Natural Resource Partners L.P. — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019. NRP owns and leases U.S. mineral properties, principally coal, and holds a 49% non-controlling interest in Ciner Wyoming, a soda ash producer. The December 2018 sale of its construction aggregates business is reflected as discontinued operations; comparisons are recast accordingly.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue and other income | $67.0 million | $60.1 million |
| Income from operations | $49.9 million | $44.2 million |
| Net income from continuing operations | $35.8 million | $26.3 million |
| Net income | $35.7 million | $24.3 million |
| Net income attributable to common unitholders | $27.7 million | $16.5 million |
| Basic / diluted net income per common unit | $2.26 / $1.75 | $1.35 / $1.08 |
| Net cash from operating activities | $23.0 million | $19.8 million |
| Adjusted EBITDA (non-GAAP) | $52.4 million | $52.2 million |
| Distributable cash flow / free cash flow (non-GAAP) | $23.1 million / $23.3 million | $20.7 million / $20.0 million |
| Cash and cash equivalents | $112.4 million | $101.8 million at Dec. 31, 2018 |
| Restricted cash | $17.3 million | $104.2 million at Dec. 31, 2018 |
| Total debt, net | $587.7 million | $672.8 million at Dec. 31, 2018 |
NRP reported total liquidity of $229.7 million at quarter-end, including cash, restricted cash and $100 million of unused revolving-credit capacity. Operating margin, calculated as operating income divided by revenue and other income, was approximately 74.5%, versus 73.6% a year earlier. The partnership declared and paid a $0.45-per-unit common distribution for the prior quarter and paid $7.5 million of preferred distributions during Q1.
Material changes versus the prior comparable period
- Revenue and other income rose 11%. Coal Royalty and Other revenue increased 10%, while Soda Ash equity earnings increased 21% to $11.7 million.
- Total coal production fell 4% to 6.0 million tons, but average coal royalty revenue per ton increased 9%; coal royalty revenue rose 4%. NRP attributed regional production movements to mine timing, lease terminations and lessee constraints.
- Operating expenses increased 8% to $17.1 million, mainly from higher operating and maintenance costs. The filing attributes much of the increase to an overriding royalty arrangement with an affiliate; related expense is offset by royalty revenue from the property.
- Net interest expense declined $3.8 million to $14.2 million, primarily due to lower debt balances. Net income from discontinued operations improved from a $1.9 million loss to a $46,000 loss following the aggregates-business sale.
- Cash from operations increased $3.2 million. Adjusted EBITDA was essentially flat: improved Coal Royalty and Other results were offset by lower cash distributions from Ciner Wyoming.
- NRP repaid $86.5 million of Opco senior-note principal in Q1, including a $49.3 million prepayment using proceeds from the aggregates sale. Total debt, net, declined by $85.1 million from year-end.
Outlook, commentary, risks and unusual items
- Management expected metallurgical coal prices to remain relatively stable for the rest of 2019. It anticipated modest declines in domestic thermal-coal prices and production in the second half as existing contracts roll off.
- Management expected near-term U.S. soda ash demand and supply to remain stable, with global demand supported by economic growth. Ciner Wyoming was considering an expansion within three years; a material project could reduce distributions to NRP temporarily, while potentially improving longer-term productivity.
- After quarter-end, NRP issued $300 million of 9.125% senior notes due 2025 and planned to redeem its 10.50% notes due 2022 on May 11, 2019, at 105.25% of principal plus accrued interest, using note proceeds and approximately $76 million of cash. Management said the refinancing would reduce debt by a further $46 million, lower annual interest expense and extend maturities. It expected approximately $29 million of second-quarter expense from the redemption premium and write-off of unamortized debt costs; approximately $6 million of financing fees were also incurred for balance-sheet treatment.
- In April 2019, NRP extended its $100 million Opco revolving-credit facility maturity from April 2020 to April 2023. The facility has leverage and fixed-charge-coverage covenants; the maximum leverage threshold can decrease if common distributions rise above $0.45 per unit, with an exception for the announced one-time special tax distribution.
- Also after quarter-end, the board declared the regular $0.45-per-unit distribution and a one-time $0.85-per-unit special distribution intended to cover unitholders’ tax liabilities from the aggregates sale.
- Commodity-price volatility is a key risk: lower coal prices could reduce revenue and potentially impair assets or affect covenant compliance; soda ash prices and energy costs affect Ciner Wyoming. NRP had no Opco revolving-facility borrowings at March 31, 2019 and stated it was in covenant compliance.
- Anadarko’s contingent-consideration lawsuit remains unresolved. NRP disputes liability; estimated possible loss ranges from zero to approximately $40 million, plus interest, court costs and attorneys’ fees if the plaintiff prevails and is awarded the amount sought. Management could not predict the outcome.
- Two customers represented 41% of Q1 revenue: Foresight Energy, 24%, and Contura Energy, 17%. The filing also notes forward-looking statements are subject to risks and that actual results may differ materially.
Important facts for investors to verify
- Completion and final economics of the 2025-note issuance and 2022-note redemption, including the expected debt reduction, interest savings and refinancing charges.
- Use of remaining restricted cash for Opco debt amortization and liquidity after the refinancing and special distribution.
- Coal production, prices and contract coverage—particularly expected second-half thermal-coal trends—and the effect on royalty revenue.
- Ciner Wyoming’s potential expansion plans, funding approach and any resulting reduction in cash distributions to NRP.
- Developments in the Anadarko litigation and the potential range of exposure.
- Customer concentration and lessee financial and operating conditions, as well as the assumptions and limitations underlying non-GAAP measures such as Adjusted EBITDA, DCF and FCF.