Natural Resource Partners L.P. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. NRP owns and leases U.S. coal and other mineral properties, holds a 49% equity interest in Ciner Wyoming (soda ash), and operates a construction aggregates business. Results exclude its sold non-operated oil and gas working-interest business, classified as discontinued operations.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue and other income | $94.9m | $118.2m | $183.6m | $214.1m |
| Income from operations | $50.4m | $70.7m | $87.4m | $119.7m |
| Net income | $50.0m | $46.4m | $66.7m | $69.9m |
| Net income attributable to common unitholders and GP | $42.4m | $46.4m | $56.7m | $69.9m |
| Basic net income per common unit | $3.39 | $3.73 | $4.54 | $5.61 |
| Operating cash flow, continuing operations | — | — | $55.6m | $38.6m |
| Adjusted EBITDA (non-GAAP) | $62.7m | $81.6m | $114.0m | $145.5m |
| Distributable Cash Flow (non-GAAP) | $38.3m | $18.1m | $56.9m | $82.5m |
Q2 operating margin was approximately 53% versus 60% a year earlier; six-month operating margin was approximately 48% versus 56%. These ratios include gains on asset sales and reflect a business mix affected by prior-period items.
Material changes and drivers
- Revenue fell 20% in Q2 and 14% for the first half. Coal Royalty and Other revenue and other income declined 31% for Q2 and 25% for the first half. Coal royalty revenue itself rose 33% in Q2 and 42% for the first half, supported by stronger Appalachian pricing; however, minimum-payment revenue recognized was far lower than in 2016.
- The comparison is affected by 2016 one-time lease modifications and terminations that generated substantial deferred-revenue recognition, plus significant first-half 2016 asset-sale gains. Those items contributed to lower year-over-year Adjusted EBITDA despite higher coal royalty revenue.
- Construction aggregates revenue increased 6% in Q2 and 8% for the first half, but higher production-related materials and labor costs and weaker pricing in some markets pressured earnings. Soda ash equity earnings declined 18% in Q2 and 7% for the first half, reflecting lower output and higher maintenance costs.
- Q2 net income included a $24.0m noncash gain from remeasuring warrant liabilities; the first-half gain was $40.5m. Preferred-unit distributions reduced income attributable to common unitholders by $7.5m in Q2 and $10.0m for the first half. Diluted per-unit results were also affected by the preferred units and warrants.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $40.8m. NRP reported $874.2m of debt, net of discounts and issuance costs, down from $1.126bn at year-end 2016. The balance sheet classified $173.9m as current debt and $700.3m as long-term debt.
- The Opco revolving credit facility had no borrowings outstanding and $180m of borrowing capacity at June 30. Management reported covenant compliance and expected to meet obligations for the following year.
- Operating cash flow from continuing operations was $55.6m for the first half. Investing cash flow from continuing operations was $0.7m; capital expenditures for plant and equipment and other totaled $5.0m. Cash increased by $0.4m to $40.8m.
- The 2017 recapitalization included $250m of preferred units and warrants and issuance of 2022 senior notes. NRP repaid its $210m revolving-facility balance, redeemed $90m of 2018 notes, and exchanged $241m of 2018 notes for 2022 notes. Management planned to redeem the remaining 2018 notes in October 2017 using cash and facility borrowings.
- Common-unit distributions remained $0.45 per quarter. The 12% cumulative preferred distribution may be paid up to half in additional preferred units. Preferred-unit and debt covenants restrict increases in common distributions under specified leverage or coverage conditions.
Outlook, commentary and risks
- No formal earnings or production guidance was provided. Management said it intended to continue reducing debt and improving credit metrics. It cited stronger, but volatile, metallurgical-coal markets; improving Appalachian thermal-coal conditions; and continued challenges for some producers. It noted that soda ash pricing was firm, while Ciner Wyoming output and maintenance weighed on results.
- Coal production at Foresight Energy’s Deer Run mine remained idled following elevated carbon monoxide readings and a disputed force majeure claim. NRP reported a cumulative $61.0m negative cash impact from unpaid minimum deficiency payments through Q2 2017; the amount may increase if the mine remains idle. Foresight represented 17.1% of Q2 revenue and other income.
- Anadarko filed suit in July 2017 over contingent consideration related to NRP’s Ciner Wyoming acquisition. NRP disputed the claim; the estimated possible loss ranged from zero to approximately $40m, plus interest, costs and attorneys’ fees.
- NRP also reported an $8.4m negative cash impact from a separate dispute over Foresight lease recoupments and recorded a valuation allowance against the related receivable. Commodity-price, local-market, customer, and interest-rate risks remain relevant.
- After quarter-end, the board declared a $0.45 common-unit distribution payable August 14, 2017 and a preferred-unit distribution, half payable in kind.
Important facts for investors to verify
- Whether Foresight’s idled Deer Run mine resumes production and whether NRP recovers disputed deficiency payments and lease amounts.
- The outcome and potential cost of the Anadarko contingent-consideration lawsuit.
- Completion and funding of the planned October 2017 redemption of remaining 2018 senior notes, and the resulting use of cash or revolving-facility capacity.
- Underlying cash generation and distributable cash flow excluding prior-period asset sales, one-time lease revenue, and noncash warrant fair-value gains.
- Preferred-unit distribution and conversion terms, warrant dilution and valuation, and the effect of their covenants on future common distributions.