Natural Resource Partners L.P. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 8, 2011. NRP owns and leases U.S. coal, aggregate and other mineral properties, and earns royalties and fees; it does not operate mines.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $103.8 million | $80.8 million | $280.0 million | $223.9 million |
| Operating income (loss) | $(16.5) million | $50.3 million | $104.2 million | $143.2 million |
| Net income (loss) | $(29.3) million | $40.2 million | $68.3 million | $112.0 million |
| Net income (loss) per limited partner unit | $(0.27) | $0.51 | $0.63 | $1.14 |
| Cash from operating activities | $79.6 million | $62.1 million | $218.3 million | $175.7 million |
| Distributable cash flow (non-GAAP) | $71.9 million | $54.2 million | $194.9 million | $151.8 million |
- Nine-month revenue rose 25.1%, led by coal royalties, which increased 28% to $211.6 million. Oil and gas royalties increased to $10.0 million from $4.2 million, primarily reflecting the BRP acquisition; aggregate royalties rose to $5.1 million from $2.8 million.
- Derived operating margin was approximately negative 15.9% in Q3, versus 62.3% a year earlier, and 37.2% for the first nine months, versus 64.0%. The quarterly reversal chiefly reflects the impairment discussed below.
- Nine-month operating cash flow increased 24% and distributable cash flow increased 28%. Investing activities used $102.3 million, primarily for mineral acquisitions; financing activities used $61.4 million, including $175.3 million in partner distributions.
- At September 30, cash was $150.1 million, current assets $197.4 million and current liabilities $53.7 million. Total debt was $817.1 million, including $30.8 million current debt; long-term debt was $786.3 million. NRP reported no revolver borrowings and $300 million of available capacity. It was in compliance with debt covenants.
Material changes and significant items
- Q3 revenue increased 28.5%, but NRP recorded a $90.9 million net asset impairment associated with its Gatling West Virginia property. This contributed to the quarterly operating and net losses. Management described the impairment as non-cash and not expected to materially affect future revenue or distributable cash flow.
- Gatling advised in October that it no longer projected production from the West Virginia mine for the foreseeable future. The lease was amended: $24.1 million of existing minimum royalties became non-recoupable, Gatling agreed to pay $3.4 million of additional non-recoupable minimums over the next two quarters, and minimums will be reduced after Q1 2012.
- Debt rose from $692.6 million at year-end 2010 to $817.1 million at September 30. NRP issued $250 million of senior notes during the first half of 2011, using proceeds in part to repay its revolver. It issued a further $50 million of notes on October 3, 2011; reported debt after that issuance was approximately $867 million. The amended $300 million revolver matures in August 2016 and includes a potential accordion to $500 million, subject to lender participation.
- NRP acquired additional mineral interests during 2011, including frac-sand, limestone, and coal interests. It may also be required to acquire more than 100 million tons of Colt coal reserves for $80 million over the following year as mine-construction milestones are completed. Management said the Hillsboro acquisition was then expected to close in the first half of 2012.
- Quarterly distributions were $0.54 per unit, paid in August. A $0.55 per-unit distribution was declared in October for payment in November.
Outlook, commentary and risks
- Management cited high metallurgical coal prices as a major contributor to improved royalty results, particularly in Central Appalachia, while noting that the market softened slightly in Q3. Metallurgical coal represented about 45% of nine-month coal royalty revenue.
- Management did not provide a clear quantified company-wide forward guidance figure in the supplied filing text. It stated that 2011 guidance had not included production or revenue from the Gatling West Virginia property.
- Management said cash on hand and revolver availability were sufficient for current capital needs. It also noted that principal payments increase significantly beginning in 2013, while asserting no expected need to access capital markets to refinance senior notes other than the $35 million note due in 2013.
- Gatling Ohio faced adverse geology and declining productivity. NRP said the mine represented less than 1% of current and future revenue, but warned that cessation of operations or new information could lead to a material impairment charge. The filing reported the assets’ carrying value at $93.6 million.
- Revenue concentration is significant: Alpha Natural Resources accounted for 29% and the Cline Group 17% of nine-month revenue, together more than 46%. The Williamson mine alone accounted for approximately 11%. NRP also disclosed related-party dealings with Cline affiliates, including $10.7 million in receivables and $43.0 million of unrecouped minimum royalty payments received to date.
- Other risks include coal commodity prices and production, delays and costs from environmental and mine-safety regulation, and timing of new mine development and acquisitions. NRP reported no material environmental charges or contamination requiring remediation known to it, and management did not expect ordinary-course legal proceedings to have a material effect.
Important facts for investors to verify
- Whether the Gatling West Virginia lease amendment and scheduled minimum payments are collected as agreed, and whether Gatling Ohio operating conditions worsen or trigger an impairment.
- How much of revenue and cash flow remains dependent on Alpha, Cline affiliates and the Williamson mine, and how lessee concentration may affect distributions.
- Acquisition funding and completion milestones, including the Colt commitment and expected Hillsboro timing, against available cash, revolver capacity and debt maturities.
- Whether distributable cash flow, a non-GAAP measure defined by NRP, continues to cover quarterly distributions; Q3 and nine-month 2011 figures were $71.9 million and $194.9 million, respectively.
- Debt covenant headroom and the effect of higher interest expense: nine-month interest expense increased to $35.8 million from $31.3 million, largely due to new senior notes issued at higher rates than the revolver.