Natural Resource Partners L.P. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. NRP owns and leases U.S. mineral properties, including coal, and operates a construction aggregates business; it also holds a 49% equity interest in Ciner Wyoming, a soda ash producer. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and liquidity
- Revenue and other income: $89.0, up 0.4% from $88.7 in Q1 2017. Coal Royalty and Other contributed $52.2, Soda Ash $9.6, and Construction Aggregates $27.2.
- Profit: Income from continuing operations was $26.1 versus $6.1; net income was $26.1 versus $5.9. Net income attributable to common unitholders was $18.2 versus $3.4. Basic and diluted net income per common unit were $1.49 and $1.15, respectively, compared with $0.28 for both measures a year earlier.
- Operating expenses and interest: Total operating expenses declined 13% to $45.0. Interest expense was $18.0, down from $23.1; Q1 2017 also included $7.8 of debt-modification expense.
- Adjusted EBITDA: $54.9, up from $51.3. This is a non-GAAP measure. Distributable cash flow (DCF), also non-GAAP, was $20.8 versus $18.5.
- Cash flow: Continuing-operations operating cash flow was $20.2 versus $20.5; total operating cash flow was $19.8 versus $20.2. Continuing-operations investing cash flow used $0.2. Continuing-operations financing cash flow used $28.7, chiefly reflecting debt repayment and preferred-unit payments.
- Liquidity and debt: Cash was $21.2 at quarter-end, with $55.0 of available credit-facility capacity, for reported total liquidity of $76.2. Net carrying-value debt was $804.6, including $79.7 current and $724.9 long-term. NRP reported compliance with debt covenants.
- Capital returns: NRP paid a $0.45-per-common-unit distribution and $7.8 in preferred distributions during the quarter, and redeemed $8.8 of preferred units paid in kind. A $0.45 common-unit distribution and $7.5 preferred distribution were declared after quarter-end.
Material changes and drivers
- Coal Royalty and Other revenue rose 2% to $52.2, although reported coal production fell 25% and coal royalty revenue fell 15%. Higher average coal royalty revenue per ton, overriding royalties, wheelage and other revenue partly offset lower production, particularly in the Illinois Basin.
- Management said metallurgical coal prices were about 35% higher year over year and expected markets to remain stable for the rest of 2018. It described domestic thermal coal as likely to remain oversupplied, despite stronger export demand.
- Soda Ash income declined 7% to $9.6, primarily due to lower international sales and higher selling, general and administrative costs. Ciner Wyoming reported sales of $121.2 versus $126.6 and net income of $22.1 versus $23.4.
- Construction Aggregates revenue and other income was essentially flat at $27.2. The segment recorded a $2.0 loss from continuing operations; management cited first-quarter seasonality, unfavorable weather, and higher fuel, repair and maintenance costs.
- NRP adopted ASC 606 using the modified retrospective method; prior-year results were not restated. Adoption increased opening partners’ capital by $90.3 and reduced reported Q1 2018 coal royalty revenue and net income by $1.7. Reported diluted earnings per unit were $1.15; the filing gives $1.23 without the adoption effect.
Outlook, risks and contingencies
- The filing provides market commentary but no company-wide quantified earnings or cash-flow guidance. Management said it remained focused on reducing debt and improving credit metrics.
- NRP’s business is exposed to coal, aggregates and soda ash prices, lessee production and credit, and local economic conditions. NRP also noted that low natural gas prices, plant retirements and renewable generation could pressure domestic thermal coal demand. A 1% increase in interest rates would raise annual interest expense by about $1.0, assuming the same $95.0 variable-rate balance remained outstanding.
- Foresight/Hillsboro litigation: Hillsboro has not paid $83.5 of claimed required Deer Run minimum payments, with approximately $12.8 of interest accrued; the claim continues to increase by $7.5 per unpaid quarter. Hillsboro sought permission to claim its lease terminated retroactively. NRP disputes termination and is pursuing the matter. Foresight indicated it might permanently close Deer Run if the lease is terminated. NRP reported a $235 carrying value for its Deer Run reserves and no impairment at March 31, while stating future cash flows will continue to be assessed. NRP also claims $9.5 in improperly recouped Macoupin royalties.
- Anadarko dispute: NRP estimated a possible loss range of zero to approximately $40, plus interest, costs and attorneys’ fees; it intends to defend the claim.
- NRP’s 12% preferred units carry cumulative distributions. The filing reports $7.5 of preferred distributions accumulated for Q1, reducing income available to common unitholders and the general partner.
Important facts for investors to verify
- Whether reported earnings and per-unit results are being compared on a consistent basis, given ASC 606 adoption and the unadjusted prior-year presentation.
- Developments in the Deer Run and Macoupin disputes, including payment recoveries, lease status, mine operations and possible impairment of NRP’s reserves.
- Outcome and potential cost of the Anadarko contingent-consideration litigation.
- Debt repayment, liquidity, credit-facility availability and covenant compliance, including upcoming principal obligations.
- Sustainability of coal royalty volumes and pricing, soda ash distributions, and construction aggregates margins and working-capital needs.
- Common-unit distributions relative to cash available after preferred distributions, debt service and maintenance capital expenditures.