Natural Resource Partners L.P. — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015 (not just Q4). NRP owns and leases U.S. mineral properties and operates construction-materials businesses. Its four operating segments are Coal, Hard Mineral Royalty and Other; Soda Ash; VantaCore; and Oil and Gas. The figures per unit reflect a one-for-ten reverse unit split effective February 2016.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue and other income | $488.8 million | $399.8 million |
| Operating income (loss) | $(477.9) million | $188.9 million |
| Net income (loss) | $(571.7) million | $108.8 million |
| Adjusted EBITDA (non-GAAP) | $292.1 million | $294.6 million |
| Distributable Cash Flow (non-GAAP) | $197.0 million | $208.4 million |
| Cash from operations | $203.4 million | $210.8 million |
| Cash and cash equivalents at year-end | $51.8 million | $50.1 million |
| Total debt, including current portion | $1.385 billion | $1.475 billion |
- Revenue rose 22%, principally because NRP owned VantaCore for a full year; comparable coal and oil-and-gas markets weakened.
- The $681.6 million impairment charge drove the GAAP loss. It included $367.6 million for oil-and-gas properties and $307.8 million in the Coal, Hard Mineral Royalty and Other segment. Management reported 2015 net income excluding impairments of $109.9 million, a non-GAAP measure.
- Liquidity was $64.8 million at year-end: $51.8 million cash and $13.0 million available under revolving facilities. Current liabilities exceeded current assets by $15.5 million, largely due to scheduled debt principal.
- NRP paid $2.70 per unit in 2015, versus $14.00 in 2014. The board cut distributions during 2015 by more than 87% from the prior-year level, directing savings primarily to debt reduction. NRP reported net debt reduction of $91.0 million.
- Interest expense was $93.8 million, up from $80.2 million. The filing reports $375 million of variable-rate debt; a 1 percentage-point rate increase would add about $3.8 million in annual interest expense, assuming unchanged borrowings.
Segments and changes versus prior period
- Coal, Hard Mineral Royalty and Other: Revenue was $246.4 million, down 4%; coal royalty revenue fell 22% to $144.0 million as production declined 7% and average royalty revenue per ton fell 16%. Other coal-related revenue increased, including $21.0 million in lease assignment fees.
- Soda Ash: Revenue was $49.9 million, up 21%. NRP’s 49% equity interest generated $49.9 million in equity earnings and $46.8 million in cash distributions. Ciner Wyoming reported record production, according to management.
- VantaCore: Revenue was $139.0 million, compared with $42.1 million in 2014, reflecting a full year of ownership versus approximately three months in 2014. Adjusted EBITDA was $22.1 million.
- Oil and Gas: Revenue was $53.6 million, down 10%; lower commodity prices offset higher production. Adjusted EBITDA was $31.0 million, after a $367.6 million impairment charge.
- NRP reorganized its internal reporting into four operating segments and a corporate segment for the quarter ended December 31, 2015; prior periods were recast for comparison. The change did not affect consolidated results.
Outlook, risks, contingencies and unusual items
- Management said coal markets were severely challenged and did not expect a near-term recovery. It also expected oil-and-gas revenue to remain exposed to weak prices and decline over time with natural production declines and lower drilling activity. NRP had not hedged future oil or gas production.
- NRP’s deleveraging plan relies on asset sales, cost control, reduced distributions and other debt-management measures. Management said traditional debt and equity markets were not currently accessible and that further deterioration could impair liquidity and covenant compliance.
- Management forecast Opco would remain covenant-compliant through December 31, 2016, but noted sensitivity to commodity prices and counterparty risk. Separately, management stated there was substantial doubt about NRP Oil and Gas’s ability to continue as a going concern through December 31, 2016, citing possible leverage covenant noncompliance and a borrowing-base reduction. The subsidiary had $85.0 million outstanding under its reserve-based facility.
- Major maturities include the $290.0 million Opco revolving facility due October 2017, $425.0 million principal on NRP’s 9.125% notes due October 2018, and scheduled Opco note amortization of about $80.8 million annually through 2018. The filing cautions that refinancing may not be available on acceptable terms.
- Foresight Energy’s Deer Run mine was idled after elevated carbon monoxide readings. NRP disputes Foresight’s force majeure claim and filed suit. Unpaid minimum deficiency payments for Q2–Q4 2015 caused a reported $16.2 million cash impact; the contractual amount at issue is up to $7.5 million per quarter, subject to royalties paid. Restart timing was unknown.
- Customer concentration and counterparty distress are material: Foresight generated $86.6 million, or 17.7%, of 2015 revenue and other income. Alpha Natural Resources generated $34.4 million, down from $48.8 million, and filed for bankruptcy in August 2015; which leases would be assumed or rejected remained uncertain. Arch Coal filed for bankruptcy in January 2016; NRP described its exposure as immaterial.
- After year-end, NRP sold Appalachian Basin oil-and-gas royalty interests and certain aggregates reserves. The filing reports $37.5 million gross / $36.6 million net proceeds for the oil-and-gas sale and $10.0 million gross / $9.8 million net for the aggregates sale; management intended to use proceeds to repay debt. The oil-and-gas sale covered about 10% of year-end proved reserves. The filing also reports a $20.3 million gain on that sale and a $1.6 million gain on the aggregates sale.
- Other exposures include regulatory and environmental requirements, coal and soda-ash price volatility, operating risks at VantaCore, and a disputed Anadarko contingent-consideration claim. NRP accrued $7.2 million for 2015 contingent consideration; Anadarko asserted that an earlier reorganization accelerated additional payment obligations, which NRP disputed.
Most important facts for investors to verify
- Liquidity, covenant headroom and refinancing or restructuring progress—especially the May 2016 oil-and-gas borrowing-base redetermination and 2017–2018 maturities.
- Whether Deer Run resumes production and the outcome and cash impact of NRP’s force majeure litigation with Hillsboro Energy.
- Alpha’s bankruptcy lease decisions, Foresight’s financial condition, and whether lessee concentration or unpaid amounts worsen.
- Actual cash proceeds from the post-year-end asset sales and how much was applied to debt; the filing presents both gross and net proceeds.
- Further impairment risk and the assumptions behind reserve valuations, commodity prices and expected cash flows.
- Distribution policy and cash available after debt service, maintenance capital expenditure and required reserves.