Natural Resource Partners L.P. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing. NRP owns and leases U.S. mineral assets, principally coal, and also operates construction-aggregates businesses and holds a 49% non-controlling interest in Ciner Wyoming, a trona and soda ash producer.
Financial results and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue and other income | $378.0 million | $400.1 million |
| Operating income | $184.0 million | $185.7 million |
| Net income from continuing operations | $89.2 million | $95.2 million |
| Net income | $88.7 million | $96.9 million |
| Net income per common unit, basic / diluted | $5.06 / $3.96 | $7.78 / $7.78 |
| Operating cash flow from continuing operations | $127.8 million | $100.6 million |
| Distributable Cash Flow (non-GAAP) | $132.1 million | $271.4 million |
| Adjusted EBITDA (non-GAAP) | $231.5 million | $255.4 million |
| Cash and cash equivalents at year-end | $29.8 million | $40.4 million |
Operating margin was approximately 48.7% and continuing-operations net margin approximately 23.6% in 2017, calculated using reported revenue and other income. The common-unit distribution remained $0.45 per quarter, or $1.80 for the year. NRP declared $17.7 million of preferred distributions during 2017, half paid in cash and half in additional preferred units.
At December 31, debt was $827.8 million at face value ($809.3 million net carrying amount); the filing’s risk discussion cites approximately $827.8 million of total indebtedness. NRP had $90 million of unused capacity under Opco’s credit facility and reported compliance with debt covenants. The 10.5% senior notes due 2022 had $345.6 million principal outstanding; Opco’s debt included $60 million drawn on its revolving facility. Approximately $80.4 million of Opco principal was scheduled for 2018.
By segment, 2017 revenues and other income were $205.9 million for Coal Royalty and Other, $40.5 million for Soda Ash, and $131.7 million for Construction Aggregates. Segment continuing income was $154.9 million, $40.5 million, and $6.4 million, respectively. Fourth-quarter reported revenue including affiliates was $100.8 million, with $0.3 million of asset-sale gain and $30.7 million net income.
Material changes versus 2016
- Revenue and other income fell 6%, while continuing-operations net income fell about 6%. Lower coal-segment revenue and fewer prior-year asset-sale gains were key factors.
- Coal Royalty and Other revenue declined 14% to $205.9 million. Coal royalties rose 19% to $120.8 million as higher metallurgical-coal prices and Appalachian production outweighed an 8% decline in total coal production. Minimums recognized as revenue fell by $33.8 million, primarily reflecting prior-year lease modifications and terminations; asset-sale gains fell by $25.5 million.
- Construction Aggregates revenue increased 9% to $131.7 million, primarily on higher sales volumes, while related operating costs increased. Soda Ash revenue increased slightly; temporary production issues were resolved in the fourth quarter.
- Adjusted EBITDA decreased 9%. Distributable Cash Flow fell 51%, largely because 2016 included $109.9 million of proceeds from discontinued-operation asset sales and higher mineral-rights sale proceeds; it is not a like-for-like measure of recurring cash generation.
- NRP completed a first-quarter recapitalization: issued $250 million of preferred units and warrants, exchanged or refinanced debt to extend most 2018 maturities to 2020 and 2022, and reduced debt by approximately $311.1 million during 2017. Interest expense declined, but the transactions also generated $7.9 million of debt-modification expense and $4.1 million of debt-extinguishment loss.
Outlook, risks and unusual items
- Management expected metallurgical-coal markets to remain tight in 2018, supported by steel demand and supply constraints. It expected domestic thermal-coal markets to remain challenged, with longer-term pressure from natural gas, power-plant retirements and renewables.
- Management expected international soda-ash markets to remain strong in 2018 and prices domestically and internationally to remain around then-current levels. These are expectations, not guarantees; the filing provides no numerical earnings or cash-flow guidance.
- Management said it remained focused on reducing debt and improving credit metrics. The 12% cumulative preferred-unit distribution, debt service, covenants and scheduled principal payments constrain cash available for common-unit distributions. Common distributions cannot be increased above $0.45 quarterly without satisfying applicable tests and approvals.
- Foresight Energy represented 18.6% of 2017 revenue. NRP is litigating over Deer Run minimum payments, which it says total $76.0 million and continue to accrue at $7.5 million per quarter, and over approximately $9.5 million of disputed Macoupin royalty recoupments. Collection and litigation outcomes are uncertain.
- Anadarko alleges that a 2013 restructuring accelerated contingent consideration. NRP disputes the claim; the disclosed possible loss ranges from zero to approximately $40 million, plus interest, court costs and attorneys’ fees.
- Coal demand, prices and lessee solvency remain exposed to competition from natural gas and renewables, regulation, permitting, environmental litigation, transportation constraints and mine disruptions. Soda ash faces price, customer-concentration, energy-cost and competition risks; aggregates depend on local construction markets and are seasonal.
- NRP issued preferred units carrying a 12% cumulative distribution and warrants to purchase up to 4.0 million common units at stated exercise prices. The preferred securities rank ahead of common units and may dilute common unitholders upon conversion. In February 2018, NRP paid the full $7.8 million preferred distribution in cash and redeemed outstanding PIK units for $8.8 million.
- Adoption of the new revenue-recognition standard on January 1, 2018 was expected to reduce deferred revenue and increase retained earnings by approximately $80–$90 million; the filing describes this as an accounting transition, not a cash inflow.
Important facts for investors to verify
- Track debt reduction, the 2018–2022 maturity schedule, revolver availability, covenant headroom and the cash burden of the 12% preferred distribution.
- Check developments and collectability in both Foresight disputes, including whether Deer Run resumes production and whether minimum-payment claims are upheld.
- Monitor the Anadarko litigation and any resulting payment or legal-cost exposure.
- Assess whether coal production, royalty rates and metallurgical-coal pricing can offset structural declines and continuing thermal-coal pressure; note the 8% year-over-year production decline.
- Evaluate recurring cash generation separately from non-GAAP DCF, which was substantially affected by prior-year asset-sale proceeds, and verify the assumptions underlying management’s commodity outlook.
- Review potential dilution from preferred-unit conversion and warrant exercise, and the effects of the revenue-recognition change on reported results.