Natural Resource Partners L.P. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; compared with the three months ended March 31, 2011. Balance-sheet comparisons are with December 31, 2011. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.
Business context
NRP owns and leases coal, aggregate, oil and gas, and other mineral interests, and owns certain processing and transportation assets. It generally does not operate mines; revenue depends substantially on lessees’ production, marketing and payments under long-term leases. At year-end 2011, NRP reported approximately 2.3 billion tons of proven and probable coal reserves and approximately 380 million tons of aggregate reserves.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $91.9 million | $84.9 million; up 8.3% |
| Operating income | $64.8 million | $55.9 million |
| Operating margin | 70.6% | 65.8% |
| Net income | $51.3 million | $45.3 million |
| Net margin | 55.9% | 53.4% |
| Net income per limited partner unit | $0.47 | $0.42 |
| Cash provided by operations | $49.5 million | $47.0 million |
| Distributable cash flow, a non-GAAP measure | $36.4 million | $39.0 million |
| Cash and cash equivalents | $107.4 million | $214.9 million at Dec. 31, 2011 |
| Total debt | $898.9 million | $867.1 million at Dec. 31, 2011 |
Q1 revenue included $59.9 million of coal royalties, $1.7 million of aggregate royalties, $1.4 million of oil and gas royalties, and $11.7 million of minimums recognized as revenue. The company reported approximately 13.5 million tons of coal and aggregate production. Interest expense was $13.6 million, compared with $10.6 million in Q1 2011. Operating costs and expenses were $27.0 million, versus $29.0 million.
At March 31, NRP had $47.0 million drawn on its $300 million revolving facility and reported $253 million of available capacity. Total current liabilities were $74.8 million, including $52.2 million of current debt. The filing states that NRP complied with its debt covenants. The partnership paid a quarterly distribution of $0.55 per unit in February and declared another $0.55 per unit for payment in May.
Material changes and notable items
- Coal royalty revenue fell 8% to $59.9 million, while coal production rose 1% to 12.1 million tons. The combined average gross coal royalty per ton declined 10% to $4.95.
- Aggregate royalty revenue increased 44% to $1.7 million, reflecting acquired properties, higher production and higher royalty rates. Oil and gas royalties declined 54% to $1.4 million, primarily due to lower natural gas prices and the absence of a prior-year lease bonus.
- Revenue rose despite lower coal royalties, supported in part by minimums recognized as revenue. Of $11.7 million recognized, $9.6 million followed Gatling Ohio’s relinquishment of recoupment rights.
- In March, NRP acquired Sugar Camp rail-loadout and infrastructure assets and a contractual overriding royalty interest for $58.9 million. The rail-loadout consideration included a $39.9 million transportation-contract asset; the separate $8.9 million overriding royalty was recorded as a financing arrangement.
- NRP had acquired approximately 118.1 million tons of the planned 200 million Deer Run reserves for about $215 million. The filing anticipated a final closing in Q3 2012, subject to project milestones, and disclosed a potential additional $40 million purchase obligation for more than 75 million tons.
- From December 2011 through April 2012, NRP acquired approximately 16,800 net mineral acres in Oklahoma for about $56 million; an additional 5,600 acres for $18.6 million were acquired after quarter-end.
- Cash declined by $107.5 million during the quarter. Investing outflows were $126.7 million, including mineral-rights acquisitions, plant and equipment, and the affiliate contract acquisition; financing outflows were $30.3 million, including $62.1 million of partner distributions.
Outlook, risks and contingencies
Management said it believed cash on hand and available credit were sufficient for current financial needs. It expected further growth in aggregate and oil and gas royalties during 2012 from acquisitions and properties emerging from development, and anticipated the Deer Run/Hillsboro-related final payment when specified mine milestones were completed. The filing provides no quantified earnings or revenue guidance. Management cautioned that mine-development timing is difficult to forecast and that delays can affect recognized revenue, particularly where minimum royalties remain subject to recoupment.
Management described metallurgical coal demand and pricing as relatively strong, while steam coal markets were weak amid low natural-gas prices, a warm winter, utility stockpiles and announced coal-plant closures. Regulatory uncertainty, permitting delays, environmental rules and increased mine-safety oversight may raise lessee costs or delay mine development, affecting production and royalty income. NRP also identified coal-price and interest-rate exposure; $47 million of quarter-end debt was variable-rate. Two lessees, Alpha Natural Resources and the Cline Group, generated 52% of Q1 revenue; the Cline Group’s Williamson mine alone represented approximately 11%.
NRP disclosed ordinary-course legal proceedings that management did not expect to have a material effect. It reported no material environmental charges or known contamination requiring remediation as of March 31, while noting possible environmental liability as a surface-interest owner. Related-party dealings include affiliate expense reimbursements, leases and substantial revenues and receivables involving Cline affiliates. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lessee production, coal prices and royalty revenue—especially from Alpha and Cline-related operations—remain resilient given market and regulatory pressures.
- The timing, milestone conditions and funding for the remaining Deer Run reserve acquisition and other announced mineral acquisitions.
- The sustainability and recoupability of minimum royalties, including the effect of Gatling Ohio’s relinquished recoupment rights on reported revenue.
- Debt amortization and refinancing needs, covenant headroom, variable-rate exposure, and the ability to fund acquisitions while maintaining distributions.
- The terms and economics of the Sugar Camp transportation contract and overriding royalty, including the recoverability of the recorded contract asset and financing arrangement.
- Related-party balances and transactions, and the effect of revenue concentration and potential environmental or mine-permitting developments.