May 9, 2018
Executives
Kathy Roberts - VP, IR Craig Nunez - President & COO Chris Zolas - CFO Kevin Craig - EVP, Coal Division
Analysts
Mark Levin - Seaport Global
Operator
Welcome to the Natural Resource Partners Quarterly Earnings Conference Call. My name is Rache and I will be facilitating the audio portion of today's interactive broadcast.
[Operator Instructions]. At this time I would like to turn the call over to Ms.
Kathy Roberts, Vice President of Investor Relations. You may begin.
Kathy Roberts
Thank you, Rache. Good morning one and welcome to the Natural Resource Partners' first quarter 2018 conference call.
Today's call is being webcast and a replay will be available on our website for seven days. Joining me today will be Craig Nunez, President and Chief Operating Officer; Chris Zolas, Chief Financial Officer; and Kevin Craig, our Executive Vice President of our Coal Division.
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 described in NRP's Form 10-K and other SEC filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Our comments today 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 website.
I also would like to remind everyone that we do not intend to discuss the outlook for production or pricing in our coal segments because such information would be a [indiscernible] and we are bound by contract to such information confidential. We will also not discuss pricing or sales with respect to our construction aggregates business for competitive reasons.
In addition I refer you to general resources public disclosures and commentary for specific questions regarding our soda ash business. Now, I would like to turn the call over to Craig, our President and Chief Operating Officer.
Craig Nunez
Thank you, Kathy, and welcome everyone to our quarterly call. It's been more than a year since more than a year since we completed the series of transactions that recapitalize the partnership and we now have four full quarters of results with what I'll call new NRP.
Our coal royalty segment has stabilized after a multi-year period of extreme volatility and our soda ash investment and construction aggregates business have held steady. NRP generated significant amounts of cash over these last 12 months according to 235 million of EBITDA, 134 million of distributable cash flow and 128 million of free cash flow.
In addition we paid 22 million of distributions to common unitholders and increased common unitholder equity by $50 million or over 30% before the beneficial impact of a new accounting standard Chris will discuss in a moment. While the royalty nature of our coal assets means that we do not have as much visibility in the future performance as our [indiscernible] who are actually mining the market in coal.
We are becoming increasingly comfortable with each passing quarter that our recent financial performance is indicative of a sustainable run-rate that we can plan on for the future. With that in mind we remain laser focused on continuing to strengthen our balance sheet while maintaining liquidity to provide a margin safety for prudent business operations.
We reiterate our previously stated goal to achieve a leverage ratio over time defined as debt to EBITDA of less than three times while maintaining minimum liquidity of $100 million. We believe this substantial delevering and derisking of the capital structure is the quickest path to maximizing the intrinsic value and in turn the market value of our common equity.
With 35% of our common units owned by insiders rest assured that our interests are fully aligned with yours in this regard. Our leverage ratio is down to 3.5 times from a peak 5.3 times with the payoff of 640 million of debt as it's now our intention to delever the partnership back in 2015.
We ended the first quarter with 76 million of liquidity consisting of 21 million of cash and 55 million of available borrowing capacity which although shy of our long term target is sufficient to manage the working capital needs of our business. Our common unit distribution coverage ratio is six times before taking into account the coupon on our preferred units and it is 4.6 times after taking a coupon into account.
We continue to benefit from the royalty nature of our coal business which is free of direct cost to mine and sell coal and other associated mining liabilities. Our leases have fixed royalty rates supported by minimum payments for kick-in if the price of coal falls below floor.
Roughly 2/3rds of our coal royalty revenues currently come from metallurgical coal unlike thermal does not face the threat posed by environmental regulatory or the power industry, low natural gas prices and renewable power sources. Our soda ash investment in General Wyoming continues to generate steady cash distribution which production cost 25% to 50% less than competing in synthetic processes.
And our construction aggregate business although a small contributor to our bottom line continues to generate stable results. With that I will now turn it over to Chris to review the specifics of our first quarter financials.
Chris Zolas
Thank you, Craig. Good morning everyone and thanks again for joining us.
The first quarter operating performance represents a good start to the year. We generated $20 million of operating cash flow during the quarter which includes a semiannual interest payment of our parent company bonds of $18 million.
Net income attributable to common unit holders at our general partner was $19 million representing a $15 million increase compared to last year's first quarter primarily due to $8 million of debt modification expense recognized by share related to our recapitalization transactions and also due to 5 million of less interest expense in 2018 as a result of our lower debt balance. Compared to the prior quarter net income available to common unitholders in general partner decreased 4 million primarily due to the seasonal nature of our aggregates business.
Basic and diluted earnings per common unit for the quarter were a $1.49 and a $1.15 respectively. Before moving to our segment results I would like to briefly discuss the impact of adopting the new GAAP revenue recognition standard in Q1, while there was no impact to revenue from our soda ash or construction aggregate segments.
The new standard did impact our coal royalty segment. Historically we recorded minimum payments received as deferred revenue and did not recognize these payments as revenue until either recoupment occurred or the recruitment period expired.
Under the new standard we are required to recognize minimum payments as revenue when we believe that it is unlikely they will ever be recouped. While the adoption of the new standard will not have a material impact on our coal royalty segment revenue or the income statement it did have a significant one time adoption impact on our balance sheet.
The cumulative effective adoption, reduced deferred revenue liability by 90 million with a corresponding increase to partners' capital. Moving to our segment results, our coal royalty segment performed well and generate 39 million of operating cash flow during the first quarter representing a 2% increase compared to last year's first quarter.
