NRP

Business Context and Reporting Period

Company: Natural Resource Partners L.P. (NRP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: NRP is a master limited partnership formed in 2002 to own and manage coal royalty properties in Appalachia, the Illinois Basin, and the Western United States. The Partnership does not operate mines but leases coal reserves to third-party operators in exchange for royalty payments. As of September 30, 2003, the Partnership held 49 properties subject to 107 leases with 46 lessees.

Key Financial Metrics (Nine Months Ended Sept 30, 2003)

Production Data: 33.4 million tons of coal produced. Average gross royalty per ton was $1.66.

Material Changes vs. Prior Period

• Revenue Growth: Coal royalty revenues increased 57% to $55.4 million for the nine months ended Sept 30, 2003, compared to $35.2 million in the same period of 2002. This was driven by a 55% increase in production (33.4 million tons vs. 21.6 million tons).
• Acquisitions: The increase is largely attributable to acquisitions completed in 2003, including properties from Alpha Natural Resources (Feb/April) and PinnOak Resources (July, 78 million tons for $58 million).
• Debt Structure: Long-term debt increased significantly from $57.5 million (Dec 31, 2002) to $173.65 million (Sept 30, 2003) due to the issuance of $175 million in senior notes to fund acquisitions and repay revolving credit facilities.
• Operating Expenses: Total operating expenses rose to $30.7 million, primarily due to higher depletion and amortization ($19.0 million) reflecting increased production and new assets.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Distributions: On October 23, 2003, the Partnership declared a quarterly distribution of $0.5375 per unit, an increase of $0.015 over the previous quarter, equating to an annualized rate of $2.15 per unit.
• Liquidity: Management believes cash from operations and the $175 million revolving credit facility (with $8 million outstanding) are sufficient for working capital and future acquisitions.
• Market Conditions: Revenue is increasingly affected by spot market prices as long-term coal supply contracts become less common. Approximately 23% of revenue comes from metallurgical coal, which is priced higher but carries specific market risks.

Risks and Contingencies:

• Operational Disruption: The Pinnacle mine in West Virginia was idled in early September due to a ventilation disruption (likely a lightning strike). While the impact on Q3 was minimal due to inventory shipments, the estimated Q4 royalty of $1.6 million is at risk until the mine reopens.
• Concentration Risk: The Partnership relies on a limited number of lessees. Four major lessees accounted for approximately 47% of total revenues for the nine months ended Sept 30, 2003.
• Environmental Liability: While lessees are responsible for reclamation and environmental compliance, NRP retains some surface liability. An environmental indemnity from predecessors is capped at $10 million until October 2005.
• Interest Rate Risk: NRP has variable rate debt under its revolving credit facility. A 100 basis point increase in LIBOR would increase annual interest expense by approximately $80,000.

Investor Verification Checklist

• Acquisition Integration: Verify the production ramp-up and royalty realization from the PinnOak and Alpha Natural Resources acquisitions to ensure they meet projected cash flows.
• Pinnacle Mine Status: Monitor the timeline for the reopening of the Pinnacle mine in West Virginia to assess the risk to Q4 and 2004 royalty estimates.
• Debt Covenants: Review the leverage ratio covenant (increased to 3.50 to 1.00) and ensure compliance given the significant increase in long-term debt.
• Lessee Concentration: Assess the financial health and production stability of the top four lessees, who generate nearly half of the Partnership's revenue.
• Coal Price Volatility: Evaluate the exposure to spot market pricing as long-term contracts expire, particularly for metallurgical coal.