Edgar Filing: NATURAL RESOURCE PARTNERS LP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-31465

______________________________________________________

NATURAL RESOURCE PARTNERS L.P.

(Exact name of registrant as specified in its charter)

______________________________________________________



Delaware		35-2164875
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1201 Louisiana Street, Suite 3400

Houston, Texas 77002

(Address of principal executive offices)

(Zip Code)

(713) 751-7507

(Registrant’s telephone number, including area code)

______________________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of "accelerated filer", "large accelerated filer", "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer	¨	Accelerated Filer	ý
Non-accelerated Filer	¨ (Do not check if a smaller reporting company)	Smaller Reporting Company	¨
		Emerging Growth Company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

At August 1, 2017 there were 12,232,006 Common Units outstanding.

NATURAL RESOURCE PARTNERS, L.P.

TABLE OF CONTENTS



		Page
Part I. Financial Information
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets	1
	Consolidated Statements of Comprehensive Income	2
	Consolidated Statements of Partners’ Capital	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	50
Part II. Other Information
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosure	51
Item 5.	Other Information	51
Item 6.	Exhibits	52
	Signatures	53

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

NATURAL RESOURCE PARTNERS L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands, except unit data)



	June 30,			December 31,
	2017			2016
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	40,783		$	40,371
Accounts receivable, net	53,997			43,202
Accounts receivable—affiliates, net	292			6,658
Inventory	7,841			6,893
Prepaid expenses and other	3,192			6,137
Current assets of discontinued operations (see Note 5)	991			991
Total current assets	107,096			104,252
Land	25,272			25,252
Plant and equipment, net	48,822			49,443
Mineral rights, net	895,642			908,192
Intangible assets, net	51,226			3,236
Intangible assets, net—affiliate	—			49,811
Equity in unconsolidated investment	248,919			255,901
Long-term contracts receivable	41,638			—
Long-term contracts receivable—affiliate	—			43,785
Other assets	9,172			3,791
Other assets—affiliate	1,265			1,018
Total assets	$	1,429,052		$	1,444,681
LIABILITIES AND CAPITAL
Current liabilities:
Accounts payable	$	5,257		$	6,234
Accounts payable—affiliates	942			940
Accrued liabilities	37,213			41,587
Current portion of long-term debt, net	173,901			138,903
Current liabilities of discontinued operations (see Note 5)	98			353
Total current liabilities	217,411			188,017
Deferred revenue	110,885			44,931
Deferred revenue—affiliates	—			71,632
Long-term debt, net	700,252			987,400
Warrant liabilities	37,457			—
Other non-current liabilities	2,699			4,565
Total liabilities	1,068,704			1,296,545
Commitments and contingencies (see Note 13)
Convertible Preferred Units (251,250 units issued and outstanding at $1,000 par value per unit; liquidation preference of $1,500 per unit)	160,377			—
Partners’ capital:
Common unitholders’ interest (12,232,006 units issued and outstanding)	204,230			152,309
General partner’s interest	1,946			887
Accumulated other comprehensive loss	(2,811		)	(1,666		)
Total partners’ capital	203,365			151,530
Non-controlling interest	(3,394		)	(3,394		)
Total capital	199,971			148,136
Total liabilities and capital	$	1,429,052		$	1,444,681

The accompanying notes are an integral part of these consolidated financial statements.

NATURAL RESOURCE PARTNERS L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per unit data)

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenues and other income:
Coal royalty and other	$	36,914		$	59,983		$	71,908		$	88,832
Coal royalty and other—affiliates	12,712			17,504			28,856			28,074
Construction aggregates	33,555			31,642			60,776			56,324
Equity in earnings of Ciner Wyoming	8,389			10,188			18,683			19,989
Gain (loss) on asset sales, net	3,361			(1,071		)	3,405			20,854
Total revenues and other income	94,931			118,246			183,628			214,073

Operating expenses:
Operating and maintenance expenses	31,020			29,797			60,648			56,582
Operating and maintenance expenses—affiliates, net	2,219			2,402			4,774			5,886
Depreciation, depletion and amortization	8,165			10,472			17,889			20,252
Amortization expense—affiliate	240			704			1,008			1,426
General and administrative	2,031			3,173			8,109			6,408
General and administrative—affiliates	852			866			1,976			1,803
Asset impairments	—			91			1,778			1,984
Total operating expenses	44,527			47,505			96,182			94,341

