Q2 2019 Earnings Call
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Thank you good morning, and welcome to the natural resource partners second quarter 2019 conference call.
Today's call is being webcast and a replay will be available on our website.
Joining me today are pregnant <unk>, President and Chief operating Officer, Chris Olin, Chief Financial Officer, and Kevin Cragg Executive Vice President of color.
Some of our comments today may include forward looking statements, reflecting <unk> views about future events.
These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward looking statements.
These risks are discussed in <unk> Form 10-K , and other securities and Exchange Commission 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 second quarter 2019 press release, which can be found on our website.
I would like to remind everyone that we do not intend to discuss operations our outlook for any particular call lumpy or get into detailed market fundamentals.
In addition, I refer you to general resources public disclosures and commentary for specific questions regarding our soda ash business segment.
Now I would like to turn the call over to Craig Newness, our president and Chief operating Officer.
Thank you Tiffany and welcome everyone to our quarterly call I'm pleased to announce that in RP continues to generate significant amounts of cash and earn attractive returns on capital.
Excluding disco ops and onetime beneficial items, we recorded $161 million or free cash flow over the last 12 months.
Our consolidated return on capital employed over the same period was 16% with the coal segment coming in at 16.7 and soda Ash returning 18.4.
These results have allowed us to add 70 million to common unit holders equity and pay out nearly 33 million of common distributions over the last year.
Our cash flow cushion, which is the free cash flow remaining after mandatory debt amortization of our private placement notes payments of preferred dividends and the current common unit distribution was $26 million over the same period.
Looking ahead falling coal prices are likely to put pressure on our co lessees in the coming months, while the impact of falling prices has not yet impacted our results. We believe it's because most of our lessees had been selling coal at higher prices locked in during the fourth quarter of last year.
We also believe most of these sales contracts will be coming up for renewal between now and the end of the year at which time sales prices will likely be reset at lower levels. However, we expect the negative impact of these adjustments on us to be somewhat muted by the minimum payment provisions in our leases that provide us with some downside price protection.
The current gold price environment, together with continuing transportation and logistical challenges as well as limited access to capital or taking a toll on some of our lessees.
Three of our lessees Black two black Hawk in Cambrian have declared bankruptcy since our last earnings call. While we cannot predict the outcome of a bankruptcy with certainty we believe that the quality of our asset base illegal strength of our position as a coal less or landlord and our experience with numerous lessee bankruptcies over the last five years work to minimize the negative impact in RP from these proceedings and we do not expect material changes to the long term, earning power of our assets involved.
In our soda Ash segment, the managing partner of ours of jet of our gender Wyoming joint venture has announced plans for a major capacity expansion any multiyear reduction in cash distributions with the cash retained at the joint venture used to fund a portion of the expansion capital cost.
Cash distributions, we received from Gener, Wyoming over the last two years have averaged $45 million annually.
Starting this month, we expect annual distributions to us to drop to 25 million and remain in the range of 25 to 28 million for the next two to three years. While this expansion is intended to provide significant increases in production capacity free cash flow and cash distributions to us over the long term the near term reduction in cash distributions has negative implications for our cash flow Christians.
Despite these headwinds.
NRP is in a much stronger position today than at the start of the last downturn in the coal markets. Our team has spent the last four years rightsizing, our business and recapitalizing our balance sheet.
It's times like these when that hard work and conservative financial planning will pay off with $86 million of cash or for your bank facility with 100 million of available borrowing capacity no parent company bond maturities for six years and a leverage ratio that is roughly half the level of just four years ago I'm confident we have the financial strength to weather storms that come our way.
With that I'll turn the call over to Chris to cover our financial performance.
Thank you Craig and good morning, everyone.
I'd like to start with a recap of the refinancing transactions, we completed in the second quarter and provide us with significant additional time to execute further deleveraging and manage our business through commodity price volatility.
First we extended all $100 million of our bank facilities committed borrowing capacity from 2020 2023.
Second we issued 300 million of new non in one 8% parent company bonds due 2025 and use the net proceeds along with cash on hand to redeem all 346 million over 10, and one half percent parent company bonds due 2022.
In addition to the benefit of extending maturities lowering both the principal and interest rate on our parent company bonds will decrease our annual interest expense by 9 million.
In terms of the impact of these refinancings.
Add on our second quarter results, we reported a 29 million dollar loss on extinguishment of debt of which 18 million related to cash we paid to call. The tenant one half percent bonds and $11 million related to noncash write off of unamortized debt issuance and debt discount costs.
With that being said I'll move to our second quarter financial results.
