Natural Resource Partners L.P. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparative periods are the corresponding 2017 periods. NRP owns and leases U.S. mineral properties and operates a construction aggregates business. Its segments are Coal Royalty and Other, a 49% equity-method interest in Ciner Wyoming (soda ash), and Construction Aggregates. Dollar figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue and other income | $95.0 | $93.3 | $292.4 | $276.9 |
| Income from operations | $46.1 | $46.5 | $144.3 | $134.0 |
| Net income | $28.5 | $26.1 | $91.0 | $58.0 |
| Basic net income per common unit | $1.71 | $1.48 | $5.44 | $3.23 |
| Net cash from operating activities | Not separately stated here | Not separately stated here | $107.5 total; $108.0 continuing operations | $80.8 total; $81.4 continuing operations |
- Revenue rose about 2% in Q3 and 6% for the nine-month period. Operating margin was approximately 48.5% in Q3 and 49.4% year to date, versus 49.9% and 48.4%, respectively, in 2017.
- Net income increased about 10% in Q3 and 57% year to date. The year-to-date comparison also reflects lower interest expense and the absence of 2017 debt-modification and debt-extinguishment charges.
- Q3 consolidated Adjusted EBITDA, a non-GAAP measure, was $58.1 million, essentially unchanged from $58.1 million a year earlier. Nine-month Adjusted EBITDA was $170.5 million versus $172.0 million.
- Nine-month distributable cash flow was $109.4 million versus $85.8 million; free cash flow was $102.3 million versus $82.3 million. These are non-GAAP measures defined by NRP and are not equivalent to GAAP cash from operations.
- Cash was $63.4 million at September 30, versus $29.8 million at year-end 2017. Total liquidity was $118.4 million, including $55.0 million of available revolving-credit capacity.
- Debt, net of discounts and issuance costs, was $791.7 million ($75.2 million current and $716.5 million long-term), down from $809.3 million at year-end. Debt at face value was $807.1 million. The $95.0 million revolving-facility balance matures in April 2020; its available capacity was $55.0 million at quarter-end. NRP and Opco reported compliance with debt covenants.
- Common distributions were $0.45 per unit per quarter. Preferred units carry a cumulative 12% annual distribution; $22.5 million accrued to preferred holders during the first nine months. The preferred units had a $164.6 million carrying value at quarter-end.
Material changes versus prior periods
- Coal Royalty and Other revenue was broadly flat in Q3. Coal royalty revenue increased 14%, but other revenue fell 30%, in part because of ASC 606 revenue-recognition changes. Nine-month coal production declined 7%, while the average coal royalty revenue per ton increased 15%.
- Construction Aggregates revenue and other income increased 6% in Q3 and 9% year to date. Higher activity was partly offset by increased delivery, materials, labor, fuel, and repair costs.
- Nine-month Soda Ash segment income was $35.0 million versus $27.7 million. The increase included a $12.7 million Ciner Wyoming royalty-dispute settlement, partly offset by lower production and sales associated with repairs and ore-grade degradation.
- ASC 606 adoption changed the timing of revenue recognition for certain coal and aggregates royalty leases. NRP recorded a $70.5 million opening partners’ capital adjustment. The filing says the adoption reduced reported Q3 coal royalty and other revenue by $3.2 million and nine-month revenue by $9.6 million compared with amounts without ASC 606.
- NRP identified and corrected an error in its original ASC 606 adoption classification for certain leases, revising previously issued 2018 interim statements. Management characterized the prior-period misstatements as not material. The correction reduced originally reported first-half 2018 income and adjusted the opening capital impact.
Outlook, commentary, risks, contingencies and unusual items
- Management expected metallurgical coal markets to remain stable, citing steel demand and supply constraints, while noting trade and tariff negotiations as a risk. It cited low utility coal inventories and natural-gas market conditions as potential support for thermal coal, alongside the longer-term pressures of power-plant retirements and renewable generation. These are expectations, not firm financial guidance; the filing gives no numerical earnings or revenue forecast.
- NRP described stable near-term U.S. soda ash demand and supply, but warned that new international capacity, particularly in Turkey, could outpace demand and pressure prices. Aggregates performance depends on local construction, energy and infrastructure markets and is seasonal.
- After quarter-end, NRP settled disputes with Foresight Energy. NRP received $25 million on October 31, 2018, and amended the Deer Run lease: $30 million recoupable annual minimum payments were replaced with $11 million non-recoupable annual minimum payments through 2033, with additional royalties possible if production resumes. The Hillsboro/Deer Run and Macoupin/Shay claims were to be dismissed. NRP was still assessing the effect on expected future cash flows from the Hillsboro property; its $235 million carrying value had not been impaired at September 30.
- Anadarko’s contingent-consideration lawsuit remained unresolved. NRP disputed liability; the disclosed possible loss range was $0 to approximately $40 million, plus interest, court costs and attorneys’ fees if Anadarko prevailed and obtained the full damages sought.
- NRP reported a material weakness in internal control over financial reporting related to ASC 606 lease classification; management concluded disclosure controls were ineffective as of September 30. The filing states enhanced controls were subsequently tested and the material weakness remediated. Investors should distinguish that subsequent remediation statement from the control status at quarter-end.
- Market risks include coal, aggregates and soda ash prices and lessee or customer demand. NRP had $95.0 million of variable-rate debt; a 1 percentage-point rate increase would raise annual interest expense by approximately $1.0 million, assuming principal remained constant.
Key facts for investors to verify
- Review the ASC 606 revisions, the $70.5 million adoption adjustment, and the stated remediation of the material weakness; assess the implications for revenue comparability and controls.
- Track the Foresight settlement’s cash receipts, future non-recoupable minimums, production royalties and any impairment assessment of the Hillsboro assets.
- Monitor the Anadarko case and the disclosed potential loss of up to approximately $40 million plus related costs.
- Assess debt repayment capacity, the April 2020 revolving-facility maturity and reduced commitments to $100 million beginning December 31, 2018, alongside preferred distributions and common-unit distributions.
- Evaluate coal production and pricing, Ciner Wyoming operating performance and soda ash pricing, and aggregates cost pressures against management’s market commentary.