Income from operations	50,404			70,741			87,446			119,732

Other income (expense)
Interest expense	(20,377		)	(22,054		)	(43,518		)	(44,251		)
Interest expense—affiliate	—			(61		)	—			(523		)
Debt modification expense	(132		)	—			(7,939		)	—
Loss on extinguishment of debt	(4,107		)	—			(4,107		)	—
Warrant issuance expense	—			—			(5,709		)	—
Fair value adjustments for warrant liabilities	23,960			—			40,529			—
Interest income	69			7			86			26
Other expense, net	(587		)	(22,108		)	(20,658		)	(44,748		)

Net income from continuing operations	49,817			48,633			66,788			74,984
Income (loss) from discontinued operations (see Note 5)	133			(2,187		)	(74		)	(5,111		)
Net income	$	49,950		$	46,446		$	66,714		$	69,873
Less: income attributable to preferred unitholders	(7,538		)	—			(10,038		)	—
Net income attributable to common unitholders and general partner	$	42,412		$	46,446		$	56,676		$	69,873

Income from continuing operations per common unit (see Note 3)
Basic	$	3.38		$	3.90		$	4.55		$	6.02
Diluted	1.13			3.90			1.35			6.02

Net income per common unit (see Note 3)
Basic	$	3.39		$	3.73		$	4.54		$	5.61
Diluted	1.13			3.73			1.34			5.61

Net income	$	49,950		$	46,446		$	66,714		$	69,873
Add: comprehensive income (loss) from unconsolidated investment and other	(13		)	462			(1,145		)	(83		)
Comprehensive income	$	49,937		$	46,908		$	65,569		$	69,790

The accompanying notes are an integral part of these consolidated financial statements.

NATURAL RESOURCE PARTNERS L.P.

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(In thousands)

(Unaudited)



	Common Unitholders				General Partner			Accumulated Other Comprehensive Loss			Partners' Capital Excluding Non-Controlling Interest			Non-Controlling Interest			Total Capital
	Common Unitholders
	Units	Amounts
Balance at December 31, 2016	12,232	$	152,309		$	887		$	(1,666	)	$	151,530		$	(3,394	)	$	148,136
Net income ⁽¹⁾	—	65,380			1,334			—			66,714			—			66,714
Distributions to common unitholders and general partner	—	(11,009		)	(225		)	—			(11,234		)	—			(11,234		)
Distributions to preferred unitholders	—	(2,450		)	(50		)	—			(2,500		)	—			(2,500		)
Comprehensive loss from unconsolidated investment and other	—	—			—			(1,145		)	(1,145		)	—			(1,145		)
Balance at June 30, 2017	12,232	$	204,230		$	1,946		$	(2,811	)	$	203,365		$	(3,394	)	$	199,971


(1)	Net income includes $10.0 million attributable to Preferred Unitholders that accumulated during the period.

The accompanying notes are an integral part of these consolidated financial statements.

NATURAL RESOURCE PARTNERS L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended June 30,
	2017			2016
Cash flows from operating activities:
Net income	$	66,714		$	69,873
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Depreciation, depletion and amortization	17,889			20,252
Amortization expense—affiliates	1,008			1,426
Return on earnings from unconsolidated investment	22,112			22,050
Equity earnings from unconsolidated investment	(18,683		)	(19,989		)
Gain on asset sales, net	(3,405		)	(20,854		)
Fair value adjustments for warrant liabilities	(40,529		)	—
Debt modification expense	7,939			—
Loss on extinguishment of debt	4,107			—
Warrant issuance expense	5,709			—
Loss from discontinued operations	74			5,111
Asset impairments	1,778			1,984
Other, net	2,422			4,094
Other, net—affiliates	(112		)	212
Change in operating assets and liabilities:
Accounts receivable	(3,603		)	3,922
Accounts receivable—affiliates	(826		)	(2,271		)
Accounts payable	46			150
Accounts payable—affiliates	2			(25		)
Accrued liabilities	(3,898		)	(3,131		)
Accrued liabilities—affiliates	—			(456		)
Deferred revenue	4,489			(38,204		)
Deferred revenue—affiliates	(10,166		)	(4,060		)
Other items, net	2,527			(2,045		)
Other items, net—affiliates	—			607
Net cash provided by operating activities of continuing operations	55,594			38,646
Net cash provided by (used in) operating activities of discontinued operations	(531		)	5,815
Net cash provided by operating activities	55,063			44,461

