Natural Resource Partners L.P. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. NRP owns and leases U.S. natural-resource properties and operates a construction aggregates business. Its three segments are Coal Royalty and Other, Soda Ash (49% equity interest in Ciner Wyoming) and Construction Aggregates. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue and other income | $111.0 million | $94.9 million | $200.1 million | $183.6 million |
| Income from continuing operations | $39.1 million | $25.9 million | $65.2 million | $32.0 million |
| Net income attributable to NRP | $38.2 million | $26.0 million | $64.3 million | $31.9 million |
| Basic net income per common unit | $2.46 | $1.47 | $3.95 | $1.75 |
| Adjusted EBITDA | $60.3 million | $62.7 million | $115.2 million | $113.9 million |
Q2 revenue rose 17%, while six-month revenue rose 9%. Six-month operating cash flow was $74.1 million, versus $55.1 million; continuing-operations operating cash flow was $74.6 million, versus $55.6 million. Six-month investing cash flow was a $1.8 million use, and financing cash flow was a $49.2 million use. Cash increased $23.1 million to $53.0 million. Management reported total liquidity of $108.0 million, including $55.0 million of available Opco credit capacity. Non-GAAP six-month distributable cash flow was $73.7 million and free cash flow was $71.3 million.
At June 30, total debt, net of discount and issuance costs, was $798.3 million, down from $809.3 million at year-end 2017; $75.2 million was classified as current. The Opco revolving facility had $95.0 million drawn and matures in April 2020. NRP reported compliance with debt covenants. The 10.5% senior notes mature in March 2022. Cash paid for interest in the first half was $33.2 million, down from $34.9 million.
Common-unit distributions were $0.45 per unit per quarter during the first half. After quarter-end, the board declared another $0.45-per-unit distribution, payable August 14, 2018. Preferred units carry a 12% annual distribution; $15.0 million accrued in the first half, and the second-quarter $7.5 million cash payment was scheduled for August 14.
Material changes and management commentary
- Coal: Six-month coal royalty and other segment revenue increased 2% to $106.3 million. Coal production fell 11% to 13.315 million tons, but average royalty revenue per ton rose 16% to $4.94. Management cited stronger metallurgical coal prices and stable near-term metallurgical market expectations, while noting trade and tariff uncertainty and longer-term pressure on coal’s share of power generation.
- ASC 606: NRP adopted the new revenue standard on January 1, 2018 using the modified retrospective method; prior-year figures were not restated. Adoption increased opening partners’ capital by $90.3 million. It reduced reported coal royalty and other revenue by $2.0 million in Q2 and $3.7 million for the first half; reported net income was lower by $2.2 million and $3.9 million, respectively, than under the former method. Certain coal and aggregates leases now recognize minimum-payment consideration straight-line over the lease term.
- Soda ash: Segment revenue and other income increased 40% to $26.2 million for the first half, principally reflecting Ciner Wyoming’s $12.7 million royalty-dispute settlement. Unexpected repairs during a scheduled outage reduced production and sales; repairs were completed and operations resumed before quarter-end. Management described domestic demand as stable near term, but cautioned that new international supply, particularly from Turkey, could pressure pricing.
- Aggregates: First-half segment revenue and other income increased 11% to $67.6 million, but higher operating costs largely offset the revenue growth. Adjusted EBITDA margin declined to 10% from 13% for the first half and to 15% from 17% in Q2, with higher diesel prices and repair-and-maintenance timing among the cited factors. First-quarter weather affected road construction and paving revenue.
- Debt costs and earnings: First-half interest expense declined to $35.7 million from $43.4 million, reflecting lower debt balances. The prior-year comparison included $7.9 million of debt-modification expense and $4.1 million of debt-extinguishment loss, neither incurred in the first half of 2018. First-half Adjusted EBITDA increased 1% to $115.2 million.
Risks, contingencies and unusual items
- Foresight / Deer Run: Hillsboro has withheld quarterly minimum lease payments since 2015 and seeks a declaration that its lease terminated. NRP disputes that claim and reported $91.0 million of unpaid minimums, plus approximately $15 million of accrued interest through July 31, 2018; the claim continues to increase by $7.5 million per missed quarter. A bench trial was scheduled for October 22, 2018. Foresight disclosed a $110.7 million impairment at the mine, but NRP reported no impairment indicator for its $235 million net book value in Deer Run reserves as of June 30, 2018.
- Other Foresight dispute: NRP claims approximately $10.1 million of minimum royalties were improperly recouped through June 30, 2018 in connection with Macoupin leases.
- Anadarko litigation: Anadarko seeks additional contingent consideration related to a 2013 transaction. NRP disputes liability; its estimated possible loss ranges from zero to approximately $40 million, plus interest, court costs and attorneys’ fees.
- Market exposure: Coal royalty revenue is exposed to lessee production, contract renewals and spot prices; aggregates depend on regional demand and costs; soda ash faces global price and supply volatility. NRP had $95.0 million of variable-rate debt; management estimated a 1 percentage-point rate increase would add about $1.0 million of annual interest expense if borrowings remained unchanged.
- The filing gave no quantified full-year earnings or cash-flow guidance. Forward-looking expectations are subject to commodity, operating, legal, economic and regulatory risks. Management stated that it remained focused on debt reduction and liquidity.
Important facts for investors to verify
- How much of reported revenue and earnings reflects ASC 606’s minimum-lease accounting and the one-time $12.7 million Ciner Wyoming settlement.
- Progress and outcomes in the Deer Run and Macoupin disputes, including potential recoveries, lease status and any effect on NRP’s reserve valuation and cash flows.
- Debt maturities, covenant headroom, credit-facility availability and the ability to reduce debt while meeting preferred and common-unit distributions.
- Whether coal production and prices, Ciner Wyoming’s output and soda ash pricing, and aggregates margins sustain the reported results.
- The sustainability of non-GAAP DCF and FCF: these measures are not GAAP, and management’s definitions may differ from similarly named measures used elsewhere.