May 10, 2017
Executives
Kathy Roberts – Vice President, Investor Relations Wyatt Hogan – President and Chief Operating Officer Craig Nunez – Chief Financial Officer
Analysts
Mark Levin – Seaport Global Paul Forward – Stifel Nicolaus
Operator
[Technical difficulty] First Quarter 2017 Earnings Conference Call. As a reminder, this conference is being recorded.
I would now like to introduce your host for today's conference, Kathy Roberts, Natural Resource Partners, Vice President of Investor Relations. Ms.
Roberts, you may begin.
Kathy Roberts
Good morning, and welcome to Natural Resource Partner's first quarter 2017 conference call. Today's call is being webcast and a replay will be available on our Web site for seven days.
Joining me today will be Wyatt Hogan, President and COO; and Craig Nunez, CFO. Some of our comments today may include forward-looking statements reflecting NRP's views about future events.
These matters involve risk and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in NRP's form 10-K for the year-ended December 31st 2016 and other Securities Exchange Commission filing.
We undertake no obligation to update or revise publically any forward-looking statements for any reasons. Our comments today are also -- will also include non-GAAP financial measures.
Additional details and reconciliations to the most directly comparable GAAP measures are included in our first quarter 2017 press release which can be found on our Web site. Now we'll turn the call over to Wyatt.
Wyatt Hogan
Thanks, Kathy. And thank you to everyone for participating in NRP's first quarter earnings call.
This is our first earnings call in 14 years as a public company. At the outset, I want to highlight that because a significant part of our business consists of royalties from coal operations.
We value the relationships that we have with our lessees above everything else and protecting the confidential nature of the communications that we have with our lessees is essential to our ability to manage our properties effectively. In addition, many of our lessees are public companies.
As a result, on this call we do not intend to discuss the operations or outlook for any particular operation or lessee. However, given NRP's unique perspective derived from the relationships with almost every major coal company, we will try to give you a big picture sense of the trends we are seeing across the coal industry.
This position also applies to our interest in Ciner Wyoming as we are a minority owner in that operation and Ciner Resources is a public company. I would refer you to Ciner's public disclosures and commentary for specific questions regarding that business segment.
Finally with respect to our aggregates business while these are operations that we do control, for obvious competitive reasons, we will not be discussing any pricing or sales information as they relate to the specific markets. With all of that being said, the first quarter of 2017 was a transformational quarter for NRP as we completed the recapitalization transactions that strengthened our balance sheet, extended our debt maturities, and enhanced our liquidity.
These transactions, which Craig will discus in more detail in a moment, were a culmination of a 2-year strategy focused on reducing leverage and extending the debt maturities at NRP in the midst of an extremely difficult period in the coal sector. The combination of the royalty nature of NRP's coal business, our diversification into the soda ash and construction aggregates businesses, and of course the tireless efforts of our team have enabled NRP to emerge from this cycle with a stronger balance sheet and improved liquidity.
From an operational performance perspective, the first quarter results are highlighted by an improved coal market, particularly with respect to our metallurgical coal properties and continued steady cash distributions from our soda ash investment in Ciner Wyoming. The metallurgical coal market and the performance of our low cost Illinois Basin thermal properties are the primary drivers of the coal segment.
Metallurgical coal accounted for 59% of NRP's coal royalty revenues and 38% of the coal produced from our properties in the first quarter. China's production cutbacks in 2016 and a temporary global supply-demand imbalance exacerbated in part by Cyclone Debbie in Australia have combined to create a met coal market that is significantly stronger than last year.
As a result, the revenue per ton we received for our central and southern Appalachian properties increased by 68% and 118% respectively compared to the first quarter of 2016. While we don't anticipate that met coal prices will remain at the levels achieved in the first quarter, we do believe that the current global market dynamics supports a sustained price above the prices our lessees are receiving in early 2016.
With respect to our Illinois Basin properties, those results reflect higher tonnage indicative of stronger export and domestic thermal market as compared to 2016. As a data point, thermal exports from United States increased to 11.5 million tons in the first quarter.
