Natural Resource Partners L.P. — Q3 2016 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2016. NRP owns and leases U.S. mineral properties, with continuing operations in Coal Royalty and Other, Soda Ash, and VantaCore construction materials. In July 2016, NRP sold its non-operated oil and gas working-interest assets for $116.1 million and reported them as discontinued operations. Unit and per-unit figures reflect a 1-for-10 reverse split completed in February 2016.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue and other income | $97.9 million | $114.0 million | $311.9 million | $333.8 million |
| Income (loss) from continuing operations | $16.4 million | ($330.7 million) | $91.4 million | ($270.0 million) |
| Net income (loss), including discontinued operations | $23.5 million | ($600.0 million) | $93.4 million | ($549.9 million) |
| Basic and diluted net income (loss) per common unit | $1.89 | ($47.91) | $7.50 | ($44.00) |
| Adjusted EBITDA, a non-GAAP measure | $58.9 million | $70.4 million | $204.4 million | $198.1 million |
| Distributable Cash Flow (DCF), a non-GAAP measure | $156.2 million | $54.2 million | $238.7 million | $142.5 million |
Cash flow and liquidity. For the first nine months of 2016, cash provided by operating activities was $82.7 million, including $74.5 million from continuing operations, versus $161.4 million and $132.2 million, respectively, in 2015. Investing activities provided $160.3 million, primarily reflecting asset-sale proceeds; financing activities used $202.4 million. Cash and cash equivalents were $92.4 million at September 30, 2016. Current liabilities exceeded current assets by approximately $50.3 million, largely because of debt classified as current.
Debt and covenants. Debt carrying value, net of discounts and issuance costs, was $1.201 billion at September 30, 2016, including $158.6 million current and $1.042 billion long-term. This included $425 million of 9.125% senior notes due October 2018, $260 million outstanding on Opco’s revolving facility, and $529.9 million of Opco private-placement notes. Opco reported leverage of 2.95x against a 4.0x maximum and fixed-charge coverage of 5.46x against a 3.5x minimum; NRP said it was in compliance with its debt covenants.
Margins. The filing does not provide a consolidated operating-margin figure as a highlighted metric. Operating income was $38.9 million in Q3 2016, versus an operating loss of $307.8 million in Q3 2015; the comparison is substantially affected by the prior-year impairment charge.
Material changes versus the prior comparable period
- Q3 revenue declined 14%; nine-month revenue declined 7%. Q3 coal production fell 35% to 7.4 million tons, and coal royalty revenue fell 29% to $27.0 million. Across nine months, production fell 41% and coal royalty revenue fell 37%.
- Q3 Adjusted EBITDA decreased 16%, chiefly because of lower coal production and royalty revenue. Nine-month Adjusted EBITDA rose 3%, supported by $48.0 million of additional minimum royalties recognized after lease modifications or terminations and $20.4 million of additional asset-sale gains.
- Q3 and nine-month DCF increased substantially, but NRP attributed much of the increase to the oil-and-gas asset sale and other asset dispositions. DCF is a non-GAAP measure and should not be read as recurring operating cash generation.
- VantaCore revenue fell 19% in Q3 and 18% for the nine-month period, reflecting lower aggregates and brokered-stone activity, especially in oil-and-gas service markets. Soda Ash segment income also declined year over year.
- Operating cash flow for the first nine months fell to $82.7 million from $161.4 million. NRP said the continuing-operations decline was primarily driven by lower coal royalties and lower minimum cash payments on certain leases.
Outlook, risks, and unusual items
- Liquidity and refinancing: Management forecast that NRP would meet obligations, remain covenant-compliant, and continue as a going concern. It also warned that scheduled 2017 debt payments would strain liquidity. NRP was pursuing potential new equity capital, refinancing or exchange options for some or all of the 2018 senior notes, further asset sales, and debt reduction, with Greenhill & Co. as adviser. No completed equity raise or refinancing was reported in this filing.
- Market outlook: Management reported improving coal markets in Q3, particularly metallurgical coal, and expected the coal royalty business to benefit if higher prices persisted. It also cited continuing pressure on U.S. coal producers, regulatory and natural-gas competition, and exposure to commodity demand, pricing, and counterparty risks.
- Foresight Energy disputes: NRP’s dispute over force majeure at the idled Deer Run mine involved $7.5 million of minimum deficiency payments per quarter; unpaid amounts had caused a cumulative $38.5 million negative cash impact through Q3 2016. NRP could not estimate when or whether production would resume. A separate lease-calculation dispute involved a $5.8 million negative cash impact; NRP recorded a valuation allowance against the related receivable.
- Other legal contingency: A subsidiary was named in a West Virginia reclaimed-mine discharge lawsuit. NRP could not reasonably estimate potential loss, if any. Management said other ordinary-course proceedings were not expected to materially affect the Partnership.
- Nonrecurring and accounting items: NRP recognized $40.4 million of deferred coal royalty revenue following lease modifications, terminations, and forfeitures. It recorded $7.7 million of impairments in the first nine months of 2016, compared with $365.5 million in the prior-year period. The 2015 comparison included major coal, oil-and-gas, and aggregates impairments. NRP also corrected an $8.0 million understatement of first-quarter 2016 operating and financing cash flows in the nine-month cash-flow statement.
- Distribution: NRP declared a $0.45-per-unit distribution payable November 14, 2016. Distributions paid during the first nine months of 2016 totaled $16.8 million.
Important facts for investors to verify
- Progress and terms of any equity raise, refinancing, or exchange addressing the $425 million October 2018 notes and Opco’s scheduled debt payments and facility commitment reductions.
- Subsequent covenant calculations, liquidity, and cash available to meet scheduled principal and interest payments.
- Whether coal-market improvement is sustained and whether it translates into higher production, royalties, and cash receipts.
- Outcome and cash-flow effects of the Deer Run force-majeure dispute and the separate Foresight Energy lease dispute.
- How much future cash generation depends on recurring operations versus asset sales and recognition of previously deferred minimum royalties.
- Whether distributions remain supportable given operating cash flow, debt obligations, and management’s stated liquidity priorities.