Business context and reporting period
Natural Resource Partners L.P. (NRP) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. NRP owns and leases U.S. natural-resource interests and operates through coal and hard-mineral royalty, soda ash, VantaCore construction materials, and oil and gas businesses. Per-unit figures reflect a 1-for-10 reverse unit split effective February 18, 2016.
Key financial results
Amounts below are in millions of dollars except per-unit data. Income statement figures are for continuing operations unless otherwise noted.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue and other income | $118.2 | $123.7 | $214.1 | $219.7 |
| Income from continuing operations | $48.6 | $36.4 | $75.0 | $60.8 |
| Net income attributable to NRP | $46.4 | $31.3 | $69.9 | $48.8 |
| Basic and diluted net income per common unit | $3.72 | $2.51 | $5.61 | $3.91 |
| Adjusted EBITDA (non-GAAP) | $81.6 | $71.2 | $145.5 | $127.6 |
| Distributable cash flow (non-GAAP) | $25.3 | $45.2 | $82.5 | $88.3 |
For the six months, continuing-operations operating cash flow was $38.6 million, down from $85.0 million; investing cash flow was $43.3 million, compared with $2.8 million; and financing cash flow was negative $101.7 million, compared with negative $127.9 million. Cash and cash equivalents of continuing operations were $21.4 million at June 30. Total debt, net, excluding debt classified with discontinued operations, was approximately $1,208.6 million; debt classified with the assets sold was $74.8 million.
Material changes versus the prior comparable period
- Q2 coal royalty production fell 54% and coal royalty revenue fell 42% year over year. For the first half, production declined 42% and coal royalty revenue declined 41%.
- Reported coal and hard-mineral revenue was supported by about $35 million of deferred minimum royalties recognized after coal lease terminations and modifications. Total minimums recognized in that segment were $43.5 million in Q2 and $50.5 million for the first half.
- VantaCore revenue declined 23% in Q2 and 17% for the first half, primarily from lower brokered stone, delivery, and fuel income. Soda ash earnings also declined year over year, reflecting lower prices and operational issues.
- First-half Adjusted EBITDA increased, principally due in part to a $19.2 million gain on the sale of oil and gas royalty properties. First-half DCF declined 7%, reflecting weaker coal-related operating cash flow, partly offset by asset-sale proceeds.
- NRP paid $0.45 per unit for each of the first two 2016 quarters, versus $0.90 per unit for the comparable 2015 quarter. The board declared another $0.45 per unit distribution for payment August 12, 2016.
Outlook, risks, contingencies, and unusual items
- Debt and liquidity: At June 30, Opco had $260.0 million outstanding under its revolving facility and $537.6 million under private placement notes. Its reported leverage ratio was 2.84x against a 4.0x maximum; fixed-charge coverage was 5.67x against a 3.5x minimum. NRP reported covenant compliance and forecast it could meet obligations and remain compliant over the next 12 months, but said forecasts are sensitive to commodity prices and counterparty risk.
- Debt service and maturities are substantial: Opco’s facility has scheduled commitment reductions, and NRP’s $425 million 9.125% senior notes mature in October 2018. Management said traditional debt and equity markets were not currently accessible and discussed asset sales, cost and capital-spending controls, lender waivers or amendments, and alternative financing. Failure to improve leverage or refinance could threaten liquidity and covenant compliance; uncured defaults could trigger cross-defaults.
- Asset sale: In July 2016 NRP completed the sale of its Williston Basin non-operated working-interest assets for $116.1 million gross proceeds, subject to customary adjustments, and used part of the proceeds to repay its $75 million oil-and-gas reserve-based facility in full. The sale was part of a strategic shift to reduce debt and focus on other business segments.
- Foresight Energy: Deer Run mine idling and disputed force majeure notices resulted in $31.0 million of cumulative foregone minimum-payment cash impact through the first half of 2016; this could increase while the mine remains idle. NRP also reported a separate $4.7 million cash impact from disputed royalty recoupments and recorded a valuation allowance. Foresight represented 13% of first-half revenue and other income.
- NRP disclosed ongoing disputes with certain Opco noteholders over whether the June credit-facility amendment triggered additional noteholder protections; the outcome could not be estimated. A subsidiary is also a defendant in a reclaimed-mine pollution lawsuit for which potential loss could not be reasonably estimated.
- Current liabilities exceeded current assets by approximately $81.2 million, largely due to scheduled debt principal and facility commitment reductions. Excluding those amounts, net current assets would have been approximately $154.8 million.
- The filing states that first-quarter 2016 operating and financing cash flows were understated by $8.0 million; the six-month cash-flow statement was corrected for the error. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Final proceeds and adjustments from the Williston sale, use of proceeds, and resulting debt and liquidity position.
- Opco’s future covenant calculations, scheduled facility reductions and principal payments, refinancing progress, and resolution of noteholders’ covenant assertions.
- Progress at Deer Run and the outcome or financial effect of the Foresight force-majeure and royalty disputes.
- How much reported revenue and cash generation depends on deferred minimum-royalty recognition, asset sales, and other nonrecurring items.
- Whether coal production, soda ash operations, and VantaCore markets improve as management expects, and whether distributions remain supportable by recurring cash flow.