An increase of 120% compared to the same period in 2016. Regarding our soda ash business, we received another 12.25 million distribution from Ciner Wyoming in the first quarter.
Although sales volumes were higher relative to the first quarter of 2016, Ciner experienced several unplanned production issues at its surface operations during the quarter and sold the additional volumes out of inventory. With respect to the markets, Ciner benefited from stronger than anticipated prices on AMSAC [ph] sales in Asia.
In February, Chinese soda ash export prices peaked at the highest levels since 2012. While the prices have normalized since then, they remain at levels above 2016.
The markets in North and South America performed as expected with aggressive action from European synthetic producers putting downward pressure on prices. These markets have stabilized and Ciner expects the markets to remain at Q1 levels for the remainder of the year.
For more detail on this business segment, I would refer you to the Ciner Resources' press release. With respect to our construction aggregates business, I want to emphasize that the first quarter is typically the slowest in this volatile period of the year as the winter season impacts construction activity.
As a result, you should not take the first quarter as an indicator of our projected annual performance. That all being said, our construction aggregates results were generally in line with our expectations for the quarter.
One final comment, yesterday entities controlled by the Robertson family acquired the remaining interest in our general partner from Chris Cline. In connection with the acquisition Trey Jackson who is Chris' nominee to our Board resigned.
With Chris no longer in control of Foresight, we did not see a reason to continue the formal relationship with Chris. And this presented an opportunity for the Robertson family to regain 100% ownership of our general partner.
We have appreciated Chris' support in partnership over the years and of course still highly value our relationship with Foresight which remains our largest lessee. I will now turn the call over to Craig to review the specifics of our recapitalization transactions and our first quarter financial performance.
Craig Nunez
Thank you, Wyatt, and good morning everyone. We have quite a lot of ground to cover today.
And I would like to begin with an overview of the preferred units and warrants that we issued as part of the recently completed series of recapitalization transactions. We issued $250 million of perpetual convertible preferred units with a 12% coupon, up to 0.5 of which may be paid in kind or pit at NRP's option.
The holder of the preferred has the right to convert a portion of the preferred in the common units beginning after year 5, and has the right to convert all of the preferred units after year 8. NRP has the right to force conversion after year 12.
We also have the right to redeem the preferred with cash at any time in accordance with the specified redemption schedule. The preferred security does not have a fixed conversion ratio or exercise price.
Let me say that again. The preferred security does have a fixed conversion ratio or exercise price.
Instead, the holder will receive a number of common units with a value equal to the principal plus cumulative unpaid dividend, if any, at the time of the conversion. Or in other words, the higher the price of NRP common units at the time of the conversion, the fewer common units will be issued and vise versa.
This mechanism has the practical effect of limiting the potential return of the preferred security to the coupon rate and preserving the equity upside for common unit holders. We also issued 4 million 8-year warrants to purchase common units.
The first tranche of 1.75 million warrants has an exercise price of $22.81 per unit. And the second tranche of 2.25 million warrants has an exercise price of $34 per unit.
Upon exercise, NRP has the choice of settling the warrants with the issuance of NRP common units or cash. The warrants also provide for net settlement which means that the holder will receive less units or cash then they would if the ones we're exercisable on one-for-one basis.
Instead the unitholder is only entitled to receive units or cash equal to intrinsic value of the warrant when exercise. So at the risk of getting too far into the details let me give you an example with numbers of how the warrants work if all 4 million warrants were exercised at a common unit value of $35 for example.
NRP could settle by issuing on 674,000 common units which is less than 17% of the 4 million warrants outstanding. Let me give you those numbers again just as representative example if all 4 million warrants were exercise when the common units were at $35.
NRP could settle all 4 million units through the issuance of only 674,000 common units or less than 17% of the warrant outstanding. Kathy will be happy to work through the numbers with you on this because it is complicated so feel free to give her a call if you'd like.
One of the most attractive features of these transactions for NRP is the flexibility we have to take out both the preferred and warrants with cash or common units at our option. If our business and liquidity are strong we will use cash and avoid dilution.
