November 5, 2021 - Natural Resource Partners L.P. (NYSE:NRP) today reported third quarter 2021 results as follows:
“Our strong performance in the third quarter reflects continued global economic recovery and strong demand for metallurgical coal, thermal coal and soda ash, and we expect conditions to remain favorable over the near and intermediate term”
“Our strong performance in the third quarter reflects continued global economic recovery and strong demand for metallurgical coal, thermal coal and soda ash, and we expect conditions to remain favorable over the near and intermediate term,” said Craig Nunez, NRP’s President & Chief Operating Officer. “We remain committed to using our robust free cash flow to reduce debt and continue to believe our long-term strategy of de-risking the Partnership in this manner is the best means to maximize unitholder value. In addition, we returned $5.6 million of distributions to common unitholders in the third quarter and have paid out $22.2 million to common unitholders over the last twelve months.”
Mr. Nunez continued, “I am also pleased to report that we generated and sold $13.8 million in carbon offset credits in October by sequestering over 1 million tonnes of carbon dioxide in our forestlands. This transaction will be reflected in our fourth quarter results and is the first tangible result of our ongoing initiative to generate cash flow from alternative revenue sources we have told you about in previous quarters. We continue to pursue additional alternative revenue projects that have the potential to provide important benefits to the environment and add significant value to NRP over the coming years.”
NRP's liquidity was $219.0 million at September 30, 2021, consisting of $119.0 million of cash and $100.0 million of borrowing capacity available under its revolving credit facility.
NRP announced today that the Board of Directors of its general partner declared a third quarter 2021 cash distribution of $0.45 per common unit of NRP to be paid on November 23, 2021 to unitholders of record on November 16, 2021. In addition, the Board declared an $8.0 million distribution on the preferred units, which will be paid one-half in cash and one-half in kind through the issuance of additional preferred units. The preferred unit distribution includes interest on previously paid-in-kind units and will also be paid one-half in cash and one-half in kind through the issuance of additional preferred units.
Coal Royalty and Other
In the third quarter of 2021 net income increased $17.4 million and free cash flow increased $5.6 million as compared to the prior year period primarily due to stronger metallurgical coal demand and pricing in the third quarter of 2021. Approximately 65% of coal royalty revenues and approximately 45% of coal royalty sales volumes were derived from metallurgical coal in the third quarter of 2021.
Metallurgical coal markets have rebounded significantly from the lows seen in 2020 to record highs and the outlook remains strong as steel demand driven by global economic recovery is more than offsetting challenges related to the COVID-19 pandemic. Domestic and export thermal coal markets have also significantly improved from the lows seen in 2020, however NRP does not have meaningful sensitivity to thermal coal price movements this year since the substantial majority of NRP's thermal cash flows are fixed through 2021 pursuant to a contract with Foresight Energy that went into effect as they emerged from bankruptcy in 2020. While there is potential for NRP to capture upside from improved thermal coal demand and pricing in 2022, thermal coal markets still face the long-term challenges of lower electricity demand, competition from natural gas and the secular shift to renewable energy.
In addition to actively managing its producing coal and hard mineral properties, NRP continues to identify alternative revenue sources across its large portfolio of land, mineral and timber assets. The types of opportunities include the sequestration of carbon dioxide underground and in standing forests, and the generation of electricity using geothermal, solar and wind energy. In the fourth quarter of this year, NRP was able to execute on one such project through the issuance and subsequent sale of 1.1 million forest carbon offset credits for $13.8 million. The offset credits were issued to NRP by the California Air Resources Board under its cap-and-trade program and represent 1.1 million tonnes of carbon sequestered from approximately 39,000 acres of NRP's forest assets in West Virginia. This is an encouraging first step in NRP's ability to create value through alternative revenue sources. While the timing and likelihood of additional cash flows being realized from further activities is uncertain, NRP believes its large ownership footprint throughout the United States will provide additional opportunities to create value in this regard with minimal capital investment.
Net income in the third quarter of 2021 increased $4.7 million as compared to the prior year period as demand for soda ash continues to improve globally from the lows caused by the COVID-19 pandemic. Free cash flow in the third quarter of 2021 was flat as compared to the prior year period as a result of Ciner Wyoming's decision in August of 2020 to suspend its quarterly distributions in an effort to achieve greater financial and liquidity flexibility as a result of the COVID-19 pandemic.
However, as a result of the continued improvement in global soda ash demand and pricing, Ciner Wyoming reinstated its quarterly cash distribution and NRP will receive $7.4 million in the fourth quarter of 2021.
Corporate and Financing
Corporate and financing costs in the third quarter of 2021 were relatively flat as compared to the prior year period. Free cash flow improved $0.3 million in the third quarter of 2021 as compared to the prior year period primarily due to lower cash paid for interest as a result of less debt outstanding in 2021.
As noted earlier, NRP declared a third quarter 2021 preferred unit distribution of $8.0 million which will be paid one-half in cash and one-half in kind. The indenture governing the 2025 parent company notes restricts NRP from paying more than one-half of the quarterly distribution on the preferred units in cash if NRP's consolidated leverage ratio exceeds 3.75x, and as of September 30, 2021, NRP's leverage ratio was 3.8x. However, as a result of the strong coal and soda ash pricing expected in the fourth quarter, and the forest carbon offset transaction described above, NRP expects its leverage ratio to fall below the 3.75x threshold by December 31, 2021. If this occurs, NRP plans to redeem its outstanding paid-in-kind preferred units and continue paying cash distributions to its common unitholders. If NRP’s consolidated leverage ratio were to remain above 3.75x and NRP remains unable to redeem its outstanding paid-in-kind preferred units, NRP would be required to temporarily suspend distributions on its common units until the leverage ratio drops below 3.75x and the outstanding paid-in-kind preferred units are redeemed. Additionally, NRP expects its leverage ratio to continue its long-term decline as NRP pays down debt.
Future distributions on NRP's common and preferred units and decisions regarding paid-in-kind preferred unit redemptions will be determined on a quarterly basis by the Board of Directors. The Board of Directors considers numerous factors each quarter in determining cash distributions, including profitability, cash flow, debt service obligations, market conditions and outlook, estimated unitholder income tax liability and the level of cash reserves that the Board determines is necessary for future operating and capital needs.
To see the full results with financial figures included, click here.