsuccessful claims could become material. Management considered ordinary-course legal claims not material.
- Other risks include variable-rate exposure on $73 million of revolver borrowings, environmental liability as a property owner, and dependence on lessees’ production and marketing. No material changes to previously reported risk factors were disclosed.
Investor verification priorities
- Confirm the timing and funding of the expected $40 million Colt payment and the mine milestone.
- Assess refinancing plans for the $35 million note due in 2013 and upcoming scheduled principal payments.
- Review the collectability, terms, and related-party nature of amounts due from Cline affiliates, including Sugar Camp receivables.
- Track coal production, realized royalty rates, lessee concentration, and the effect of weak steam-coal demand.
- Evaluate distributable cash flow against distributions and the unusual revenue items recognized in H1.
- Monitor the selenium claim and potential environmental, permitting, and regulatory developments.