Natural Resource Partners LP — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; filed November 3, 2022. Dollar amounts are in millions unless stated otherwise. NRP owns and leases U.S. mineral interests and holds a 49% non-controlling interest in Sisecam Wyoming, a soda ash producer.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue and other income | $102.3 | $56.8 | $291.9 | $132.5 |
| Operating income | $82.2 | $39.2 | $234.4 | $82.6 |
| Net income | $74.6 | $29.5 | $205.3 | $53.3 |
| Net income attributable to common unitholders | $65.7 | $21.1 | $179.1 | $29.1 |
| Basic / diluted net income per common unit | $5.25 / $3.71 | $1.71 / $1.10 | $14.36 / $10.24 | $2.36 / $1.98 |
- Nine-month operating cash flow was $198.0, versus $66.6 in 2021. Investing cash flow was $1.8; financing cash outflow was $274.3. Cash declined $74.6 to $60.9.
- Management reported nine-month free cash flow of $199.0 and distributable cash flow of $199.7; these are non-GAAP measures and should be considered alongside GAAP cash flows.
- At September 30, total debt, net, was $238.7, down from $433.5 at December 31, 2021. Cash was $60.9 and undrawn credit capacity was $130.0, for reported liquidity of $190.9. The current portion of debt was $90.0. Management reported a 0.8x leverage ratio and compliance with debt covenants.
- Operating and maintenance costs were $7.9 and general and administrative costs were $4.5 in Q3. Interest expense was $5.1 in Q3 and $22.6 year to date. The filing does not provide a single reported consolidated margin measure.
Material changes and drivers
- Q3 revenue and other income rose 80% year over year. Mineral Rights segment revenue and other income increased 75% to $87.7, driven by higher coal royalties, oil and gas royalties, carbon-neutral initiative revenue, and transportation and processing revenue. Soda Ash segment equity earnings were $14.6, up from $6.7.
- For the first nine months, Mineral Rights segment revenue and other income increased 104% to $247.9; Soda Ash segment equity earnings increased to $44.0 from $11.2. Coal royalty revenue increased to $170.8 from $66.1, with higher coal prices and volumes contributing. Coal sales from NRP properties were 24.2 million tons, up 14%.
- Sisecam Wyoming’s nine-month net sales increased to $543.0 from $384.1 and net income to $97.1 from $30.7. NRP received $34.1 in distributions from the investment during the period, versus $3.9 in 2021.
- Q3 included $8.6 of carbon-neutral initiative revenue, including subsurface CO2 storage and geothermal transactions. Management says timing and likelihood of further cash flows from these activities are uncertain.
- NRP retired $178.6 of its 9.125% senior notes during the first nine months, recording $6.5 of debt-extinguishment losses. In October, it redeemed the remaining $121.4 at 102.281% of principal, using cash and $70.0 drawn under its credit facility. NRP said the repurchases and redemption are expected to save approximately $27.4 annually in interest costs; the fourth quarter is expected to include a further $3.9 extinguishment loss.
Liquidity, distributions and outlook
- In August, NRP extended and increased its secured Opco credit facility to $130.0, with a maturity in August 2027. It was undrawn at September 30; the subsequent $70.0 borrowing funded part of the October note redemption. The facility requires leverage of no more than 3.0x and interest coverage of at least 3.5x.
- In November, the board declared a Q3 distribution of $0.75 per common unit and $7.5 in cash distributions on preferred units. Future distributions remain subject to quarterly board approval and depend on factors including cash flow, debt service, market outlook and cash needs.
- Management cited tight coal supply, labor and supply-chain constraints, and elevated soda ash prices as supportive factors, but noted weaker steel demand, slowing global growth and lower construction activity in China. It provided no numerical earnings or production guidance in the supplied filing text.
- NRP reported approximately 140,000 acres under carbon sequestration leases, with estimated storage capacity of 800 million metric tons of CO2. These opportunities require minimal capital investment according to management, but future cash-flow timing and likelihood remain uncertain.
- Two customers, Alpha Metallurgical Resources and Foresight Energy Resources, represented 21% and 19% of Q3 revenue, respectively. NRP also identified ordinary-course legal matters, which management did not expect to materially affect financial position, liquidity or operations. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much of the sharp revenue and cash-flow increase reflects durable coal prices, production and royalties versus unusual or transaction-related revenue, including the $8.6 carbon-neutral item.
- The post-quarter debt and liquidity position after the $121.4 note redemption, $70.0 credit-facility draw, redemption premium and subsequent cash distributions; also verify remaining debt maturities and covenant headroom.
- Whether Sisecam Wyoming can sustain sales, margins and cash distributions if soda ash prices or demand weaken.
- Exposure to major customers and coal-market risks, including supply constraints, environmental and regulatory pressures, and changes in lessee production.
- Preferred-unit economics and dilution: 250,000 preferred units remained outstanding at quarter-end, with a stated liquidation preference of $1,850 per unit; diluted per-unit earnings include assumed conversion effects.