Natural Resource Partners L.P. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. NRP owns and leases U.S. natural-resource properties and operates in Coal Royalty and Other, Soda Ash (49% equity interest in Ciner Wyoming) and VantaCore construction materials.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue and other income | $88.7 million | $95.8 million |
| Income from operations | $37.0 million | $49.0 million |
| Continuing-operations net income | $17.0 million | $26.4 million |
| Net income | $16.8 million | $23.4 million |
| Basic / diluted net income per common unit | $1.15 / $0.02 | $1.88 / $1.88 |
| Adjusted EBITDA (non-GAAP) | $51.3 million | $63.9 million |
| Distributable Cash Flow (non-GAAP) | $18.5 million | $64.4 million |
| Operating cash flow, continuing operations | $20.5 million | $22.7 million |
| Cash and cash equivalents | $112.9 million | $40.4 million at Dec. 31, 2016 |
| Total debt, net | $970.9 million | $1,126.3 million at Dec. 31, 2016 |
The filing does not present a headline operating-margin measure. Operating income was about 41.8% of revenue in Q1 2017 versus 51.1% in Q1 2016; these ratios are calculated from reported figures and are affected by prior-period asset-sale gains. At March 31, NRP also had $180 million of unused Opco revolving-credit capacity, for reported cash plus capacity of approximately $292.9 million. The current portion of debt was $263.5 million.
Material changes and drivers
- Revenue declined 7% year over year. Coal Royalty and Other revenue fell 17%, largely because Q1 2016 included $21.9 million of asset-sale gains. Excluding those gains, this segment benefited from higher coal royalties: royalty revenue rose 51% as production increased 4% and Appalachian pricing improved.
- VantaCore revenue rose 10% with increased aggregates, construction and asphalt activity; higher materials and labor costs contributed to increased operating expenses. Soda Ash equity earnings increased to $10.3 million from $9.8 million, reflecting higher sales volumes and lower variable and SG&A costs.
- Adjusted EBITDA declined 20%, mainly because of the prior-year asset-sale gains. DCF fell 71%, principally because Q1 2016 included $42.7 million of mineral-rights sale proceeds; higher interest and G&A cash outlays also weighed on the current period.
- Net income was also affected by Q1 2017 recapitalization costs: $7.8 million of debt modification expense and $5.7 million of warrant issuance expense. A $16.6 million noncash gain from warrant fair-value remeasurement partly offset these charges. Diluted EPS was especially affected by the preferred units and warrants; basic EPS is a more direct comparison of the reported common-unit result.
Capital structure, outlook and risks
- In March, NRP issued $250 million of 12% cumulative Class A preferred units, net of fees, and warrants; the preferred purchasers also received governance and approval rights. Preferred distributions accrued by $2.5 million in Q1. The units are perpetual unless converted or redeemed, and may be paid partly in additional units under specified terms.
- NRP exchanged $241 million of 9.125% notes due 2018 for 10.5% notes due 2022 and issued another $105 million of 2022 notes for cash. It repaid Opco’s $210 million revolver balance and made scheduled Opco note repayments. NRP reported $970.9 million of net debt at quarter-end and compliance with debt covenants.
- After quarter-end, NRP redeemed $90 million of 2018 notes at a premium and planned to redeem the remaining 2018 notes in October 2017 at par, using cash and expected revolver borrowings. Management said it expected to meet obligations, including scheduled debt payments and preferred distributions, and remain covenant-compliant for the following year; it also emphasized continued deleveraging. No specific full-year earnings or revenue guidance is provided.
- The board declared a $0.45-per-common-unit distribution for May 12, 2017. Preferred distributions for the period outstanding in Q1 were also declared, with half to be paid in kind. Preferred terms restrict increases above $0.45 per quarter without preferred-holder approval in specified leverage or coverage circumstances; debt covenants also constrain distributions.
- Management described metallurgical-coal prices as above the lows of early 2016 but expected prices to move toward more sustainable levels; thermal coal markets had improved modestly. Soda ash pricing and demand remain subject to global and regional conditions, while VantaCore is seasonal and locally market-dependent. Commodity prices, lessee production and customer demand remain material risks.
- Foresight Energy accounted for 17.8% of Q1 revenue. NRP’s Deer Run force-majeure dispute concerns missed minimum deficiency payments, with a reported cumulative $53.5 million negative cash impact through Q1 2017; further impact may accrue while the mine remains idle. A separate Macoupin lease dispute had an $8.0 million negative cash impact, and NRP recorded a valuation allowance for the related receivable.
- NRP has a pending land and timber-rights sale; $17.5 million of assets were classified as held for sale and a $1.8 million impairment was recorded. Management intends to use proceeds to repay debt. Management did not expect the cited legal proceedings to materially affect the Partnership, but outcomes are uncertain.
Key facts for investors to verify
- Progress and funding for the remaining 2018-note redemption, and the resulting debt maturities, interest burden and liquidity.
- Foresight’s mine status and the outcome or collectability of the $53.5 million Deer Run and $8.0 million Macoupin disputed amounts.
- Preferred-unit cash and in-kind distribution obligations, conversion and redemption terms, and their effect on common-unit distributions and dilution.
- Whether operating cash generation and DCF can support debt reduction and distributions without relying on asset sales.
- Actual coal, soda ash and aggregates pricing, production and demand relative to management’s market commentary; the filing gives no quantitative full-year guidance.