On the other hand if times are tight we can avoid a large cash outflow and safeguard the balance sheet by delivering units. So now let's discuss the accounting for the transaction which is equally complex Generally Accepted Accounting Principles require us to record the value of the warrants as a liability on our balance sheet and recognize changes in that value as gains or losses on the income statement.
If the value of the liability falls as will generally be the case when our unit price declines, we will recognize a gain if the value of the liability rises as will generally be the case when our unit price increases we will record a loss. On March the date the warrants were issued we recorded an initial liability of $78 million.
By the end of the first quarter and primarily in response to a decrease in our unit price the value of the liability had fallen to $61 million resulting in a $16.6 million gain on the income statement. Now accounting for the preferred units is a bit more straightforward than the warrants.
We simply reduced the $250 million preferred proceeds by the 78 million warrant value and 13 million of issuance costs to arrive at a carrying value of 159 million on the balance sheet at closing of the transaction. Unlike the warrants we will not be required to mark the preferred to market each period.
However the preferred balance will increase to the extent that we elect to pick dividends the last accounting aspect of the recap transactions worth noting is the impact to our diluted earnings per unit. First of all GAAP requires that we give effect to the potential dilutive effect of the warrants and preferred unit even though we have the option to pay off both of these instruments with cash and avoid all dilution.
Second, GAAP also requires us to strip out certain items from net income which is the numerator of the earnings per unit fraction that can have a material impact on the results this was especially noteworthy this quarter where removal of the $16.6 million gain on the warrant liability resulted in a significant difference between basic and fully diluted EPU. We've included a table in the 10-Q that illustrates the diluted EPU calculation and we will make it a point to explain material differences between basic and diluted EPU in future.
So with that I'd like to move now to a summary of our first quarter financial results and I'll compare these sequentially to the fourth quarter and year-over-year to the first quarter of 2016. Let me say at the outset there is a great deal of noise in our results.
The first and fourth quarter numbers were significantly impacted by costs associated with closing the recapitalization transactions and last year's results were marked by impairment charges and gains on asset sales related to our de-leveraging strategy. I will break each of these items out for you and attempt to explain the results in a way that will help you sort through the noise and understand the underlying operating performance of our businesses.
Specifically, I'll discuss our comparative results excluding the following items. In the first quarter of this year, we recorded $17.4 million of costs related to the recapitalization transactions which was comprised of $7.8 million of debt modification cost $5.7 million of warrant issuance expense and $3.8 million of performance-based awards that are included in general and administrative expense.
These costs were offset in part by the $16.6 million mark-to-market gain on our warrant liability that occurred between the time the recapitalization closed in the end of the quarter. We also recognize $1.8 million of asset impairments in the first quarter of this year.
In the fourth quarter of last year, we incurred $9.2 million of impairment charges $1.8 million of gains on asset sales and $3.7 million of performance-based awards related to the recap transactions. And in the first quarter of last year 2016, we incurred $1.9 million impairment charges and $21.9 million of gains on asset sales.
So with that let's review our results. Total company revenue for the first quarter was $89 million and net income attributable to common unitholders in the general partner was $14.3 million or $0.15 per basic common unit.
Adjusting for the items discussed previously total company revenue and net income delivered sequential increases of 3% and 15% respectively and delivered year-over-year growth of 20% and almost 400% respectively. These results were driven by significant improvement in our coal segment and steady growth in our soda ash business.
Now for our segment results, coal royalty and other revenue for the quarter was $51 million and operating income was $35 million adjusting for the previously mentioned impairment charges and gains on sales recorded in prior periods. Revenue and operating income posted sequential increases of 16% and 21% respectively and year-over-year growth of 30% and 51%.
Higher metallurgical coal production and prices as well as increased production on our Illinois Basin thermal coal properties were the primary drivers of improved results. Now for soda ash equity in the earnings of our 49% equity investment in Ciner Wyoming were $10.3 million in the first quarter representing a sequential increase of 10% and year-over-year growth of 5%.
