NATURAL RESOURCE PARTNERS LP annual report, FY2015

Natural Resource Partners L.P. — 2015 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015 (not just Q4). NRP owns and leases U.S. mineral properties and operates construction-materials businesses. Its four operating segments are Coal, Hard Mineral Royalty and Other; Soda Ash; VantaCore; and Oil and Gas. The figures per unit reflect a one-for-ten reverse unit split effective February 2016.

Financial performance and liquidity

Metric20152014
Revenue and other income$488.8 million$399.8 million
Operating income (loss)$(477.9) million$188.9 million
Net income (loss)$(571.7) million$108.8 million
Adjusted EBITDA (non-GAAP)$292.1 million$294.6 million
Distributable Cash Flow (non-GAAP)$197.0 million$208.4 million
Cash from operations$203.4 million$210.8 million
Cash and cash equivalents at year-end$51.8 million$50.1 million
Total debt, including current portion$1.385 billion$1.475 billion
  • Revenue rose 22%, principally because NRP owned VantaCore for a full year; comparable coal and oil-and-gas markets weakened.
  • The $681.6 million impairment charge drove the GAAP loss. It included $367.6 million for oil-and-gas properties and $307.8 million in the Coal, Hard Mineral Royalty and Other segment. Management reported 2015 net income excluding impairments of $109.9 million, a non-GAAP measure.
  • Liquidity was $64.8 million at year-end: $51.8 million cash and $13.0 million available under revolving facilities. Current liabilities exceeded current assets by $15.5 million, largely due to scheduled debt principal.
  • NRP paid $2.70 per unit in 2015, versus $14.00 in 2014. The board cut distributions during 2015 by more than 87% from the prior-year level, directing savings primarily to debt reduction. NRP reported net debt reduction of $91.0 million.
  • Interest expense was $93.8 million, up from $80.2 million. The filing reports $375 million of variable-rate debt; a 1 percentage-point rate increase would add about $3.8 million in annual interest expense, assuming unchanged borrowings.

Segments and changes versus prior period

  • Coal, Hard Mineral Royalty and Other: Revenue was $246.4 million, down 4%; coal royalty revenue fell 22% to $144.0 million as production declined 7% and average royalty revenue per ton fell 16%. Other coal-related revenue increased, including $21.0 million in lease assignment fees.
  • Soda Ash: Revenue was $49.9 million, up 21%. NRP’s 49% equity interest generated $49.9 million in equity earnings and $46.8 million in cash distributions. Ciner Wyoming reported record production, according to management.
  • VantaCore: Revenue was $139.0 million, compared with $42.1 million in 2014, reflecting a full year of ownership versus approximately three months in 2014. Adjusted EBITDA was $22.1 million.
  • Oil and Gas: Revenue was $53.6 million, down 10%; lower commodity prices offset higher production. Adjusted EBITDA was $31.0 million, after a $367.6 million impairment charge.
  • NRP reorganized its internal reporting into four operating segments and a corporate segment for the quarter ended December 31, 2015; prior periods were recast for comparison. The change did not affect consolidated results.

Outlook, risks, contingencies and unusual items

  • Management said coal markets were severely challenged and did not expect a near-term recovery. It also expected oil-and-gas revenue to remain exposed to weak prices and decline over time with natural production declines and lower drilling activity. NRP had not hedged future oil or gas production.
  • NRP’s deleveraging plan relies on asset sales, cost control, reduced distributions and other debt-management measures. Management said traditional debt and equity markets were not currently accessible and that further deterioration could impair liquidity and covenant compliance.
  • Management forecast Opco would remain covenant-compliant through December 31, 2016, but noted sensitivity to commodity prices and counterparty risk. Separately, management stated there was substantial doubt about NRP Oil and Gas’s ability to continue as a going concern through December 31, 2016, citing possible leverage covenant noncompliance and a borrowing-base reduction. The subsidiary had $85.0 million outstanding under its reserve-based facility.
  • Major maturities include the $290.0 million Opco revolving facility due October 2017, $425.0 million principal on NRP’s 9.125% notes due October 2018, and scheduled Opco note amortization of about $80.8 million annually through 2018. The filing cautions that refinancing may not be available on acceptable terms.
  • Foresight Energy’s Deer Run mine was idled after elevated carbon monoxide readings. NRP disputes Foresight’s force majeure claim and filed suit. Unpaid minimum deficiency payments for Q2–Q4 2015 caused a reported $16.2 million cash impact; the contractual amount at issue is up to $7.5 million per quarter, subject to royalties paid. Restart timing was unknown.
  • Customer concentration and counterparty distress are material: Foresight generated $86.6 million, or 17.7%, of 2015 revenue and other income. Alpha Natural Resources generated $34.4 million, down from $48.8 million, and filed for bankruptcy in August 2015; which leases would be assumed or rejected remained uncertain. Arch Coal filed for bankruptcy in January 2016; NRP described its exposure as immaterial.
  • After year-end, NRP sold Appalachian Basin oil-and-gas royalty interests and certain aggregates reserves. The filing reports $37.5 million gross / $36.6 million net proceeds for the oil-and-gas sale and $10.0 million gross / $9.8 million net for the aggregates sale; management intended to use proceeds to repay debt. The oil-and-gas sale covered about 10% of year-end proved reserves. The filing also reports a $20.3 million gain on that sale and a $1.6 million gain on the aggregates sale.
  • Other exposures include regulatory and environmental requirements, coal and soda-ash price volatility, operating risks at VantaCore, and a disputed Anadarko contingent-consideration claim. NRP accrued $7.2 million for 2015 contingent consideration; Anadarko asserted that an earlier reorganization accelerated additional payment obligations, which NRP disputed.

Most important facts for investors to verify

  • Liquidity, covenant headroom and refinancing or restructuring progress—especially the May 2016 oil-and-gas borrowing-base redetermination and 2017–2018 maturities.
  • Whether Deer Run resumes production and the outcome and cash impact of NRP’s force majeure litigation with Hillsboro Energy.
  • Alpha’s bankruptcy lease decisions, Foresight’s financial condition, and whether lessee concentration or unpaid amounts worsen.
  • Actual cash proceeds from the post-year-end asset sales and how much was applied to debt; the filing presents both gross and net proceeds.
  • Further impairment risk and the assumptions behind reserve valuations, commodity prices and expected cash flows.
  • Distribution policy and cash available after debt service, maintenance capital expenditure and required reserves.