Business context and reporting period
Natural Resource Partners L.P. (NYSE: NRP) filed this Form 10-K for the fiscal year ended December 31, 2016. NRP owns and leases U.S. mineral properties and operates through Coal Royalty and Other, a 49% non-controlling interest in soda-ash producer Ciner Wyoming, and construction-materials operator VantaCore. The filing also describes recapitalization transactions completed March 2, 2017, after year-end.
Financial and operating performance
- Revenue and earnings: 2016 revenue and other income was $400.1 million, down 9% from $439.6 million. Income from continuing operations was $95.2 million, versus a $260.2 million loss in 2015; net income was $96.9 million, versus a $571.7 million net loss. The comparison is heavily affected by 2015 impairment charges of $384.5 million, compared with $16.9 million in 2016. Operating income was $185.7 million, versus an operating loss of $170.4 million.
- Cash flow and non-GAAP measures: Cash from continuing operating activities was $100.6 million, down from $168.5 million. Adjusted EBITDA was $255.5 million, down 3% from $262.6 million. Distributable Cash Flow (DCF) was $271.4 million, up from $176.6 million, primarily because DCF includes proceeds from asset sales: $109.9 million from the discontinued oil-and-gas business and $61.0 million from mineral-rights sales. DCF is not GAAP operating cash flow.
- Segment performance: Coal Royalty and Other revenue and other income was $239.2 million, down 5%; coal production fell 36% to 30.2 million tons and coal royalty revenue fell 29% to $101.8 million. Soda Ash revenue and other income was $40.1 million, down 20%, reflecting lower international prices and higher royalty and G&A costs, partly offset by higher sales volumes. VantaCore revenue and other income was $120.8 million, down 13%; sold tonnage declined 5% to 7.0 million tons, while management cited cost control as supporting profitability.
- Liquidity and debt: Year-end cash was $40.4 million. Net debt and debt-affiliate carrying value was $1.126 billion, compared with $1.371 billion at year-end 2015. Current liabilities exceeded current assets by approximately $83.8 million, principally due to scheduled debt payments. NRP reported compliance with debt covenants; Opco’s leverage ratio was 2.80x and fixed-charge coverage was 4.99x.
- Distributions: NRP paid $0.45 per common unit each quarter in 2016, or $1.80 for the year, versus $2.70 in 2015. The February 2017 distribution was also $0.45 per unit.
Material changes versus the prior comparable period
- Coal production and royalty revenue weakened substantially, though minimums recognized as revenue rose to $64.6 million from $15.5 million, partly due to lease modifications and forfeiture of recoupment rights.
- NRP sold assets for $181.0 million gross proceeds in 2016, including its Williston Basin non-operated working interests for $116.1 million. The sale marked a strategic exit from that business, with proceeds used in part to reduce debt.
- Operating cash flow from continuing operations declined by $67.9 million. Lower coal royalties and minimum cash payments were principal factors.
- NRP completed a 1-for-10 reverse unit split in February 2016; reported per-unit figures reflect the split.
Outlook, risks, contingencies and unusual items
- Recapitalization after year-end: NRP issued $250 million of 12% preferred units with warrants; exchanged $241 million of 9.125% notes due 2018 for 10.5% notes due 2022; and issued a further $105 million of 2022 notes for cash. It extended Opco’s revolving credit facility to April 2020, repaid borrowings outstanding at closing, and reduced facility commitments to $180 million, stepping down to $150 million in 2017 and $100 million in 2018. NRP said the transactions reduced 2018 debt maturities by $575 million. The filing reports management expected to meet obligations, comply with covenants and continue as a going concern.
- The preferred units carry cumulative 12% annual distributions, rank senior to common units, and may be partly paid in additional preferred units. Conversion, warrants and future equity issuance could dilute common unitholders. Preferred distributions and debt covenants constrain common-unit distributions; the common distribution remained $0.45 per quarter.
- Foresight Energy accounted for 15.8% of 2016 revenue. NRP is litigating Foresight’s force-majeure claim at the idled Deer Run mine; unpaid minimum deficiency payments had a cumulative $46.0 million negative cash impact through 2016 and could rise by $7.5 million per quarter while operations remain idled. A separate Macoupin dispute involved a $6.2 million negative cash impact; NRP recorded a valuation allowance for the receivable.
- Management cited depressed coal markets, lessee financial distress and bankruptcies, commodity-price volatility, regulatory and environmental exposure, and soda ash and aggregates market conditions as material risks. A subsidiary is also a defendant in a citizen environmental lawsuit concerning discharges from a reclaimed mine; NRP said it could not reasonably estimate potential loss, if any.
- Coal-market improvement late in 2016 supported higher 2017 commitments at some lessees, but management cautioned that recent metallurgical-coal prices might not be sustained. NRP also noted that VantaCore’s local markets and Ciner Wyoming’s soda ash results remain exposed to demand and pricing conditions.
Important facts for investors to verify
- Track operating cash generation separately from DCF, which benefited materially from asset-sale proceeds in 2016.
- Confirm completion and cash cost of the planned 2018 Notes redemptions, and monitor the stepped-down revolver commitments and debt-service schedule.
- Assess whether NRP can service the 12% preferred distributions while maintaining the common-unit distribution and complying with covenants.
- Monitor the Deer Run and Macoupin lawsuits, any recovery of disputed amounts, and the timing or likelihood of Deer Run restarting.
- Review coal production, realized royalty revenue per ton, lessee creditworthiness, and the durability of the late-2016 market recovery.
- Evaluate the potential dilution and governance implications of preferred-unit conversion, warrants and investor consent rights.