We received $12.25 million of cash distributions during the first quarter which was unchanged from the previous quarter and the first quarter last year. As for our construction aggregate business revenue for the first quarter was $27 million and we recorded a net operating loss of $1.5 million which was in line with our expectations for the quarter.
This business is seasonal in nature in the first quarter it's typically the low point of the year as construction activity declines in winter months. Now for the Corporate and Financing segments total Corporate and Financing costs were $27 million for the first quarter, which were 12% lower than the fourth quarter and flat with the first quarter 2016.
These results were significantly impacted by the recapitalization transactions however. Adjusting for those items Corporate and Financing costs decreased 3% though sequentially and year-over-year the decrease is being driven predominantly by lower interest expense.
Turning to cash flow the partnership generated cash from operating activities in the first quarter to $20.2 million or a $1.62 per common unit. There were several material nonrecurring items that had a significant impact on cash from operations in the current and comparative quarters.
The first quarter of this year was negatively impacted by $9.2 million of interest expense that was paid in conjunction with the extension of our 2018 bonds. Since interest payments on the 2018 bonds were historically paid in the second quarter the early payment distorts year-over-year comparisons.
Second, we make cash payments of $7.50 million for performance-based awards associated with the recapitalization transactions in in the first quarter of this year. And lastly, the first quarter of last year included $3.9 million of cash from discontinued operations of our oil and gas segment.
But for these nonrecurring items, cash from operations increased 46% from the fourth quarter to the first quarter, and 63% compared to the first quarter of last year. We incurred $2.1 million of capital expenditures in the first quarter or $0.17 per unit, compared to $1 million in the fourth quarter, and $1.4 million in the first quarter of 2016.
We paid $5.6 million of distributions to common units in the first quarter, or $0.45 per common unit. We ended the quarter with $113 million of cash and $180 million of available borrowing capacity under our Opco bank facility.
Early in the second quarter, we used $94 million of cash to redeem $90 million of our non [indiscernible] of 2018 bonds. We still have $94 million of the 2018 bonds outstanding that we plan to redeem in October at par.
That concludes my prepared remarks. And with that, I'd like to turn the call back over to the operator for questions.
Operator
[Operator Instructions] Your first question comes from the line of Mark Levin from Seaport Global. Your line is open.
Mark Levin
Hi, gentlemen. Thanks very much for hosting this call.
Obviously, a lot of noise, as you mentioned, in the numbers. But I want to kind of bring it back, at least for now, to bigger picture questions, and how to think about debt reduction targets and goals from hereon out versus the strategy toward growing the distribution or when you might consider growing the distribution again.
Maybe you can kind of walk us through the big picture, and help us understand how you think about one versus the other.
Wyatt Hogan
Sure. Thanks Mark.
This is Wyatt. Over in the near-term, we're going to continue to focus on deleveraging the partnership, improving our cost structure as well as our balance sheet.
However we recognize that as an MLP, at some point we will be looking to grow the partnership and increase distributions to the unit holders. At this point we're not prepared to provide a timeline for acquisition or distribution growth.
But, right now, it's essentially continue the strategy that we've had over the past couple of years, which is to focus on de-leveraging and improving the balance sheet over the near term.
Mark Levin
Wyatt, is there a target leverage ratio that we should be thinking about?
Wyatt Hogan
I don't think so, Mark. Right now we're not commenting on future outlook.
And so there's no specific target that I would like to communicate right now. We're just going to continue to try to drive it lower, with the idea that we'd get to a position where we're comfortable looking at growth again.
Mark Levin
Got it. And related to that de-leveraging question, are there any additional major asset sale opportunities or are you pretty comfortable with what you have right now?
Wyatt Hogan
Mark, there is one asset sale that we have that's indicated, at least tangentially, in our earnings release, where we have a definitive agreement to sell some timber assets in West Virginia. But beyond that, there's no significant acquisitions or divestitures on the horizon.
And we're not going to comment on anything specific, but the [indiscernible] is noted in the disclosure.