During the second quarter, we generated $53 million of operating cash flow and 54 million of free cash flow driven by strong royalty cash collections and steady overall performance from our coal royalties segment.
Second quarter net income was 19 million, which includes the 29 million loss on extinguishment of debt related to our Q2 refinancings.
Basic and diluted diluted earnings per common unit for the second quarter were 95 cents and 87 cents respectively.
Our next move on to our segment results.
Our coal royalties segment continued to perform well our lessee sold a total of 7 million tons of coal from our properties and our coal sales prices were stable.
Our coal royalties segment generated $56 million of operating and free cash flow during the second quarter of 2019.
An 8% increase compared to the prior year quarter, driven by the collection of lease amendment fees and the Hillsboro minimum payment and we began to recognize in 2019 after the litigation settlement with fore sight.
We continued to see solid pricing from our metallurgical coal driven by sustained global steel demand.
In terms of our coal mix metallurgical coal made up approximately 50% of our total coal royalties sales volumes and approximately 70% of our coal royalty revenue during the second quarter.
Additionally, during the second quarter, we continued to see stable sales pricing for our thermal coal as a result of our lessees locking in favorable favorable pricing in the fourth quarter of last year.
With this backdrop of stable overall pricing for our coal in the second quarter, our coal royalties segments net income was $54 million, an increase of 36% compared to the prior year quarter.
This increase was driven by $14 million of increased lessee forfeitures of Recoupable balances from minimums paid in prior periods.
$4 million of increased lease amendment fees and $3 million of increased straight line minimum revenue primarily from our Hillsboro property.
These increases in our coal royalties segments Q2, net income compared the prior year quarter were partially offset by 4 million decrease in coal royalty revenue driven by lower coal sales volumes from idling of the Pinnacle mine in the fourth quarter of 2018.
Logistical issues in the Illinois basin caused by flooding and high water throughout the river systems and the timing of mining on our northern Powder River Basin property.
Moving to our second business segment, our soda ash business generated 11 million of net income and 9 million of free cash flow during the second quarter of 2019.
Net income decreased $5 million compared to the prior year quarter due to Gener Wyoming's prior year litigation settlement of a royalty dispute that resulted in $13 million of income in the second quarter of 2018.
Excluding the impact of this litigation settlement Q2, 2019, net income increased $8 million compared to the prior year quarter, driven by increased production and sales volumes and increased domestic and international sales prices.
While the facilities operating performance was stronger than the prior year quarter, we received $9 million of free cash flow from Gener, Wyoming in Q2, 2019, which represents a $2.9 million decreased compared to the prior year quarter as Craig mentioned earlier. This decrease is a result of the decision magenta roaming to reduce distributions to fund its capital expansion project.
We expect the annual distributions from general roaming to drop to 25 million or $6.25 million per quarter and remain in that range of 25 to 28 million annually for the next two to three years.
Our coal our corporate and financing segment costs in the second quarter were $46 million, which include the 29 million loss on extinguishment of debt, resulting from our Q2 debt refinancings.
Excluding this 29 million of loss, our Q2 corporate financing costs were down 4 million or 21% compared to the prior year quarter, primarily due to lower interest expense, resulting from the $262 million of debt, we've repaid over the last 12 months.
Regarding distributions, we paid a quarterly 45 cents per unit distribution to our common unit holders and a quarterly cash distribution of 7.5 million to our preferred unitholders in may.
In addition, we also paid and 85 cents per unit special distribution to May two our common unit holders to cover their tax liability, resulting from the sale of our construction aggregates business.
In July we declared another quarterly cash distribution of 45 cents per common unit and 7.5 million cash to our preferred unit holders.
With that I'll turn the call back over to the operator for questions.
Yeah, I'd like to remind everyone in order to ask a question via phone. Please press Star then the number one on your telephone keypad again in order to ask the questions I phone. Please press Star then the number one on the telephone keypad. Thank you. Your first question comes from the line of Mark Levine of Seaport Global Your line is open.
Great. Thank you very much appreciate it just a couple of questions. The first more more modeling related.
I think you referenced in your remarks, the production to lease minimums.
Seemed like where we miss relative to estimates for or relative to.
What you guys reported was that was a big big difference in the other revenue and particularly the production lease minimum revenue line item, which jumped significantly quarter over quarter. Maybe you can provide some more color around that jump and then how to think about modeling that line item going forward. Thank you.
Sure. Thanks, Mark This is Chris you're absolutely right. There was a big jump in production lease minimum revenues and as I said on the on the call that was driven by lessee forfeitures of their recoupable balances that occurred in the second quarter.
Primarily driven by lease terminations and that's really the big driver for that amount, that's not something that that.
