Natural Resource Partners L.P. — Q2 2015 Form 10-Q
Business and period. The partnership owns, operates, manages and leases U.S. coal, oil and gas, aggregates and other mineral assets, and holds a 49% interest in OCI Wyoming. This unaudited report covers the quarter and six months ended June 30, 2015; dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue and other income | $137.6 | $90.6 | $247.3 | $170.9 |
| Operating income | $55.9 | $50.4 | $96.3 | $102.8 |
| Net income | $32.6 | $31.4 | $50.1 | $64.0 |
| Net income attributable to NRP | $31.3 | $31.4 | $48.8 | $64.0 |
| Net income per common unit | $0.25 | $0.28 | $0.39 | $0.57 |
| Adjusted EBITDA (non-GAAP) | $79.2 | $76.9 | $143.4 | $145.9 |
| Distributable cash flow (non-GAAP) | $47.2 | $64.9 | $99.8 | $102.9 |
Calculated operating margin was approximately 40.6% in Q2 2015 versus 55.6% in Q2 2014, and 38.9% for the first half versus 60.2% in the prior-year period. Lower margin reflects, in part, the addition of VantaCore’s operating aggregates business; the filing notes that this business has lower margins than royalty operations.
- Cash flow: First-half operating cash flow was $106.1, compared with $99.6 a year earlier. Investing used $22.5; financing used $106.1. Cash declined $22.6 to $27.5.
- Debt and liquidity: Total debt and affiliate debt was $1,432.1 at June 30, down $43.1 from year-end. Cash plus available capacity under revolving facilities was $117.5, including $90.0 of borrowing capacity. Variable-rate debt was $390.0; a 1 percentage-point rate increase would add an estimated $3.9 of annual interest expense.
- Current liabilities exceeded current assets by about $120, primarily because $155.98 of debt was classified current, including $75.0 on a term loan due January 2016 and scheduled senior-note principal payments. Excluding these debt maturities, current assets exceeded current liabilities by about $36.
Changes versus the prior period
- Q2 revenue rose 52%, principally reflecting VantaCore, acquired in October 2014. First-half revenue increased 45%; non-coal sources grew to 55% of revenue from 37% a year earlier.
- Coal revenue rose 2% in the first half, but coal royalty revenue fell 15% and average royalty revenue per ton fell 19%. Increased recognized minimum royalties and a $9.3 reserve-swap gain offset much of the royalty decline.
- VantaCore generated $67.4 of first-half revenue. OCI Wyoming equity earnings increased to $24.1 from $19.2, while cash distributions from OCI Wyoming decreased to $21.8 from $25.6.
- Oil and gas revenue increased 8% in the first half as higher production from the Sanish Field acquisition more than offset lower commodity prices. First-half interest expense increased 19%, and depreciation, depletion and amortization increased 81%, largely due to the 2014 acquisitions.
- First-half net income and earnings per unit declined despite higher revenue. Adjusted EBITDA declined 2%; distributable cash flow declined 3%. Q2 distributable cash flow fell 27%, reflecting higher maintenance capital expenditures and working-capital changes, partly offset by asset-sale proceeds.
Outlook, risks and unusual items
- Capital allocation: Management’s stated plan is to strengthen the balance sheet, reduce debt and improve liquidity. The quarterly distribution was cut 75%, from $0.35 per unit to $0.09 for Q1 and Q2 2015; management intends to use the savings for debt reduction. A $0.09 distribution was also declared for Q3.
- Markets: Management described thermal and metallurgical coal markets as severely challenged and did not expect recovery during 2015. It expected continued producer production cuts and mine idling. OCI Wyoming reported record soda-ash production; management cited anticipated OCI Resources distribution growth of 3%–6% for 2015. Aggregates activity is seasonal and locally market-dependent. Oil and gas prices remain volatile; NRP had not hedged future production.
- Lessee and operating exposure: Foresight Energy and affiliates represented 20% of first-half revenue. Alpha Natural Resources, which represented 6.5% of Q2 revenue, filed for Chapter 11 on August 3, 2015. NRP expected continued operations and anticipated that most active Alpha leases would be assumed, but lease outcomes and recovery of pre-petition amounts remain subject to bankruptcy proceedings.
- Foresight Energy declared force majeure at Hillsboro after elevated carbon monoxide levels. NRP disputes the claim; a valid declaration could eliminate a quarterly minimum deficiency payment, with a $3.1 cash impact reported. Mining restarted July 28, 2015.
- Debt: Opco amended its $300 revolving facility, extending maturity to October 2017. NRP noted $425 of 9.125% senior notes due in 2018 and cautioned that refinancing may not be available on acceptable terms. Management reported compliance with financial covenants at June 30.
- Unusual items: Results included a $9.3 reserve-swap gain and a $3.1 gain on sale of other assets. A $3.8 credit to first-half depletion expense corrected prior-period depletion; management judged the error and adjustment immaterial to prior-period statements. Q2 impairment expense was $3.8, including impairments of a coal preparation plant and coal mineral rights. Final acquisition accounting for VantaCore reduced goodwill as acquired mineral rights and intangibles were adjusted.
- Contingencies: NRP accrued $8.8 of estimated contingent consideration payable to Anadarko in 2016, while disputing Anadarko’s claim that an earlier OCI reorganization accelerated additional payments. The potential cumulative amount is capped by the agreement at the net present value of $50, less a deductible. A subsidiary is also named in a reclaimed-mine pollution lawsuit; potential loss could not be estimated.
- Controls: Management concluded disclosure controls were ineffective because a mine-safety imminent-danger order at a VantaCore quarry was not timely reported, resulting in a late Form 8-K. Management said it added procedures; the matter did not implicate internal control over financial reporting.
Most important facts for investors to verify
- Alpha’s bankruptcy treatment of NRP leases, royalty payments and the estimated $2.5 of pre-petition royalties.
- Resolution of Foresight Energy’s Hillsboro force-majeure claim and any resulting minimum-payment shortfall.
- Liquidity and refinancing plans for the January 2016 term-loan maturity, scheduled senior-note payments and the 2018 notes; monitor covenant compliance.
- Whether debt reduction and the $0.09 per-unit distribution can be sustained amid coal-market weakness and lower distributable cash flow.
- Outcome of Anadarko’s contingent-consideration claim, the pollution litigation, and remediation of the disclosure-control deficiency.