Mark Levin
Sure, perfect. And then my last question, when you're kind of thinking about the trajectory of EBITDA or earnings over the course of this year.
I realize you guys aren't giving guidance, but just from a modeling perspective, thinking about how Q2 might compare to Q1, and then Q3 and Q4 just to kind of give us an idea maybe of how you see the quarters breaking out over the course of the year maybe relative to Q1.
Wyatt Hogan
Yes, again, Mark, I don't think we're -- we're not giving any guidance right now, so I can't comment on the future quarters.
Mark Levin
Fair enough. All right, appreciate it.
Thank you very much.
Operator
Your next question comes from the line of Paul Forward from Stifel. Your line is open.
Paul Forward
Good morning, and thanks for having the call.
Wyatt Hogan
Morning, Paul.
Paul Forward
Yes, Wyatt, let's see. I guess, it sounds like you're really not going to give any sort of numerical guidance, but certainly you could talk about your lessees and how they're responding to current market conditions.
I was just wondering if you could talk a little bit about the metallurgical coal business as it is right now. Are you seeing -- certainly this is a historic move upward that we've seen in pricing over the last six months or so, I was just wondering if you could talk a little bit about your lessees' activities, and are there -- could we anticipate that you will continue to see -- or how can I ask this without having you really talk about guidance.
Is there activity levels that, with recent spot market weakness, are you concerned that if it continues that you will see a backing off of growth plans? And maybe as a follow-up to that, how weak would market pricing have to go relative to where we are now before we might see some sort of backing off of growth plans among lessees?
Wyatt Hogan
Sure. So I guess first, Paul, maybe a few data points would be helpful for you.
When you compare our first quarter of this year to the fourth quarter of '16, metallurgical coal tonnage from our properties increased by about 650,000 tons, about 530,000 of that came out of Central Appalachia, and the remainder came out of Southern Appalachia. So we did see from the fourth quarter of '16 to the first quarter of this year an increase in the metallurgical coal produced from our properties.
That led to met coal revenues increasing a little over $5 million as compared to Q4. So, higher prices and increased production on met coal in the consecutive periods.
The average realized price per ton increased about $0.50 per ton for metallurgical coal in those period. So we did see significantly increased production activity.
Some of that is in response to market, and some of it is in response to -- or some of it is caused by specific mines that may have issues in the fourth quarter that came back on in the fourth quarter, and vice versa. And of course, let these also move on and off our property from time to time.
So I do think -- and the other thing I'd point out as well in terms of where we are today at NRP, receives our royalties and production a month after the actual coal is produced and sold. And so there's a lag effect that we have.
And so we're still benefiting today from the prices from last month in terms of our numbers. So in terms of specific prices that it might drop to, I don't really know.
But just you guys follow all the other operators and their comments that they've made on their calls. I think the general sense is that metallurgical coal will settle back down a little bit, and it's already started that downward move, as I indicated in my comments.
I think it's going to settle out at a price that's above the numbers from last year, and that price is conducive to continued production and sale of met coal from our properties.
Paul Forward
Thanks, Wyatt. And I guess maybe another point matters, just wondering, and since you've got discussions with a whole host of lessees, you might give us a different perspective on this.
But are you hearing any concerns among lessees about things like labor tightness that might be a limiting factor on growth? Or maybe another point is that certainly the rails are important in the economic considerations of do grow or do you stay put.
How aggressive are the rails being in terms of claiming higher transport rates in response to this really tight international market?
Wyatt Hogan
I do think, Paul, that labor is a significant constraint on growth. With the deterioration of the coal industry over the last couple of years -- a lot of the labor pool has essentially moved out of Central Appalachia, and so I think production response to the current market will be muted to some degree by the inability of labor -- or inability of the companies to find the labor to mine the coal.
So that should be good from a pricing perspective in the market. It will limit the supply response to some degree.
You know the rails are going to take their piece of the pie when, when prices go up I think they're going to charge more so, I think that that's a battle that the operators have to face on a daily basis.
