Natural Resource Partners L.P. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. NRP owns and leases U.S. mineral properties, principally coal, and holds a 49% non-controlling interest in Ciner Wyoming, a soda ash producer. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue and other income | $31.0 | $81.5 | $71.2 | $148.5 |
| Operating income (loss) | $(115.2) | $60.8 | $(86.1) | $110.8 |
| Net income (loss) | $(125.5) | $19.4 | $(106.7) | $55.1 |
| Net income (loss) per common unit, basic | $(10.64) | $0.95 | $(9.74) | $3.20 |
| Net cash from operating activities | $19.9 | $53.4 | $51.8 | $76.5 |
| Adjusted EBITDA (non-GAAP) | $29.3 | $62.8 | $61.3 | $115.2 |
| Distributable cash flow (non-GAAP) | $21.3 | $54.0 | $51.7 | $77.2 |
| Free cash flow (non-GAAP) | $19.8 | $53.8 | $50.2 | $77.1 |
The operating loss reflects a $132.3 million non-cash impairment charge, so reported operating margin and net margin were negative; the filing does not present these margins as separate metrics. Impairments primarily involved coal properties affected by weaker markets, lease terminations and revised mine plans, and frac sand outlook affected by reduced oil and gas drilling.
- At June 30, cash was $110.8 million and total liquidity was $210.8 million, including $100 million of undrawn revolving credit capacity.
- Total debt was $505.0 million at face value ($497.9 million net of issuance costs), down from $524.1 million at face value at year-end 2019. Debt included $300 million of 9.125% senior notes due 2025 and $205.0 million of Opco notes; $45.8 million was classified as current.
- Six-month operating cash flow fell $24.8 million year over year. Cash increased by $12.6 million to $110.8 million during the first half.
- NRP and Opco reported compliance with debt covenants. The $100 million Opco revolver matures in April 2023.
Changes versus the prior comparable period
- Q2 revenue and other income declined 62%; first-half revenue declined 52%. Coal Royalty and Other segment revenue fell 51% in Q2 and 46% for the first half, amid lower coal sales volumes and pricing. First-half coal sales from NRP properties were 8.4 million tons, down 35%.
- Coal market weakness was compounded by COVID-19 impacts on steel and electricity demand. Soda Ash segment results also weakened: Ciner Wyoming reported a Q2 net loss of $4.2 million versus income of $25.6 million a year earlier, as lower soda ash demand, prices and volumes weighed on performance.
- Adjusted EBITDA fell $33.5 million in Q2 and $54.0 million in the first half. First-half operating cash flow also reflected lower distributions from Ciner Wyoming and lower coal-related cash generation.
- Interest expense declined year over year as debt balances fell. The 2019 comparison included a $29.3 million loss on extinguishment of debt related to redemption of the 2022 notes; there was no corresponding charge in 2020.
Outlook, risks and notable items
- Management said it could not predict the severity or duration of COVID-19’s effects, but believed liquidity and prior deleveraging efforts positioned NRP to manage through the downturn. No quantified earnings or production guidance was provided.
- NRP amended Foresight Energy leases after Foresight emerged from bankruptcy. The amendments provide fixed payments of $48.75 million in 2020 and $42.0 million in 2021 for specified lease and infrastructure obligations; NRP reported receiving $21.2 million of the 2020 amount in the first half. A separate filing note describes $40.0 million of annual fixed consideration in 2020 and 2021, including $5.0 million for an infrastructure lease accounted for as a financing transaction; investors should review the amendment and accounting details.
- Ciner Wyoming suspended the distribution that otherwise would have been paid to NRP in August for Q2, and will reassess distributions quarterly. It also delayed significant spending on a planned capacity expansion pending greater visibility into pandemic effects. Management expected soda ash markets to remain challenged over the next several quarters.
- NRP recorded $3.7 million of bad debt expense in Q2 and reported a $3.6 million CECL allowance at June 30 across trade and long-term contract receivables. Further impairment or credit losses could arise if economic conditions worsen.
- Foresight Energy and Contura Energy accounted for 32% and 24% of Q2 revenue, respectively, underscoring lessee and customer concentration. Commodity prices, lessee solvency, coal demand, soda ash demand and potential covenant pressure remain key risks.
- NRP’s common-unit distribution was not paid for Q2 as initially reported in the cash-flow discussion; subsequently, in August, the board declared $0.45 per common unit for Q2. The board also declared a $7.5 million preferred-unit cash distribution. Preferred distributions accumulated during the period and rank ahead of common-unit earnings.
- Ordinary-course legal proceedings were not expected by management to have a material effect. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Review the $132.3 million impairment assumptions, affected properties and possibility of additional charges under prolonged weak commodity markets.
- Track Foresight’s payments under the amended leases, including the distinction between the $48.75 million/$42.0 million MD&A amounts and the $40.0 million annual fixed-consideration disclosure.
- Confirm Ciner Wyoming’s distribution decisions, cash generation and expansion-plan timing, given the Q2 distribution suspension.
- Monitor liquidity, scheduled Opco principal repayments, covenant headroom and the current portion of debt.
- Assess receivable collections and customer concentration, particularly exposures to Foresight Energy and Contura Energy.
- Distinguish GAAP results from management’s non-GAAP Adjusted EBITDA, DCF and FCF measures when evaluating cash available for distributions and debt repayment.