Natural Resource Partners L.P. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. NRP is a master limited partnership that owns and leases mineral reserves and related infrastructure, but does not operate mines. Its revenues depend on lessee production, commodity prices and lease terms.
Financial and operating metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $377.7 million | $301.4 million |
| Operating income | $104.1 million | $196.1 million |
| Net income | $54.0 million | $154.5 million |
| Net income per limited partner unit | $0.50 | $1.54 |
| Cash from operations | $305.6 million | $258.7 million |
| Distributable cash flow (non-GAAP) | $274.4 million | $227.0 million |
| Cash and cash equivalents at year-end | $214.9 million | $95.5 million |
| Total debt at year-end | $867.1 million | $692.6 million |
| Cash distributions per unit for the year | $2.17 | $2.16 |
- Coal royalties were $279.2 million, up 26%; coal production was 49.2 million tons, up 4%, and average coal royalty revenue rose to $5.68 per ton from $4.71.
- Aggregate royalties were $6.7 million on 5.9 million tons of production. Oil and gas royalties were $14.0 million, up 82%, primarily reflecting a full year of BRP properties.
- Processing and transportation fees were $13.5 million and $16.7 million, respectively. These, along with other revenue, supplemented the coal royalty business.
- Operating margin was approximately 27.6% in 2011 versus 65.1% in 2010; net margin was approximately 14.3% versus 51.3%. These are calculated from reported figures and were heavily affected by 2011 impairments.
- Operating, investing and financing cash flows were $305.6 million, negative $115.1 million and negative $71.1 million, respectively. NRP reported $274.4 million of distributable cash flow, a non-GAAP measure defined after scheduled principal payments and reserves for future principal payments.
- NRP had no outstanding balance on its $300 million revolving credit facility at year-end; it was fully available and matures in August 2016. Management reported compliance with debt covenants. The filing says there were no variable-rate borrowings at year-end.
Material changes versus the prior year
- Revenue increased 25%, led by higher coal royalty revenue, stronger royalty rates and production in Central Appalachia and the Illinois Basin, and increased oil and gas royalties.
- Net income fell 65% despite revenue growth. NRP recorded $161.3 million of asset impairment charges in 2011, versus none in 2010, and interest expense rose to $49.2 million from $41.6 million.
- The impairments related to Gatling West Virginia ($90.9 million net) and Gatling Ohio ($70.4 million). Both mines were idled, and NRP concluded their carrying values would not be recovered. Management characterized these charges as non-cash and not expected to materially affect future operating cash flow or distributable cash flow.
- Debt increased by approximately $174.5 million year over year, including issuance of $300 million in senior notes, partly offset by repayments. Cash rose by approximately $119.4 million.
- Quarterly distributions increased from $0.54 per unit to $0.55 in the second half of 2011. Fourth-quarter 2011 revenue was $90.7 million, but NRP reported an operating loss of $5.1 million and net loss of $19.4 million, including the Gatling Ohio impairment.
- Quarterly 2011 figures were adjusted for identified revenue and reserve-exchange accounting items. The filing says these adjustments were non-cash; review the quarterly reconciliation for period-by-period effects.
Outlook, risks and unusual items
- Management described substantial uncertainty entering 2012: very low natural-gas prices were displacing coal in power generation; unseasonably warm weather reduced demand; coal-fired plant closures related to air-quality rules could weigh on demand; and weaker European and steel-market conditions affected metallurgical coal. Lessees entered 2012 with significant metallurgical coal unpriced.
- Management expected continued growth in aggregates and oil and gas royalties from acquisitions and assets moving out of development, but did not provide a clear quantified 2012 revenue or earnings forecast in the supplied filing text. Some Illinois mine developments may take years to reach full production; minimum royalties provide cash but may remain deferred revenue until recouped or the recoupment period expires.
- Customer concentration is material: Alpha Natural Resources generated 28.4% of 2011 revenue and the Cline Group 17.2%; Cline’s Williamson mine alone accounted for about 12%. The loss or disruption of major lessees or mines could materially affect royalties and distributions.
- Key sector risks include coal and metallurgical coal price declines, natural-gas substitution, environmental and greenhouse-gas regulation, permitting delays, mine safety enforcement, production interruptions, transportation constraints and lessee financial or operational problems. NRP generally places operating, labor and reclamation obligations on lessees, but acknowledges potential residual environmental exposure as a property owner.
- Debt obligations include $30.8 million of scheduled principal payments in 2012 and $87.2 million in 2013; management noted that annual payments increase significantly beginning in 2013. The filing lists $80 million of pending Colt acquisition obligations as of year-end, subject to construction milestones. Subsequent to year-end, NRP completed a $40 million Colt acquisition and made additional Oklahoma oil and gas acquisitions.
- The filing reports ordinary-course legal proceedings that management did not expect to materially affect financial position, liquidity or operations. The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Important facts for investors to verify
- Whether the 2011 Gatling impairments fully reflect the recoverable value and future royalty potential of those assets, and whether either mine resumes operations or is sold.
- Current production, pricing and contract coverage for metallurgical and steam coal, particularly given management’s stated 2012 market uncertainty and lessee unpriced volumes.
- Exposure to Alpha, Cline and the Williamson mine, including receivable collection, minimum-royalty recoupment terms and related-party transaction terms.
- Debt amortization, liquidity after subsequent acquisitions, covenant headroom and the cash available to support distributions as principal payments rise.
- Whether Colt acquisition milestones are met and whether new Illinois projects and acquired oil, gas and aggregate properties achieve expected production and returns.
- Changes in permitting, air-quality and water regulation, and the status and financial consequences of relevant litigation or regulatory actions.