Operating cash flow decreased 15% compared to the prior quarter primarily due to our payment of property taxes in Q1, the majority of which we will get reimbursed for later in the year and due to the timing of co-royalty minimum receipts. Operating income was 41 million representing a 16% increase compared to last year's first quarter primarily as a result of stronger metallurgical and thermal coal pricing.
Compared to the prior quarter our co-royalty segment operating income increased 3% demonstrating the continued trends in the coal markets we realized in the second half of 2017. In particular we continued to realize strong sales prices from our met coal properties in Appalachian.
Net coal made up 77% of our production and 83% of our revenue in the region during the first quarter and we expect demand for met coal to stay strong as it remains an essential ingredient in steel making. While all of our coal in the Illinois and Northern Powder River Basin is thermal coal and we recognize the decline in demand for U.S.
thermal coal due to [indiscernible] retirements. Approximately 30% of the U.S.
electricity is currently generated from coal and we believe thermal coal will remain an important component of the U.S. and global energy mix for many years to come.
In addition we believe many of our thermal properties are well positioned to remain profitable due to their low cost structure, high heat content and strategic locations. In regards to our soda ash segment we received 12 million of cash distributions from General Wyoming in the first quarter that was identical to the amounts we received in the prior quarter and the prior quarter of last year.
Our construction aggregate segment generated 3 million of operating cash flow during the first quarter and a net loss of 2 million. As a reminder our construction aggregates business is highly seasonal due to the effect of weather conditions on construction activity levels.
Our Q1 results were consistent with prior year despite challenging weather and higher than expected fuel costs. In addition local markets and our aggregate mining and production businesses remain stable.
Our corporate and financing segment costs in the first quarter totaled 22 million which was 41% lower than last year's first quarter primarily due to prior recapitalization transactions and also result of debt repayment during 2017 that is lower interest expense, compared to the prior quarter corporate and financing costs decreased 6% primarily due to lower interest expense. During the first quarter we paid distribution to $0.45 per unit to our common unitholders and 7.8 million to our preferred unitholders.
In addition we redeemed all of the outstanding paid in kind preferred units for 8.8 million. Distribution and cash flow for the first quarter was 21 million and as recently announced common unitholders will receive a cash distribution of $0.45 per unit and preferred unitholders who received 7.5 million in cash later this month.
As Craig mentioned earlier our liquidity remained strong and we ended the quarter with total liquidity of 76 million consisting of 21 million in cash and 55 million of available borrowing capacity under our bank facility. With that I'll turn the call back over to the Operator for questions.
Operator
[Operator Instructions]. Your first question comes from the line of Mark Levin with Seaport Global.
Mark Levin
Couple of quick questions, what are the impact of weather in Q1 whether it be on the coal business as it relates to logistics or even the aggregates business, anyway you can help us quantify how weather might have impacted EBITDA?
Kevin Craig
Mark, this is Kevin Craig. We think in the coal segment we did have exact from weather specific operations and then also rail network backup, probably in the range of a couple of million dollars in back to the coal segment.
In the aggregate segment was river traffic was slowed up a bit Mark but it's not a material amount $0.5 million of less EBITDA as a result of that.
Mark Levin
And Craig, you made an interesting comment I just want to try to pick up on this during your remarks about the core business is stabilizing and if you go back and look I guess maybe three or four quarters of EBITDA from the coal business it looks pretty consistent relatively narrow range. I know you guys don’t give I'm not going to ask here for your guidance but you did make the comment specifically about maybe the stabilization or you've been seeing stabilization there.
Maybe you can elaborate or expand a little bit on that comment?
Craig Nunez
Mark, glad you picked up on that because we do want to let you know that in fact we do feel those markets have stabilized and our business is stabilizing. We are not giving guidance per say but we are looking what's happened in recent quarters and it does appear that in this current environment that's looking more and more like a sustainable run rate and so we're beginning to take that into account as we do our planning.
Mark Levin
That's great to hear. The last question I was going to ask just was around the $100 million liquidity target.
Is there any specific reason why $100 million that number I mean why 100 versus let say 50 or 75, what's the thoughts process around that $100 million number?
Craig Nunez
Well a good bit of it is judgment mark, as a B credit with S&P and AA credit with Moody's access to capital, the financing markets is never guaranteed and so we feel that we need to have a cushion of additional liquidity above and beyond what we need for our mark to market operate activities just in case the market's not available to us when we need it to happen.
Operator
Your next question comes from the line of Nick [indiscernible] with Stifel.
Unidentified Analyst
I wanted to ask you about the 10.5% holdco notes, what are your thoughts in terms of the ability or opportunity to lower the cost of debt with nearing call date in March of 2019?
Craig Nunez
Well on those notes we have call premium on the -- every year until one year prior to the 2022 maturity and it is difficult to make the math work to pay that call premium and refinance and end up with lower net cost and benefit from company but sure you did the math works and the demand for the paper is there we would certainly look forward on that the opportunity.
Unidentified Analyst
Okay. So in terms of the outlook for the credit you are talking about taking leverage down from 3.5 to 3 turns, the strength of the free cash flow generation my belief is that it's completely underappreciated by the high yield universe and so I think ideally in the next several quarters the high yield market will only pick up start the credit.
That's all I have to say. Thank you.
Christian Baeza
: Thank you.
Operator
[Operator Instructions]. There are no further questions at this time.
Craig Nunez
Thank you everyone for joining our call. We thank you for your support and your interest in NRP.
Things are moving along as I think we all would have expected hoped they would have after we completed our recapitalization transactions last year. The company continued to generate net significant amounts of cash and for the foreseeable future appears to be well-positioned to continue doing so.
So thanks again for your support. Have a good day.
Good bye.
Operator
This concludes today's conference call. You may now disconnect at this time.