Natural Resource Partners L.P. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. NRP owns and leases U.S. natural-resource properties and operates construction-materials businesses. Its segments are Coal Royalty and Other, Soda Ash (49% equity interest in Ciner Wyoming), and Construction Aggregates. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue and other income | $93.3 | $97.9 | $276.9 | $311.9 |
| Income from continuing operations | $26.5 | $16.4 | $58.5 | $91.4 |
| Net income attributable to common unitholders and GP | $18.4 | $23.5 | $40.3 | $93.4 |
| Basic net income per common unit | $1.48 | $1.89 | $3.23 | $7.50 |
| Adjusted EBITDA (non-GAAP) | $58.1 | $58.9 | $172.2 | $204.4 |
| Distributable Cash Flow (non-GAAP) | $28.9 | $156.2 | $85.8 | $238.7 |
For the first nine months, continuing-operations operating cash flow was $81.4 million, compared with $74.5 million; investing cash flow was $3.4 million provided, versus $53.5 million provided; and financing cash flow used $4.0 million, versus $76.9 million. The prior-year investing and DCF comparisons included proceeds from asset sales, including the 2016 sale of oil-and-gas working interests.
At September 30, cash was $121.2 million and net carrying-value debt was $936.6 million, down from $1.130 billion at December 31, 2016. Current debt was $174.1 million. NRP reported $111 million of available borrowing capacity under Opco’s credit facility; the facility had $69 million drawn against stated commitments of $180 million. NRP said it complied with debt covenants. On October 2, it redeemed the remaining $94.4 million of 2018 Senior Notes using cash and Opco facility borrowings.
NRP maintained a $0.45 quarterly common-unit distribution. The board declared the next $0.45 distribution for payment November 14, 2017. Preferred Units carry cumulative distributions at 12% annually, up to half payable in additional units. The 2017 recapitalization included $250 million of gross preferred-unit proceeds and warrants to purchase 4.0 million common units.
Material changes versus the prior comparable period
- Q3 revenue declined 5%; nine-month revenue declined 11%. Nine-month continuing income and Adjusted EBITDA also fell, while continuing-operations operating cash flow increased.
- Coal Royalty and Other nine-month revenue was lower mainly because 2016 included $40.4 million of revenue from lease modifications and terminations and $27.3 million of asset-sale gains. Coal royalty revenue itself rose 26%, driven by improved Appalachian metallurgical coal prices and production; lower Illinois Basin production partly offset the increase.
- Construction Aggregates revenue rose 9% for both the quarter and nine-month period, reflecting higher sales and production. Ciner Wyoming equity earnings fell 17% in Q3 and 10% for the nine months, amid lower output and higher maintenance costs.
- Lower DD&A and fewer asset impairments benefited comparisons. Nine-month results also included $7.9 million of debt-modification expense and $4.1 million of debt-extinguishment loss related to refinancing.
- NRP retrospectively adopted accounting that classifies its warrants as equity rather than liabilities. This removes period-end fair-value remeasurement volatility; if the warrants’ down-round feature is triggered, the effect is treated as a deemed dividend reducing income available to common unitholders.
Outlook, risks and unusual items
- Management gave no numerical earnings or production guidance. It said it expects to meet obligations, including scheduled debt payments and preferred distributions, and remain covenant-compliant for one year after issuance of the financial statements. It also intends to continue using operating cash to reduce debt.
- Management cited stronger metallurgical and international thermal coal prices than in 2016, while noting domestic thermal coal faces competition from mild weather and natural gas. Soda ash markets were described as strong internationally; Ciner Wyoming had temporary production issues, with improvement in the quarter. Aggregates results depend on local markets, with gains in Louisiana offset by weaker activity in other areas.
- Foresight Energy’s Deer Run mine force-majeure dispute has caused a reported cumulative $68.5 million negative cash impact through three quarters of 2017; the amount could rise while the mine remains idle. NRP is pursuing litigation. A separate Macoupin Energy lease dispute has caused an $8.5 million negative cash impact; NRP recorded a valuation allowance on the receivable.
- Anadarko sued over alleged acceleration of contingent consideration. NRP disputes the claim; its estimated possible loss ranges from zero to approximately $40 million, plus interest, costs and attorneys’ fees.
- Foresight Energy accounted for 20.1% of Q3 revenue and other income and 18.4% for the nine-month period, creating customer concentration exposure.
- Preferred-unit terms restrict increases in common distributions above $0.45 per quarter under specified leverage or coverage conditions without preferred-holder approval. The preferred units also have conversion, redemption, voting and approval rights; potential conversion and warrants may dilute common unitholders.
- The market-risk section says there were no Opco Credit Facility borrowings at September 30, but the debt note and balance sheet report $69 million outstanding. The filing text contains this discrepancy.
Most important facts for investors to verify
- Current status and cash consequences of the Deer Run and Macoupin disputes, and whether Foresight-related minimum payments resume.
- Outcome and potential exposure in Anadarko’s contingent-consideration lawsuit.
- Debt balances and liquidity after the October 2017 redemption, including facility availability, upcoming maturities, covenant headroom and the filing’s inconsistent $69 million borrowing disclosure.
- Ability to sustain the $0.45 common distribution alongside 12% cumulative preferred distributions and the preferred-unit restrictions.
- Coal production, especially Illinois Basin volumes, and progress at Ciner Wyoming; also monitor concentration in Foresight Energy.
- Effects of warrant and preferred-unit conversion or exercise on common-unit dilution and income available to common unitholders.