Cash flows from investing activities:
Return of equity from unconsolidated investment	2,388			—
Proceeds from sale of oil and gas royalty properties	(544		)	34,347
Proceeds from sale of coal and aggregates royalty properties	1,427			9,802
Return of long-term contract receivables	1,207			—
Return of long-term contract receivables—affiliate	804			2,180
Proceeds from sale of plant and equipment and other	385			843
Acquisition of plant and equipment and other	(4,998		)	(3,919		)
Net cash provided by investing activities of continuing operations	669			43,253
Net cash provided by (used in) investing activities of discontinued operations	202			(3,814		)
Net cash provided by investing activities	871			39,439

NATURAL RESOURCE PARTNERS L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



Cash flows from financing activities:
Proceeds from issuance of Convertible Preferred Units and Warrants, net	242,100			—
Proceeds from issuance of 2022 Senior Notes, net	103,688			—
Proceeds from loans	—			20,000
Repayments of loans	(348,292		)	(98,482		)
Distributions to common unitholders and general partner	(11,234		)	(11,232		)
Distributions to preferred unitholders	(1,250		)	—
Contributions to discontinued operations	(329		)	—
Debt issue costs and other	(40,534		)	(11,998		)
Net cash used in financing activities of continuing operations	(55,851		)	(101,712		)
Net cash provided by (used in) financing activities of discontinued operations	329			(10,570		)
Net cash used in financing activities	(55,522		)	(112,282		)

Net increase (decrease) in cash and cash equivalents	412			(28,382		)

Cash and cash equivalents of continuing operations at beginning of period	40,371			41,204
Cash and cash equivalents of discontinued operations at beginning of period	—			10,569
Cash and cash equivalents at beginning of period	40,371			51,773

Cash and cash equivalents at end of period	40,783			23,391
Less: cash and cash equivalents of discontinued operations at end of period	—			2,000
Cash and cash equivalents of continuing operations at end of period	$	40,783		$	21,391

Supplemental cash flow information:
Cash paid during the period for interest	$	34,880		$	42,671
Non-cash financing activities:
Issuance of 2022 Senior Notes in exchange for 2018 Senior Notes	$	240,638		$	—

The accompanying notes are an integral part of these consolidated financial statements.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Nature of Business

Natural Resource Partners L.P. (the "Partnership") engages principally in the business of owning, operating, managing and leasing a diversified portfolio of mineral properties in the United States, including interests in coal, trona and soda ash, construction aggregates and other natural resources. As used in these Notes to Consolidated Financial Statements, the terms "NRP," "we," "us" and "our" refer to Natural Resource Partners L.P. and its subsidiaries, unless otherwise stated or indicated by context.

Principles of Consolidation and Reporting

The accompanying unaudited Consolidated Financial Statements of the Partnership have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In management's opinion, all necessary adjustments to fairly present the Partnership's results of operations, financial position and cash flows for the periods presented have been made and all such adjustments were of a normal and recurring nature. Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation.

The Partnership reclassified oil and gas royalty activities in prior period amounts to conform to the way it internally manages and monitors segment performance. This change had no impact on the Partnership's consolidated financial position, net income or cash flows. See Note 4. Segment Information for a discussion of our operating segments.

Recently Issued Accounting Standards

The FASB issued authoritative guidance that eliminates the requirement to consider "down-round" features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. The guidance requires entities that present earnings per share ("EPS") under ASC 260 to recognize the effect of a down round feature in a freestanding equity-classified financial instrument only when it is triggered. The effect of triggering such a feature will be recognized as a dividend and a reduction to income available to common shareholders in basic EPS. Entities will also have to make new disclosures for financial instruments with down-round features and other terms that change conversion or exercise prices. The guidance is effective for annual and interim periods ending after December 31, 2018. Early adoption is permitted. The Partnership is currently evaluating the impact of the provisions of this guidance on its consolidated financial statements and may early adopt this guidance.

