Natural Resource Partners L.P. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Financial amounts below are in millions of dollars unless noted. The partnership owns and leases U.S. mineral reserves, principally coal, to independent mine operators; it does not operate mines.
Financial results and liquidity
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $80.8 | $64.0 | $223.9 | $190.2 |
| Operating income | $50.3 | $41.4 | $143.2 | $110.5 |
| Net income | $40.2 | $30.7 | $112.0 | $81.2 |
| Net income per limited partner unit | $0.51 | $0.36 | $1.14 | $0.77 |
| Operating cash flow | $62.1 | $38.1 | $175.7 | $138.8 |
| Distributable cash flow (non-GAAP) | $54.2 | $30.1 | $151.8 | $114.6 |
- For the quarter, revenue grew 26%, operating income 22%, and net income 31% year over year. Nine-month revenue rose 18% and net income rose 38%. Operating margin was approximately 62% for the quarter and 64% for the nine months; net margin was about 50% for both periods.
- Nine-month capital investment was $114.7 million, mainly for mineral rights and equipment. Financing cash outflow was $71.4 million, including $151.4 million of partner distributions. Cash decreased $10.4 million from year-end 2009 to $72.2 million.
- At September 30, total debt was $637.6 million, including $31.5 million current debt, versus $658.8 million at December 31, 2009. The $300 million revolver had $39 million drawn and $261 million available at quarter-end. Management reported compliance with debt covenants. Current assets were $109.3 million and current liabilities $48.4 million.
- Deferred revenue increased to $96.3 million from $67.0 million at year-end, primarily from Cline minimum royalties not yet recouped through production. These payments provide cash when received but may not be recognized as revenue until recouped or the applicable period expires.
Changes and significant transactions
- Coal royalties rose 11% for the first nine months, despite coal production declining 2%; the average gross royalty per ton increased 13%. Higher realized prices, royalty rates, and metallurgical-coal mix supported results. Aggregate royalties were nearly flat, while aggregate production fell 10% and the prior-year bonus adjustment reduced reported revenue.
- On September 20, the partnership eliminated its incentive distribution rights by issuing 32 million common units to the holders. The general partner retained its 2% interest; 106.0 million common units were outstanding at September 30. Management said the transaction is expected to dilute near-term cash available for distribution but may improve the cost of capital and support future growth.
- In June, NRP formed BRP LLC with International Paper, contributing $42.5 million and taking control with a 51% income interest plus a preferential cumulative distribution; International Paper received a 49% income interest after that preference. Purchase-price allocation remained incomplete at quarter-end.
- On October 4, after quarter-end, NRP paid $55 million using its credit facility for about 27.4 million additional Colt coal-reserve tons. The Colt agreement contemplated further purchases, with approximately $150 million expected over the next two years; about $70 million was anticipated in Q1 2011, subject to development milestones.
Outlook, commentary, and risks
- Management said steam and metallurgical coal prices were above its Q3 forecast and expected metallurgical-coal prices to remain steady for the rest of 2010. It cited a recovery in global activity and steel demand as supportive. No quantified earnings or distribution guidance was provided.
- NRP stated it expected available liquidity and financing sources to meet current capital needs, including planned Colt purchases. It anticipated using revolver capacity and potentially debt or equity issuance. The revolver matures in March 2012; scheduled annual principal payments rise materially beginning in 2013.
- Management highlighted permitting delays and higher compliance costs from EPA and MSHA oversight, potential mine-development delays, and possible future greenhouse-gas regulation that could reduce coal demand. Commodity-price declines could lower production, royalty rates, and reserve values; variable-rate borrowings create interest-rate exposure.
- The Gatling, West Virginia mine had not restarted by quarter-end. Cline continued minimum payments while pursuing revised coal-sale terms and other buyers. If operations do not resume or sales arrangements fail, NRP may record an impairment, which management said could materially affect earnings but not operating cash flow or distributable cash flow.
- NRP may be required to acquire more than 171 million Colt reserve tons for an aggregate $205 million as milestones are met. Management reported no material environmental charges or contamination known to require remediation, and believed ordinary-course legal proceedings would not materially affect the partnership.
- A change in intangible-asset amortization increased expense by $2.9 million in Q3 and $5.9 million for nine months, or approximately $0.04 and $0.08 per unit, respectively; management expected the effect to continue, varying with production. Q3 G&A also included $2.2 million of BRP transaction costs.
Key facts for investors to verify
- Progress and funding requirements for Colt mine milestones, including the expected Q1 2011 payment, and the economics of subsequent reserve acquisitions.
- Whether Gatling resumes production or requires an impairment, and whether Cline’s minimum payments remain collectible and recoupable.
- Deferred-revenue recoupment, related future cash-flow effects, and the concentration of Cline-related revenue: 20% of nine-month revenue, with $7.3 million receivable from Cline affiliates at quarter-end.
- Effects of the IDR elimination and 32 million-unit issuance on per-unit distributions, dilution, and future financing costs; the declared post-quarter distribution remained $0.54 per unit.
- Debt covenant headroom, refinancing and amortization needs, and exposure to coal-market, permitting, regulatory, and interest-rate changes.