I think he is really.
You can forecast on a regular basis and if you.
If you looked at our prior quarter amounts that's something that's probably more of a of a sustained normal rate for that for that line item.
Got it Thats very very helpful in terms of leverage.
Looks like you guys were 2.6 times again, many kudos for driving that down as you have over the last several years really really a great job, but I'm just curious.
Where do you stop if you stop so if you're a 2.6 times is is one turn the right number is one of the half turns is no no lever I mean, how do you how do you guys ultimately see.
What the capital structure should look like over the next few years.
Mark This is Craig how you doing it's good to talk to you to you as well.
We don't have a long term target for debt capital structure, just yet but it is.
Well below the 2.6 level, where we are now.
We have a couple of outstanding items out there that we want to get through we still have some litigation this outstanding.
We want to get that behind Us and we also want to see what happens after we with the volatility in the gold price market coal markets. These days and what happens after re contracting in the back half of this year and as we get into 2020 to see what the.
Farm is like no that makes that makes that makes sense and related to the point you made about some of your lessees that you know that filed for bankruptcy and.
One of them will be out soon and producing but I guess that several of the others is a little bit more.
Squishy can you maybe remind us.
A.
What the contribution was.
Production was from from those companies that are in bankruptcy and then secondly, maybe as a quick history course, because as you referenced you've had a number of lessees over the years.
Through the bankruptcy process can you maybe talk about how the core.
I have dealt with.
You know there is companies contracts with you as they went through those bankruptcies.
Sure first of all we aren't going to comment as we've said before mark on specific last season and the contributions that we receive from specific lessees I will tell you though that.
While.
All of the bankruptcies combined that we referred to there is a there is a relatively modest reduction in our cash flows that we anticipate it's not a material impact to us. We also don't believe that there's any.
Hit to the long term, earning power those assets, we think they're going to continue to generate the same run rate that is before so I don't think there's really any.
Any adjustments in these needs to be made for that as far as the process of going through bankruptcy. What his has tended to happen in the past is that.
Our leases are either accepted or rejected.
As they go through the bankruptcy process and if they're accepted they tend to answer excepted as is so theres no modifications reductions to to those leases et cetera, and what has actually happened is that in I would say the majority and that's it.
Roughly the majority of.
Bankruptcies, where our leases are assumed we actually are able to receive improved terms in one form or fashion, even if it's just a sign that fees that type of thing that are one time hit onetime benefits for us.
We've.
The times when the leases would not be us.
Is when the typically when the operation on that lease is not profitable for the operator.
And so from our view.
The decision of was the assessment of whether a lease is going to continue to operate whether it's going to be assumed or not as it typically falls on the economic viability of that operation on that lease if an operator via the bankrupt operator that may be emerging from liquidate or reorganization or another operator can actually make money.
By operating that lease.
It typically continues to operate and we continue to get paid.
If it's not a viable operation if it's if it's losing money at the operating level, regardless of the capital structure of the of the lessee in that operation normally shuts down and goes away and at least for Jeff.
No that makes that makes sense assets.
Good explanation.
One more from me so im sorry, Mark let me have something to that also sure I would say that that you know over the last five years, we have been through quite a number of lessee bankruptcies here I mean.
Substantial number of lessee bankruptcies here.
And that through that time I would suggest that.
Never say never side.
I think it's unlikely that there are many operations that we have.
Currently are operating on the NRP properties that.
Our unprofitable for the lessees.
At the present time because.
Most of those were shaken out during the carnage in the last down cycle.
No that makes that makes perfect sense, our two last quick ones for me one is.
A major eastern rail has.
Or seems to be putting up for sale.
Some of its properties I won't ask you to comment specifically on on that situation, but is there a point at which you guys would consider actually getting bigger in terms of your coal reserve position or are we thinking more along the lines of just continuing to shrink the debt balances and improve the cash cushion.
Well Mark our primary focus is to continue to improve the capital structure, because we think that's the.
The.
Least risky best risk adjusted way to increase.
The value over time.
Now that being said you know as a coal.
Mineral owner, we're in a somewhat unique position.
And there could be if an opportunity came along to acquire a cold mineral rights. It was.
Synergistic with what we had and we were in a unique position to.
To to add value and perhaps accelerate our deleveraging process.
Bye bye.
By an attractive assets I think we would consider it everything and anything however, the primary focus continues to be.
What it's been for the last three years and that is four years and that is to improve the financial profile of the business.
No that makes sense and then final final final question, which is any color you can provide in terms of.
Frequent question, sometimes is around minimum minimum royalty payments and any way to quantify in a given year, what a good minimum bases.
