Natural Resource Partners L.P. — Q2 2019 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2019, compared with the same periods in 2018. NRP owns and leases U.S. mineral properties, primarily coal, and holds a 49% non-controlling interest in Ciner Wyoming, a soda ash producer. The construction aggregates business was sold in December 2018 and is reported as discontinued operations.
Financial highlights
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue and other income | $81.5 million | $69.6 million | $148.5 million | $129.7 million |
| Income from continuing operations | $19.1 million | $35.1 million | $54.9 million | $61.4 million |
| Net income | $19.4 million | $38.1 million | $55.1 million | $62.4 million |
| Basic net income per common unit | $0.95 | $2.38 | $3.20 | $3.73 |
| Net cash from operating activities | $53.4 million from continuing operations | $53.9 million from continuing operations | $76.2 million continuing; $76.5 million total | $71.3 million continuing; $74.1 million total |
- Q2 Coal Royalty and Other revenue rose 32% to $70.1 million, led by production-lease minimums, lease amendment revenue and straight-line minimum-lease revenue. Coal royalty revenue itself fell 12%; coal sales volumes were down 1%.
- Q2 Soda Ash segment income was $11.3 million versus $16.5 million. Ciner Wyoming’s prior-year comparison included $12.7 million from a royalty-dispute settlement; higher production, sales volumes and prices partly offset that effect.
- Q2 operating expenses increased 23% to $20.6 million, including higher bad-debt expense. Interest expense fell to $12.5 million from $17.7 million, but a $29.3 million debt-extinguishment loss contributed to lower net income.
- For the first half, non-GAAP Adjusted EBITDA was $115.2 million versus $105.3 million; non-GAAP distributable cash flow was $77.2 million and free cash flow was $77.1 million. These company-defined measures are not GAAP measures.
- At June 30, total assets were $1.219 billion and total liabilities were $614.6 million. Total debt, net, was $544.1 million, down from $672.8 million at December 31, 2018. Cash and equivalents were $70.9 million; restricted cash was $14.9 million.
- Reported liquidity was $185.8 million: $70.9 million cash, $14.9 million restricted cash and $100 million available under the Opco revolving facility. No revolver borrowings were outstanding; NRP reported compliance with debt covenants.
Material changes and financing
- NRP issued $300 million of 9.125% senior notes due 2025 and used the proceeds plus $76 million of cash to redeem its 10.50% senior notes due 2022. The redemption incurred an $18.1 million call premium and a write-off of debt costs and discount, together included in the $29.3 million extinguishment loss.
- The Opco credit facility’s maturity was extended to April 2023; commitments remained $100 million. Opco also repaid $88.8 million of senior-note principal during the first half, including a $49.3 million prepayment related to the aggregates-business sale.
- First-half common-unit distributions included a one-time $0.85-per-unit special distribution related to tax liabilities from the aggregates sale. In July, the board declared a $0.45-per-unit distribution for Q2 2019 and a $7.5 million preferred-unit distribution.
- Compared with the prior year, the discontinued aggregates business no longer contributed material ongoing revenue or operating income.
Outlook, commentary and risks
- Management expected metallurgical coal prices and sales volumes to decline modestly in the second half of 2019. It also expected domestic thermal coal prices and volumes to decline modestly as lessee contracts rolled off amid a weaker market. Flooding, transport constraints, mine plans and lessee capital limitations affected coal volumes.
- Management reported that three lessees had filed for bankruptcy protection in the preceding three months and expressed caution about the financial condition of U.S. coal producers. Foresight Energy and Contura Energy represented 20% and 16% of Q2 revenue, respectively.
- Ciner Wyoming planned a significant capacity expansion, partly funded by retaining cash otherwise distributed to partners. NRP expected its annual cash distributions from Ciner Wyoming to fall to approximately $25–$28 million for two to three years, with potential longer-term benefits from higher productivity.
- Anadarko’s contingent-consideration lawsuit could result in a loss ranging from zero to approximately $40 million, plus interest, court costs and attorneys’ fees. NRP disputed the claim and was defending it; trial was scheduled for September 2019.
- Coal and soda ash price volatility, lessee financial health, transportation disruptions, customer concentration and potential changes to the tax rules governing publicly traded partnerships are material risks. Management said lower coal prices could also affect property values and debt-covenant compliance.
Investor verification points
- Review the $29.3 million debt-extinguishment charge and the ongoing cost of the 9.125% 2025 notes against the stated debt-reduction and maturity-extension benefits.
- Assess recurring coal royalty performance separately from minimum payments, lease amendments and other items that lifted 2019 revenue.
- Track lessee volumes, bankruptcies, customer concentration and second-half coal-market assumptions.
- Monitor Ciner Wyoming’s expansion, retained cash and the projected $25–$28 million annual distributions.
- Follow the Anadarko litigation and possible exposure, as well as use of the remaining $14.9 million of restricted cash for debt repayment.
- Confirm future liquidity, covenant headroom, required Opco debt amortization and the sustainability of common and preferred distributions.