Natural Resource Partners L.P. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. NRP owns and leases U.S. mineral interests and holds a 49% non-controlling interest in Sisecam Wyoming, a soda ash producer. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue and other income | $99.9 | $38.5 | $189.6 | $75.7 |
| Operating income | $79.0 | $25.1 | $152.3 | $43.4 |
| Net income | $66.8 | $15.4 | $130.7 | $23.8 |
| Net income attributable to common unitholders | $58.1 | $7.4 | $113.4 | $8.0 |
| Basic / diluted earnings per common unit | $4.65 / $3.29 | $0.60 / $0.56 | $9.10 / $6.50 | $0.65 / $0.65 |
| Operating cash flow | $63.1 | $13.4 | $115.5 | $36.6 |
| Free cash flow (non-GAAP) | $63.7 | $12.9 | $116.0 | $36.7 |
Q2 operating margin was approximately 79% versus 65% in the prior-year quarter; six-month operating margin was approximately 80% versus 57%. The filing does not present gross margin as a standalone metric. NRP’s non-GAAP adjusted EBITDA was $80.7 million for Q2 and $156.3 million for the first six months, compared with $27.4 million and $56.8 million, respectively, in 2021.
Liquidity, debt and distributions
- At June 30, cash was $59.4 million, down from $135.5 million at year-end 2021. Total liquidity was $159.4 million, including $100 million available under the Opco revolving credit facility.
- Debt, net, was $298.4 million, versus $433.5 million at December 31, 2021. Management reported a 1.2x leverage ratio and compliance with debt covenants. Six-month cash debt repayments were $137.2 million.
- NRP retired $118.1 million of 9.125% notes due 2025 in Q2, producing a $4.0 million debt-extinguishment loss and expected annual interest savings of approximately $10.8 million. In July, it retired another $38.8 million; $143.1 million of these notes remained outstanding as of the report date. NRP expected a further $1.8 million loss on extinguishment in Q3 from the July repurchases.
- Approximately $20 million of Opco senior-note principal repayments were due during the remainder of 2022. The $100 million credit facility was scheduled to mature in April 2023.
- NRP paid common distributions of $0.75 per unit for Q1 2022 and declared $0.75 per common unit for Q2, payable after quarter-end. It also declared a $7.5 million Q2 preferred-unit cash distribution. Future distributions remain subject to quarterly Board determination.
Changes and operating drivers
- Q2 revenue and other income rose 159% year over year; six-month revenue rose 151%. Mineral Rights segment revenue and other income increased 138% in Q2 and 125% for the first half, principally on higher coal prices and volumes. Six-month coal royalty revenue increased to $118.4 million from $33.7 million.
- NRP’s lessees sold 15.2 million tons of coal from NRP properties in the first half, up 16%. Approximately 75% of coal royalty revenue and 45% of coal royalty sales volume came from metallurgical coal in that period.
- Soda Ash segment equity earnings were $14.6 million in Q2 and $29.5 million in the first half, versus $2.6 million and $4.6 million in the comparable 2021 periods. Management attributed the improvement to higher international prices and stronger cash distributions from Sisecam Wyoming, whose regular quarterly distributions resumed in late 2021.
- Interest expense declined year over year as debt was reduced. This benefit was partly offset by higher operating and maintenance and G&A expenses, including higher WPPLP overriding-royalty costs, bad-debt expense, incentive compensation and consulting expense. The WPPLP royalty expense is stated to be offset by royalty revenue from the property.
Outlook, risks and notable items
- No quantified earnings or revenue guidance was provided. Management said metallurgical coal prices had eased from Q1 record highs but remained supported by tight supply; it viewed the near-term thermal coal price outlook positively. It cited labor and supply-chain constraints, the war in Ukraine, strong electricity demand and high natural-gas prices as market factors, while also noting slowing global growth and softer steel demand.
- Management described strong soda ash demand trends, including renewable-energy investment, vehicle electrification and urbanization, alongside supply constraints. Results remain exposed to commodity prices, production and demand, including conditions affecting Sisecam Wyoming and lessees.
- NRP is pursuing alternative uses of its land and mineral portfolio. A 2022 agreement grants Denbury rights to develop a carbon-sequestration project on 75,000 acres in southwest Alabama, with stated potential storage capacity above 300 million metric tons of CO₂; timing and additional cash flows are uncertain.
- Two customers exceeded 10% of revenue: Alpha Metallurgical Resources contributed 33% of Q2 revenue and 32% for the first half; Foresight contributed 17% and 15%, respectively. Receivables and collection risk merit attention; the reported CECL allowance was $5.1 million at June 30.
- Management noted uncertainty around COVID-19-related impacts and potential future impairment assessments. Ordinary-course legal proceedings were not expected to materially affect the Partnership. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether coal pricing, volumes and lessee production remain strong enough to sustain the unusually large year-over-year earnings and cash-flow increases.
- Actual cash distributions received from Sisecam Wyoming and the durability of soda ash prices, demand and supply conditions.
- Debt paydown, remaining maturities, refinancing access and the impact of note repurchases and related extinguishment costs.
- Customer concentration, receivable collection trends, bad-debt charges and the WPPLP related-party royalty arrangements.
- Board decisions on future common and preferred distributions, and whether the carbon-sequestration opportunity produces material cash flows.
- Reconcile reported diluted earnings per unit with basic earnings per unit: assumed preferred-unit conversion and warrants materially affect the diluted calculation.