To think about I mean, just worse worse worse case scenario, which hopefully will never come into play, but if it did is there any sort of financial color you can provide around like the floors, which minimums provide you guys from a cash flow perspective.
Well generally and give you some guidance here are not guidance per se, but.
Generally we don't receive any minimums.
Have to speak of on the met side because.
Net pricing is above the minimum threshold at or at least as overseas.
Market prices so to speak on those so that we're really talking about the thermal side of the business right now and we do receive we do have a number of minimums there.
That are in place that are what I'll call in the money and so what I think you're really asking is of those minimums.
How much are actually getting the money in kicking in what's the amount of deficiency payments that we're actually receiving because we have that minimum.
Got provision in our contracts.
That that number is roughly in today's price environment, today's a thermal price environment 2020 $5 million.
Got it that's a annual that's that's like on an annualized basis correct.
Okay, and Mark just just to add a little color to that we do have a footnote in our 10-Q, we have a revenue footnote and its footnotes.
Two.
In our 10-Q, and we actually disclose there the total amount of minimums, we have for all of our lease contracts and kind of break it out in buckets of.
Of the five five year increments. So the total amount there is just about $74 million of total annual minimums, we have with all of our lessees.
Okay. That's perfect that's exactly what I was looking for and are there any there are a lot of new bed projects that are that are being talked about or discussed.
Are any of are there any new met projects that are on NRP land that could conceivably add to your met volume over the next few years.
Mark This is Kevin Craig.
No.
Not a brand new project or something.
Okay, and just for continuations of of operations and one in particular coming off adverse call back on orders, but.
Not what you would think of as the new Green field.
Got it that's perfect. Thank you guys for letting me take all the time and ask those questions appreciate it.
Thank you Mark.
Once again to ask questions iPhone Press Star then the number one on your telephone keypad.
I have a question from the line of Steve Berman, an individual investor Your line is open.
Yes, thank you very much.
The minimums are they principally tied to the thermal side as opposed to the met coal or they are they on both segments.
We have them on both segments are both met and thermal but at the current price environment in the met market means that the market prices are above where the minimums are set so the the minimums are not kicking in and we're not receiving deficiency payments on the met side right now okay. So so when you said you would expect that the pricing of coal will be going down.
You're implying it's going to be in the on the met side right.
We think we will both both met and thermal benchmarks have fallen quite significantly here year to date.
So we think there will be lower prices on met and thermal.
I see okay.
And.
[laughter] I'm sure. This is obvious to a industry experts like the last person that spoke but.
What are the key driving.
Forces in the pricing of these various coal markets.
Obviously, there's a lot of things, but just simplistically what are the what's causing the downward swing in prices.
So this is Kevin Craig.
Number of factors go into that obviously I guess you started at the macro level economic growth.
On the thermal side electric generation, both domestic and internationally.
If you look at our export market.
We compete around the world with Kohl's, such as Australian coals going into China. So you have currency exchange rates that play a role demand from China, India The international.
Players.
On the met side in particular and the demand for steel.
<unk>.
Fuel plant utilization rates.
And I'm thinking, particularly of both our domestic steel plant utilization rates European market and then your Asian markets are really the key drivers to get back to your supply demand dynamics.
So the industrial slowdown that supposedly is taking place in China.
It is do you feel that that is directly impacting the pricing of.
Your product.
My opinion is.
Not to date, you've seen met coal being imported into China year over year to very consistent rate.
Okay. So in.
Steel production out of China are in China has grown year over year.
So there are certainly other factors that drive the macro market.
And if you can't look at any one data point.
It's really a number of points to drive the worldwide demand.
Mhm.
Okay.
So basically you see.
You seem to be implying that a the current payout is sustainable even though you want to reduce your leverage further and have some things that still need to be done is is that a fair.
Assessment.
The clean yield.
When you say part of current payout you mean, our current is common distribution yes.
Yeah.
Well, we're not going to give specific guidance on that however, we will be will tell you that.
Even during the carnage of the.
The last downturn in the coal markets, we were quite focused on maintaining the distribution that occurred at the current level because we realize that our investors have to pay income tax on the there. She pro rata share of the income we earn and unlike most MLP is we actually do generate taxable income that flows through to our to our equity holders. So we are quite focused on maintaining the current common distribution.
Okay. Thank you very much.
Thanks for your call sure.
There are no further questions at this time I would like to turn the call over back to speak a pregnant. Yes. There's good. Please go ahead sir.
Thank you very much and I'd like to thank everyone for participating in our call today and thank you for your interest in in RP and continued support we look forward to talking to you again to have a great day.
This concludes today's conference call you may now all disconnect.