Natural Resource Partners L.P. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; the filing also provides unaudited quarterly results. NRP owns and leases U.S. mineral properties, principally coal, and holds a non-controlling 49% interest in Ciner Wyoming, a trona mining and soda ash producer.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue and other income | $263.9 million | $278.5 million |
| Operating income | $51.3 million | $192.5 million |
| Continuing-operations net income (loss) | $(25.4) million | $122.4 million |
| Net income (loss) | $(24.5) million | $140.0 million |
| Operating cash flow from continuing operations | $137.3 million | $178.3 million |
| Adjusted EBITDA (non-GAAP) | $199.2 million | $230.2 million |
| Cash, cash equivalents and restricted cash | $98.3 million | $206.0 million |
| Debt, net | $516.2 million | $672.8 million |
Calculated operating margin was approximately 19.4% and net margin approximately -9.3% in 2019, based on reported revenue and other income. Results included a $148.2 million non-cash impairment charge, primarily on coal properties and above-market contracts, and a $29.3 million debt-extinguishment loss. Excluding the impairment alone, continuing-operations net income was $122.8 million; this is not a GAAP measure.
- Segments: Coal Royalty and Other generated $216.8 million of revenue and other income, down 6%; Soda Ash contributed $47.1 million, down 3%. NRP recognized $47.1 million of equity earnings from Ciner Wyoming but received $31.9 million in distributions from it.
- Coal: Lessees sold 23.7 million tons from NRP properties, down 12%. Coal royalty revenue fell 15% to $109.6 million; average royalty revenue per ton declined 3% to $4.67.
- Cash generation: Free cash flow, a non-GAAP measure, was $139.0 million versus $183.4 million. Cash flow cushion was $7.8 million versus $16.1 million. Distributable cash flow was $144.9 million versus $384.0 million; the comparison is heavily affected by 2018 proceeds from the sale of the construction aggregates business.
- Liquidity and debt: Year-end liquidity was $198.3 million, comprising $98.3 million cash and $100 million of undrawn revolving-credit capacity. Face-value debt was $524.1 million, including $300 million of 9.125% notes due 2025 and $224.1 million of Opco notes. Approximately $46.2 million of principal was due in 2020. NRP reported compliance with debt covenants.
- Distributions: Common-unit distributions paid totaled $2.65 per unit in 2019, including a one-time $0.85 special distribution; the regular quarterly rate was $0.45. Preferred units carry cumulative distributions of 12% annually, and $30 million was paid to preferred unitholders in 2019.
Material changes versus 2018
- Revenue and other income declined 5%; coal sales volumes and coal royalty revenue fell amid weaker markets and lower activity at certain mines.
- Operating income and net income fell sharply, chiefly because impairments rose to $148.2 million from $18.3 million. The impairments reflected weaker thermal coal expectations, lessee financial constraints, lease terminations and lower projected cash flows.
- Operating cash flow declined by $41.0 million. Factors included the absence of 2018’s $25 million Hillsboro litigation settlement, lower Ciner Wyoming distributions and weaker coal royalties; lease amendment fees and Hillsboro minimum payments partly offset the decline.
- NRP issued $300 million of 9.125% notes due 2025 and used the proceeds plus cash on hand to redeem its 10.5% notes due 2022 at a premium. Debt balances and interest expense fell, but the redemption generated a $29.3 million loss on extinguishment.
- NRP sold its construction aggregates operating business in December 2018. Accordingly, 2018 included substantial sale proceeds and discontinued-operation income that did not recur in 2019.
Outlook, risks and unusual items
- Management expected industry challenges to continue to weigh on results, while stating that prior balance-sheet strengthening should help NRP navigate the downturn. No numerical NRP earnings or cash-flow guidance was provided.
- Management expected Ciner Wyoming distributions to remain approximately $25 million–$28 million annually while the joint venture funds a capacity expansion. The project aims to raise annual capacity to as much as 3.5 million tons; cost and timing remain uncertain. Deca by-product stockpiles are expected to be exhausted by 2023, potentially reducing output by about 200,000 short tons annually if production is not replaced.
- Ciner Wyoming’s ANSAC membership termination is scheduled to take effect December 31, 2021. ANSAC represented about 60% of Ciner Wyoming net sales in 2019. NRP cited risks of higher marketing and logistics costs, customer retention and export-capacity availability during the transition. Its Union Pacific rail agreement, used for approximately 96.9% of 2019 shipments, also expires at the end of 2021.
- Customer and lessee concentration is material: Foresight Energy generated $58.9 million, or 22.9%, of 2019 revenue; Contura generated $40.7 million, or 15.8%. Four lessees filed for bankruptcy in 2019. Foresight was evaluating restructuring options after agreeing to a lender forbearance period; prolonged idling, mine closures or lease changes could reduce NRP receipts. Oak Grove was temporarily idled late in 2019, and its lessee filed for bankruptcy in the first quarter of 2020.
- Key broader risks include coal and soda ash price volatility, declining thermal coal demand and competition from natural gas and renewables, environmental and permitting requirements, transportation disruptions, and lessee credit risk. NRP also identifies potential environmental liability as a property owner despite lease protections and lessee reclamation obligations.
- The Anadarko contingent-consideration lawsuit concluded in NRP’s favor in November 2019, with no liability. The filing reports no material effect expected from ordinary-course legal proceedings. Auditors issued an unqualified opinion on the financial statements, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Review the assumptions behind the $148.2 million impairment, including reserve, production, price and discount-rate estimates, and assess exposure to further impairments.
- Track Foresight’s restructuring, lessee bankruptcies, mine idling and lease amendments, and the resulting effect on royalty, minimum and transportation revenues.
- Assess debt-service capacity and covenant headroom, especially the approximately $46.2 million of 2020 principal repayments and the $300 million 2025 notes bearing 9.125% interest.
- Monitor whether Ciner Wyoming’s expansion is completed on budget and schedule, its distributions to NRP, the deca-related production outlook, and the ANSAC and Union Pacific transitions.
- Confirm the sustainability of common-unit distributions: 2019 included a special distribution, cash flow cushion was $7.8 million, and preferred distributions rank ahead of common distributions.
- Consider that NRP’s 2019 results and comparisons are affected by non-cash impairments, debt-refinancing costs, discontinued operations and prior-year asset-sale and litigation proceeds; review reconciliations of non-GAAP measures.