Natural Resource Partners L.P. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; filed November 5, 2015. NRP owns, operates, manages and leases U.S. mineral interests, including coal, oil and gas, aggregates, and a 49% interest in a soda ash business. Results include VantaCore and the Sanish Field acquisitions completed in late 2014.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue and other income | $125.5 million | $91.6 million | $372.8 million | $262.5 million |
| Operating income (loss) | $(576.3) million | $55.0 million | $(480.0) million | $157.9 million |
| Net income (loss) | $(600.0) million | $36.2 million | $(549.9) million | $100.2 million |
| Net income (loss) per common unit | $(4.79) | $0.32 | $(4.40) | $0.89 |
| Adjusted EBITDA | $78.5 million | $68.6 million | $221.9 million | $214.5 million |
| Distributable cash flow | $58.0 million | $57.8 million | $157.8 million | $160.7 million |
Q3 and nine-month net losses primarily reflect non-cash asset impairments of $626.8 million and $630.6 million, respectively. Reported operating and net margins were therefore substantially affected by the write-downs; the filing does not provide a comparable adjusted margin measure.
- Cash flow: Nine-month operating cash flow was $161.4 million, versus $157.1 million. Investing activities used $24.5 million; financing activities used $125.8 million. Cash increased to $61.2 million from $50.1 million at year-end 2014.
- Debt and liquidity: Total debt and debt-affiliate was $1.425 billion at September 30, down from $1.475 billion at December 31, 2014. Current assets were $133.0 million and current liabilities $149.8 million, a $16.8 million working-capital deficit, mainly reflecting $81.0 million of current debt. At quarter-end NRP reported $15.0 million of combined revolver availability. Following an October borrowing-base reduction and $15.0 million repayment, availability was $13.0 million as of the report date.
- Interest and obligations: Nine-month interest expense was $70.0 million, up from $57.8 million. NRP cited $80.8 million of annual Opco senior-note principal payments through 2018 and $425 million of 9.125% senior notes maturing in 2018.
- Distributions: Per-unit distributions were reduced from $0.35 for Q4 2014 to $0.09 for Q1 and Q2 2015. A $0.045 distribution for Q3 2015 was declared after quarter-end, payable November 13.
Changes versus prior period and operating performance
- Nine-month revenue rose 42%, primarily from the acquired VantaCore aggregates business and Sanish Field production. Non-coal sources accounted for 56% of revenue and other income, versus 34% in 2014. Management noted that VantaCore generates higher revenue but lower margins than NRP’s royalty businesses.
- Coal-related revenue declined 4% for the nine months, including a 19% decline in coal royalty revenue, as lower prices and weaker production in Appalachia and the Illinois Basin outweighed growth elsewhere. Q3 coal-related revenue declined 16%.
- Oil and gas revenue increased 13% for the nine months as acquisition-driven production growth more than offset lower commodity prices. Q3 oil and gas revenue increased 29%, with higher production partly offsetting sharp price declines.
- Equity earnings from Ciner Wyoming rose 27% to $36.7 million for the nine months; cash distributions received were $34.5 million, down from $35.9 million.
- Adjusted EBITDA increased 3% for the nine months, while distributable cash flow declined 2%. Management attributed the EBITDA increase mainly to acquisitions, partly offset by weaker coal royalties.
Outlook, risks and unusual items
- Management said coal markets remained severely challenged and did not expect a near-term recovery. It also cited volatile, weak oil and gas markets and warned that further market deterioration could cause additional impairments. No specific earnings or production guidance was provided.
- NRP’s $626.8 million Q3 impairment included $335.7 million for oil and gas properties, $247.8 million for coal properties and $43.4 million for aggregates properties. Drivers included lower expected commodity prices and drilling, weak coal demand and idled operations, and underperforming aggregates projects.
- Foresight Energy’s Deer Run mine was idled after elevated carbon monoxide readings. NRP disputes Foresight’s force majeure claim; if valid, it could eliminate quarterly minimum deficiency payments of $7.5 million while the mine remains idled. Nonpayment for Q2 and Q3 had a $9.2 million cash impact. Stockpiles were expected to be depleted early in Q4.
- Alpha Natural Resources, NRP’s second-largest lessee, filed for Chapter 11 in August 2015. It continued operating and paying royalties, but NRP expected possible production cuts or mine idling. Foresight and Alpha together represented material revenue concentrations; Foresight was 18% of nine-month total revenue and other income.
- Management’s plan focuses on debt reduction and liquidity, including lower distributions, cost controls and intended asset-sale processes. Management warned that failure to sell assets alongside further market deterioration could weaken liquidity and covenant compliance. It said it believed liquidity was sufficient for current needs and that debt covenants were being met.
- NRP recorded an $8.8 million accrual for contingent consideration payable to Anadarko in 2016. Anadarko separately asserts that an organizational restructuring accelerated additional payment obligations; NRP disputes the claim. Potential additional consideration could be substantial, subject to the agreement’s maximum net-present-value amount of $50 million, less applicable amounts and deductible.
- A subsidiary was named in litigation alleging pollutant discharges from reclaimed West Virginia mine sites. NRP could not reasonably estimate a potential loss. The filing also reports a non-material $3.8 million depletion adjustment relating to prior periods, recorded as a credit in 2015.
- NRP had not hedged future oil or natural gas production. A 1% increase in interest rates would raise annual interest expense by approximately $3.9 million, assuming unchanged variable-rate debt.
Important facts for investors to verify
- Current borrowing availability, debt maturities, covenant headroom and progress refinancing the 2018 senior notes.
- Whether Deer Run resumes production, the resolution of the force majeure dispute, and collection of minimum payments.
- Alpha’s bankruptcy outcome and the resulting impact on royalties, receivables and lease assumptions.
- Commodity-price and reserve assumptions underlying the large impairments, and the potential for further write-downs.
- Execution and proceeds of any asset sales, and whether reduced distributions and operating cash flow can support debt reduction.
- Outcome and potential financial exposure from Anadarko’s contingent-consideration claim and the West Virginia litigation.