Paul Forward
Yes, switching over to thermal coal, just wondering if you could talk a little bit about obviously you know you're well supported with I think today you've got about 330 natural gas prices very helpful to the 2017 outlook for thermal coal just wondering if you could talk about you know your lessees mix of, of assets in thermal coal and do you see over time. Over the next a couple years that, that that plant retirements could have an effect on volumes over the next couple years or is this likely to be more offset relative to the, to the 2016 levels by were natural gas prices have gone relative to the low 2016?
Wyatt Hogan
We've seen over the last 12 months or so at least the six to 12 months natural gas will pretty firm about $3 which enables most of the thermal coal from NRP properties to remain competitive. In particular our properties our largest exposure in thermal coal is with the Illinois Basin properties and then those properties are the lowest cost or some of the lowest cost properties around and so they've been able to remain competitive even in a low pricing environment.
And they've been further benefited by the export market this year which is improved dramatically and a lot of, lot of that Illinois Basin coal has been going export and so we've benefited from that as well. I think Central App thermal will continue to be challenges is higher cost and has difficulty competing with natural gas.
Fortunately for us we have relatively smaller exposure to Central App thermal and over the long term we think the Illinois Basin properties provide an opportunity for substantial revenue for us.
Paul Forward
Great. And the I think you've mentioned this Chris Cline had sold at GP Staker's was just wondering just as have any practical effect on NRP any increase flexibility or is this you know not likely to be something that changes the outlook for the company.
Wyatt Hogan
No, it has no impact all on us or at all, he did have the right to nominate one director or two directors one of which is as resigned as of yesterday. So from our board perspective where one director viewer but that doesn't change the governance of the company at all, the prospects going forward, what Chris kind of exiting the control of foresight.
There just wasn't a need to have that continued relationship with him going forward and we're building on a very good relationship that we have worked with for side and more in the marine team.
Paul Forward
Great, thanks very much, Wyatt.
Wyatt Hogan
Thanks, Paul.
Operator
Your next question comes from the line of George [indiscernible]. Your line is open.
Unidentified Analyst
Hey guys. Thanks for letting me on.
So beyond 2017 without getting to the guidance specifically just want to ask about the outlook for the revenue for the VantaCore and cash distribution trend for the Soda ash so, the next complete year so my understanding is this year building slightly be flattish for the Soda ash and if you have some of the seasonality for the VantaCore for the balance of the year. The revenue will be higher, but any sort of color on the trend in the next couple of years?
Wyatt Hogan
Again, George, good morning, thanks for participating in the call. We're not going to give future outlook or guidance and with respect to market for soda ash and the coverage ratio from Jan, I would refer you to their comments on, on their call regarding the outlook going forward for that business segment.
Unidentified Analyst
Okay. And also one housekeeping item just looking through the income statement just look at the SG&A and the opening stance do you think it's going to run rate going forward just based on the 1Q run rate or do you think, did that could be some items that could change things around like we should be aware?
Craig Nunez
As Wyatt said -- this is Craig, we're not giving guidance first say. I will say that you need to look through the onetime items that we highlighted on the call today that occurred in Q1 that impacted G&A and those would not be continuing costs but other than that there's no major changes that have taken place in our G&A cost structure over the last year and don't expect anything any in the near term.
Unidentified Analyst
Okay. Thank you.
Thanks again for hosting this call.
Craig Nunez
Thank you, George.
Wyatt Hogan
Thanks for joining.
Operator
There are no further questions at this time. I'd like to turn the call back Mr.
Wyatt Hogan.
Wyatt Hogan
Thank you, Nicole. The events of the first quarter marked the beginning of a new chapter in the life of NRP.
We begin the second quarter of 2017 with stronger liquidity a solid balance sheet and strong cash flow generation. Our coal business is performing well as evidenced by operating income growth, excluding asset impairment and gains on asset sales of 21% from the previous quarter and 51% year-over-year.
General Wyoming continues to deliver a steady stream of cash distributions and we expect our construction aggregates business to improve as we move into the summer construction season. Thank you again for participating in our call.
Operator
This concludes today's conference call. You may now disconnect.