NATURAL RESOURCE PARTNERS LP annual report, FY2018

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Business context and reporting period

Natural Resource Partners L.P. (NRP) filed this Form 10-K for the fiscal year ended December 31, 2018; it is an annual report, not a standalone fourth-quarter filing. NRP owns and leases U.S. mineral interests, principally coal, and holds a 49% non-controlling interest in Ciner Wyoming, a trona miner and soda ash producer. In December 2018, NRP sold its construction aggregates business, a strategic shift to focus on coal royalties and soda ash and reduce debt.

Financial and operating performance

  • Revenue and income: Revenue and other income was $278.5 million, up 13% from $246.3 million in 2017. Continuing-operations net income was $122.4 million versus $82.5 million; total net income was $140.0 million versus $88.7 million. Basic net income per common unit was $8.77, compared with $5.06.
  • Segments: Coal Royalty and Other reported $230.2 million of revenue and other income (83% of total); Soda Ash reported $48.3 million (17%). Coal Royalty and Other included a one-time $25.0 million Foresight litigation settlement gain. Ciner Wyoming equity earnings were $48.3 million, up from $40.5 million.
  • Coal operations: Coal production on NRP properties was 26.9 million tons, down 3%. Average coal royalty revenue per ton increased 11% to $4.80. Management said metallurgical coal generated about 65% of coal royalty revenue.
  • Margins and expenses: Income from operations was $192.5 million, equivalent to approximately 69% of reported total revenue and other income; continuing net income was approximately 44%. These ratios are affected by equity earnings and nonrecurring gains and are not directly comparable to conventional operating margins. Operating expenses rose 23% to $86.0 million, including $18.3 million of impairments. Net interest expense declined 14% to $70.2 million.
  • Cash flow: Cash from continuing operating activities was $178.3 million, versus $112.2 million. Reported free cash flow, a non-GAAP measure, was $183.4 million versus $121.3 million. Distributable cash flow was $384.0 million, but included $198.1 million of construction-aggregates sale proceeds; it is not a recurring operating cash-flow measure.
  • Liquidity and debt: At year-end, cash was $101.8 million and restricted cash was $104.2 million; the latter was earmarked for debt repayment, acquisitions or capital expenditures under the debt agreements. NRP reported $306.0 million of total liquidity, including $100.0 million of undrawn revolver capacity. Debt was $687.1 million at face value ($672.8 million net carrying value), down from $827.8 million at face value at year-end 2017. The revolver was repaid in December; $49 million of sale proceeds was paid toward Opco notes in January 2019, with a further $55 million intended for scheduled 2019 amortization.
  • Distributions: Common distributions remained $0.45 per unit quarterly ($1.80 for 2018). Preferred units carry a 12% annual distribution; $30.0 million was attributable to preferred holders in 2018. Debt and partnership-agreement restrictions constrain increases to common distributions.

Material changes versus the prior comparable period

  • Total reported revenue and other income increased, while underlying coal royalty revenue rose 7% to $129.3 million. Higher metallurgical prices and production supported Appalachia; lower Illinois Basin production partially offset the gain.
  • NRP adopted ASC 606 on January 1, 2018 using the modified retrospective method. The $70.5 million cumulative adjustment increased opening partners’ capital. Adoption reduced 2018 coal royalty and other revenue by $55.6 million versus the amount that would have been reported under the previous standard; 2017 was not restated.
  • The $205 million aggregates-business sale generated a $13.1 million gain and approximately $198.1 million in reported net cash proceeds. The business is presented as discontinued operations for all periods. The sale proceeds materially supported debt reduction and year-end liquidity.
  • Asset impairments rose to $18.3 million from $3.0 million, chiefly a $13.0 million aggregates-property impairment and $5.3 million of coal-property impairments. Total debt fell by about $140.7 million at face value, and interest expense decreased.

Outlook, commentary, risks and contingencies

  • Outlook: Management expected metallurgical coal prices to remain relatively stable in 2019, while noting that slower GDP growth and trade issues could weaken the market. Thermal coal pricing could be pressured by lower export prices and natural-gas prices from 2018 highs. Management expected near-term U.S. soda ash demand and supply to be broadly stable and international demand to benefit from economic growth. The filing provides no formal numeric earnings or production guidance.
  • Customer, lessee and market concentration: Foresight Energy represented 21.7% of 2018 revenue. Contura and former Alpha operations together represented approximately 17%. Coal lessee bankruptcies, including Mission Coal and Westmoreland, create uncertainty about continued production, lease payments and recovery of claims; the Pinnacle mine was closed.
  • Soda ash execution and logistics: ANSAC accounted for approximately 52% of Ciner Wyoming’s 2018 net sales. Its membership termination is expected to take effect December 31, 2021, after which Ciner plans to market directly in affected international territories. About 93.5% of Ciner Wyoming’s 2018 shipments initially used Union Pacific’s rail line; the service agreement expires December 31, 2019. Ciner also expects significant capital spending over the next few years to replace production from deca stockpiles expected to be exhausted by 2023.
  • Debt and distribution constraints: NRP disclosed substantial debt service needs, including approximately $116.1 million of Opco principal payments due in 2019 and $345.6 million of NRP notes due in 2022. The Opco revolver matures in April 2020. The partnership reported compliance with debt covenants at year-end, but refinancing, cash-flow and covenant risks remain. Preferred distributions rank ahead of common distributions; outstanding PIK units after January 1, 2022 would block common distributions until redeemed.
  • Legal contingency: Anadarko’s contingent-consideration lawsuit remains unresolved. NRP estimates a possible loss from zero to approximately $40 million, plus interest, court costs and attorneys’ fees, and is defending the claim.
  • Other risks and unusual items: Coal and soda ash prices, environmental and permitting requirements, transportation disruptions, reserve-estimation uncertainty and dependence on lessee-reported production can affect results. NRP also cautions that adverse regulatory or market changes could impair assets or reduce distributions. The company reported effective disclosure controls and internal control over financial reporting; the financial statements received an unqualified audit opinion.

Most important facts for investors to verify

  • Separate recurring operating cash generation from the aggregates-sale proceeds and the $25.0 million Foresight settlement; review the non-GAAP definitions and reconciliations.
  • Assess debt maturities, required 2019 repayments, post-sale liquidity, revolver maturity and covenant headroom, including the distinction between unrestricted and restricted cash.
  • Monitor coal lessee bankruptcies and production, concentration in Foresight and other operators, and the effect of the amended Deer Run minimum-payment terms.
  • Track the Anadarko litigation exposure and the timing, amount and restrictions on any potential payment.
  • Evaluate Ciner Wyoming’s rail-contract renewal, ANSAC transition, deca-replacement capital requirements and distributions to NRP.
  • Account for ASC 606’s opening-equity adjustment and 2018 revenue effect when comparing periods; verify whether future reporting or lease developments change that impact.