Natural Resource Partners L.P. — Q1 2011 Form 10-Q
Business context and reporting period. The filing covers the unaudited three months ended March 31, 2011, compared with Q1 2010. NRP owns and leases U.S. coal, aggregate and other mineral properties, and earns royalties and related fees; it does not operate mines. Results depend substantially on lessee production, commodity prices and market demand.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $84.9 million | $63.5 million | +33.6% |
| Operating income | $55.9 million | $40.9 million | +36.5% |
| Net income | $45.3 million | $30.2 million | +50.0% |
| Net income per limited partner unit, basic and diluted | $0.42 | $0.24 | +75.0% |
| Net cash provided by operating activities | $47.0 million | $41.9 million | +12.3% |
| Distributable cash flow (non-GAAP) | $39.0 million | $33.8 million | +15.2% |
- Operating margin was approximately 65.8%, compared with 64.4%; net margin was approximately 53.4%, compared with 47.5%.
- Coal royalties were $65.4 million, up 38.6%; aggregate royalties were $1.2 million, up 46%. Coal production was 11.9 million tons, up 11%, and aggregate production was 1.3 million tons, up 109%.
- Management attributed stronger coal royalties mainly to higher metallurgical coal prices and improved royalty rates in Central Appalachia, plus higher Illinois Basin production. Metallurgical coal accounted for about 42% of coal royalties and 34% of related production.
- Operating costs and expenses rose to $29.0 million from $22.6 million. Depreciation, depletion and amortization increased to $14.3 million from $11.4 million; general and administrative expense rose to $10.2 million from $6.5 million, primarily due to incentive-plan accruals, additional employees and BRP costs. Interest expense was broadly unchanged at $10.6 million.
- Investing cash outflow was $84.9 million, mainly for acquisitions of mineral rights; financing cash inflow was $11.4 million. Cash declined by $26.5 million to $69.0 million. Distributions paid were $58.4 million.
- At March 31, cash was $69.0 million, total debt was $762.4 million (including $179.0 million drawn on the revolving facility), and working capital was approximately $57.4 million. The $300 million facility had $121 million of availability. NRP reported compliance with debt covenants.
Material changes and notable transactions
- Compared with Q1 2010, higher royalty revenue and production were partly offset by higher depletion, amortization and G&A. Per-unit earnings comparisons also reflect a larger unit count: weighted-average units were 106.0 million versus 69.5 million, following the 2010 issuance of 32 million units in exchange for eliminating incentive distribution rights.
- NRP acquired limestone properties in Tennessee for $4.7 million and Kentucky for $16.0 million, with portions payable upon milestones. In Q1, it also paid $70.0 million toward the Colt coal-reserve acquisition. The filing describes potential further Colt purchases of more than 100 million tons for $80.0 million over the following year, subject to mine-development milestones.
- After quarter-end, NRP completed a $200 million private placement of senior notes and planned further closings for another $100 million later in 2011. Proceeds repaid the $179 million revolver balance; management said the full $300 million facility was then available. The new notes mature in 2023 and 2026, with stated rates of 4.73%–5.18% across the tranches.
- The partnership paid a quarterly distribution of $0.54 per unit in February and declared another $0.54 per unit for payment in May 2011.
Outlook, risks and contingencies
- Management stated that available liquidity was sufficient for current capital needs and expected to fund the Colt purchase and other acquisitions through the revolver and/or capital markets. No numerical earnings or production guidance was provided.
- Management expected to benefit from strong metallurgical coal demand if the global economy and steel demand continued to recover. However, Appalachian coal permitting delays, increased regulatory scrutiny and mine-safety enforcement could raise lessee costs and delay development.
- NRP identified significant customer concentration: Cline, Massey and Alpha together generated more than 46% of Q1 revenue. Cline’s Williamson mine alone contributed approximately 11%; a pending Alpha–Massey merger could concentrate revenue among fewer lessees.
- The Gatling mine had been idled since April 2010. Cline continued minimum payments and discussions over its coal sales contract, but NRP warned that a prolonged shutdown or unsuccessful sales discussions could lead to impairment of assets with a $131.6 million carrying value. The filing stated that its current undiscounted cash-flow analysis supported the carrying value.
- Minimum royalties can provide cash before they qualify as revenue because they may be recoupable against future production. Delayed mine development could therefore affect reported revenue. Commodity-price declines could reduce production, royalties and reserve values; variable-rate debt also creates interest-rate exposure.
- NRP reported no material environmental charges or known contamination requiring remediation, and management believed ordinary-course legal proceedings would not materially affect the partnership. Environmental liability remains a risk because NRP owns surface interests, despite lease indemnities and lessee reclamation bonds.
Important facts for investors to verify
- Whether metallurgical coal prices, lessee production and royalty rates remain strong, and whether the reported production growth is sustainable.
- Lessee concentration and the financial and operational condition of Cline, Massey and Alpha, including the implications of the proposed Alpha–Massey merger.
- Gatling’s restart or contract outcome, minimum-payment coverage and any subsequent impairment assessment.
- Completion, timing and funding of Colt milestones and the additional $80 million purchase commitment, along with the final costs and returns of recent acquisitions.
- Post-quarter debt issuance and revolver repayment, future debt maturities, covenant headroom and liquidity after planned acquisitions and distributions.
- Whether distributable cash flow supports distributions: Q1 DCF was $39.0 million versus $58.4 million of distributions paid. DCF is a non-GAAP measure and should be assessed alongside operating cash flow and capital needs.
- Final valuation of BRP assets and related non-controlling interests; the acquisition accounting was preliminary at quarter-end.