Natural Resource Partners L.P. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The partnership owns and leases mineral properties, principally coal reserves, and generally earns royalties from third-party mine operators; it does not operate mines. Financial figures below are in millions of dollars unless otherwise stated. Prior-year figures were restated for certain income-related items.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $94.2 | $103.2 | $276.7 | $284.5 |
| Operating income (loss) | $65.6 | $(17.8) | $194.0 | $106.7 |
| Net income (loss) | $52.0 | $(30.6) | $153.2 | $70.9 |
| Net income per limited partner unit | $0.48 | $(0.28) | $1.42 | $0.66 |
| Net cash from operations | — | — | $193.9 | $218.3 |
| Distributable cash flow (non-GAAP) | $65.1 | $76.4 | $172.1 | $200.4 |
- Q3 operating margin was approximately 69.7%, versus a loss from operations in the prior-year quarter; nine-month operating margin was approximately 70.1%, versus 37.5%. The prior-year periods included a $90.9 million asset impairment, explaining much of the year-over-year improvement in operating income.
- For the first nine months, coal royalties fell 9% to $193.1 million; aggregate royalties were $5.1 million, and oil and gas royalties declined 33% to $6.7 million. Total revenue fell 3%.
- Cash and cash equivalents were $122.4 million at September 30, down from $214.9 million at year-end 2011. Total debt was $939.3 million, including $87.2 million current and $852.0 million long-term. Partners’ capital was $616.8 million.
- Operating cash flow decreased 11% year over year. Investing used $176.7 million, principally for mineral-rights acquisitions and $59.0 million for contracts; financing used $109.7 million, including $181.3 million of partner distributions. The partnership paid $43.1 million of interest in the period.
- Q3 and nine-month revenue less operating costs imply operating margins noted above. Interest expense was $13.7 million for Q3 and $40.8 million for nine months, up from the comparable 2011 periods.
Changes, outlook, and notable items
- Q3 revenue declined 9%, mainly because of lower Central Appalachian coal royalties and weaker oil and gas royalties. Nine-month coal royalties also weakened, particularly in Central Appalachia, partly offset by growth in Southern Appalachia and the Illinois Basin.
- Management cited softer metallurgical coal prices and demand in Q3 and continued weak steam-coal markets, including coal displacement by low-priced natural gas and anticipated effects of power-plant closures. It saw some improvement in steam-coal demand as gas prices rose, but did not expect material improvement in results through year-end.
- Management expected production and revenue from the Deer Run longwall operation to increase substantially over the following year. Oklahoma oil and gas acquisitions were not expected to contribute materially until 2014.
- Nine-month distributable cash flow declined 14%. The partnership paid a $0.55-per-unit distribution in August and declared another $0.55 per unit for payment in November.
- Acquisitions included Deer Run coal reserves, Oklahoma oil and gas interests, and Sugar Camp rail-loadout infrastructure and an overriding royalty. The October 30, 2012 acquisition of a frac-sand overriding royalty for approximately $15 million was subsequent to quarter-end.
- Unusual revenue items included $9.6 million of minimum royalties recognized after Gatling Ohio relinquished recoupment rights, a $4.7 million gain on a preparation-plant sale to related party Taggart, and $3.8 million from a right-of-way sale. The Taggart sale included a $1.8 million note receivable at quarter-end.
- Liquidity included $122 million cash and $197 million available under the $300 million revolving facility at quarter-end; the filing later reports $182 million available as of its filing date. Management said liquidity was adequate and intended to refinance $35 million of notes due in 2013. The partnership reported compliance with debt covenants.
- Key risks include commodity prices and lessee production, regulatory and permitting pressure on coal, and concentration: Alpha Natural Resources and Cline Group each generated 23% of nine-month revenue. Cline affiliates also accounted for $62.9 million due from affiliates, mostly related to Sugar Camp agreements. Variable-rate debt was $103 million at quarter-end.
- The partnership had received a notice of intent to file a citizen suit alleging selenium discharges at a West Virginia property; no suit had been filed as of September 30. Management said that individual matter was not expected to be material, while noting broader similar claims could become material. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether coal prices, lessee production, and Central Appalachian royalty trends improve or deteriorate, and the pace of Deer Run’s production ramp-up.
- Cash generation and distributable cash flow relative to distributions, acquisition spending, debt service, and scheduled principal repayments.
- Refinancing plans for the $35 million 2013 note, covenant headroom, and actual revolving-credit availability.
- Collection and recoupment terms for affiliate receivables, including Sugar Camp obligations, and the extent of related-party transactions and revenue concentration.
- Potential exposure from environmental claims, regulatory actions, and any expansion of landowner-focused litigation.