Natural Resource Partners LP — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparative periods ended June 30, 2020. NRP owns and leases U.S. mineral properties and holds a 49% non-controlling interest in Ciner Wyoming, a soda ash producer. Its operating segments are Coal Royalty and Other and Soda Ash.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue and other income | $38.5 million | $31.0 million | $75.7 million | $71.2 million |
| Operating income (loss) | $25.1 million | $(115.2) million | $43.4 million | $(86.1) million |
| Net income (loss) | $15.4 million | $(125.5) million | $23.8 million | $(106.7) million |
| Net income (loss) per common unit, basic | $0.60 | $(10.64) | $0.65 | $(9.74) |
| Operating cash flow, continuing operations | $13.4 million | $19.9 million | $36.6 million | $50.1 million |
| Adjusted EBITDA (non-GAAP) | $27.4 million | $29.3 million | $56.8 million | $61.3 million |
| Free cash flow (non-GAAP) | $12.9 million | $19.8 million | $36.7 million | $50.2 million |
Q2 Coal Royalty and Other segment revenue and other income was $35.9 million, up 5%; Soda Ash segment equity earnings were $2.6 million, compared with a $3.1 million loss. Coal sales from NRP properties were 6.5 million tons, up 67% year over year. For the first half, coal sales were 13.1 million tons, up 56%.
At June 30, cash and cash equivalents were $97.9 million, and total liquidity was $197.9 million, including $100 million available under the undrawn Opco credit facility. Net debt was $453.2 million, down from $471.5 million at December 31, 2020; debt at face value was $458.8 million. Six-month debt repayments were $19.1 million. The consolidated leverage ratio was 4.6x. Q2 net interest expense was $9.7 million; six-month net interest expense was $19.7 million.
Material changes and unusual items
- Revenue improved as coal and soda ash demand rebounded from pandemic-related lows. Six-month revenue increased 6% year over year.
- Net income turned positive largely against the prior-year comparison, which included $132.3 million of asset impairment charges. NRP recorded $4.1 million of impairments in the first half of 2021, primarily from a coal lease termination. Depreciation, depletion and amortization rose to $10.0 million from $4.1 million, partly reflecting increased production at Illinois Basin properties.
- Cash flow and non-GAAP free cash flow declined year over year. Management attributed the first-half decrease mainly to $10.3 million less in Ciner Wyoming distributions and $5.7 million of lease amendment fee payments received in the prior-year period.
- Ciner Wyoming’s first-half net sales were $248.5 million versus $190.6 million, and net income was $14.4 million versus $11.1 million. Its regular quarterly distributions remained suspended; NRP received $3.9 million in distributions in the first half, compared with $14.2 million a year earlier.
- Preferred-unit distributions accumulated at $15.6 million in the first half. One-half of the first-quarter 2021 preferred distribution was paid in kind. The Board subsequently declared a Q2 common distribution of $0.45 per unit and a preferred distribution payable half in cash and half in additional preferred units.
Outlook, risks and contingencies
Management said metallurgical and thermal coal and soda ash demand continued to recover, while noting ongoing pandemic uncertainty and longer-term challenges for thermal coal, including competition from natural gas and the shift to renewable energy. NRP reported that most thermal coal cash flows were fixed through 2021 under its Foresight agreement. Ciner Wyoming deferred the timing of significant expansion and infrastructure spending to preserve flexibility and did not expect to resume regular distributions until it had more visibility into soda ash markets. The filing provides no formal quantified earnings or cash flow guidance.
Management expects leverage to begin declining as debt is repaid. However, while leverage exceeds 3.75x, the 2025 notes indenture restricts payment of more than half of preferred distributions in cash. If leverage remains above that threshold into 2022 and paid-in-kind preferred units cannot be redeemed, NRP may have to temporarily suspend common-unit distributions until leverage falls below the threshold and those units are redeemed. Approximately $20 million of Opco senior-note principal repayments were expected during the remainder of 2021. NRP said it was in compliance with debt covenants and had $100 million of undrawn credit capacity.
Two customers, Foresight and Alpha Metallurgical Resources, accounted for 22% and 23% of first-half revenue, respectively. NRP noted potential future impairment exposure if the pandemic’s effects are worse than estimated. Ordinary-course legal proceedings were not believed to be material; the filing reported no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the 4.6x leverage ratio declines enough to affect preferred-unit payment restrictions and the possibility of common-distribution suspension.
- Coal production, royalty rates and lease minimums, including the timing and terms of Foresight’s fixed payments through 2021.
- Whether Ciner Wyoming restores regular distributions, and the effects of its deferred expansion spending on future cash flows.
- The sustainability of free cash flow after debt service, preferred distributions and scheduled principal repayments; Adjusted EBITDA, DCF and FCF are non-GAAP measures.
- Exposure to the two significant customers, coal-market changes, pandemic-related uncertainty and additional mineral-property impairments.