The FASB issued authoritative guidance on revenue recognition. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance will also require enhanced disclosures, provide more comprehensive guidance for transactions such as service revenue and contract modifications, and enhance guidance for multiple-element arrangements. The Partnership is required to adopt this guidance in the first quarter of 2018 using one of two retrospective application methods. The Partnership has performed revenue scoping procedures to identify the contracts for all of its revenue streams and utilized the practical expedient of grouping contracts or performance obligations with similar characteristics as prescribed by the new standard. The Partnership is in the process of completing its revenue contract analysis. The Partnership anticipates utilizing the full retrospective adoption method for financial statement comparability.

The FASB issued authoritative lease guidance that requires lessees to recognize assets and liabilities on the balance sheet for the present value of the rights and obligations created by all leases with terms of more than 12 months. The guidance also requires disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual and interim periods ending after December 31, 2018. The Partnership is currently evaluating the impact of the provisions of this guidance on its consolidated financial statements.

The FASB issued authoritative guidance that replaces the incurred loss impairment methodology in the current standard with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for annual and interim periods ending after December 31,

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

2019. The Partnership does not expect the impact of the provisions of this guidance to have a material effect on its consolidated financial statements.

The FASB issued authoritative guidance to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows in order to reduce current and potential future diversity in practice. The guidance is effective for annual and interim periods ending after December 31, 2017. The Partnership adopted this guidance in the second quarter of 2017 and its adoption did not have a material effect on its consolidated financial statements.

2. Convertible Preferred Units and Warrants

On March 2, 2017, NRP issued $250 million of Class A Convertible Preferred Units representing limited partner interests in NRP (the "Preferred Units") to certain entities controlled by funds affiliated with the Blackstone Group, L.P. (collectively referred to as "Blackstone") and certain affiliates of GoldenTree Asset Management LP (collectively referred to as "GoldenTree") (together the "Preferred Purchasers") pursuant to a Preferred Unit and Warrant Purchase Agreement. NRP issued 250,000 Preferred Units to the Preferred Purchasers at a price of $1,000 per Preferred Unit (the "Per Unit Purchase Price"), less a 2.5% structuring and origination fee. The Preferred Units entitle the Preferred Purchasers to receive cumulative distributions at a rate of 12% per year, up to one half of which NRP may pay in additional Preferred Units (such additional Preferred Units, the "PIK Units").

NRP also issued two tranches of warrants (the "Warrants") to purchase common units to the Preferred Purchasers (Warrants to purchase 1.75 million common units with a strike price of $22.81 and Warrants to purchase 2.25 million common units with a strike price of $34.00). The Warrants may be exercised by the holders thereof at any time before the eighth anniversary of the closing date. Upon exercise of the Warrants, NRP may, at its option, elect to settle the Warrants in common units or cash, each on a net basis.

The Preferred Units have a perpetual term, unless converted or redeemed as described below. The Preferred Units (including any PIK Units) are convertible into common units at a price of $1,000 per Preferred Unit plus the value of any accrued and unpaid distributions at the election of the holders (1) after the fifth anniversary and prior to the eighth anniversary of the issue date at a 7.5% discount to the volume weighted average trading price of our common units (the "VWAP") for the 30 trading days immediately prior to the notice of conversion if the 30-day VWAP immediately prior to such notice is greater than $51.00 (subject to a maximum of 33% of the Preferred Units per year) and (2) after the eighth anniversary of the issue date at a 10% discount to the VWAP for the 30 trading days immediately prior to the notice of conversion. Instead of issuing common units pursuant to clause (1) of the preceding sentence, NRP has the option to redeem the Preferred Units proposed to be converted for cash at a price equal to the $1,000 per Preferred Unit plus the value of any accrued and unpaid distributions. To the extent the holders of the Preferred Units have not elected to convert their Preferred Units by the twelfth anniversary of the issue date, NRP has the right to force conversion of the Preferred Units at a price equal to the $1,000 per Preferred Unit plus the value of any accrued and unpaid distributions into common units at a 10% discount to the VWAP for the 30 trading days immediately prior to the notice of conversion.

In addition, NRP has the ability to redeem at any time (subject to compliance with its debt agreements) all or any portion of the Preferred Units (including PIK Units) for cash at the agreed upon per unit amount, which is calculated as the Per Unit Purchase Price multiplied by (i) prior to the third anniversary of the closing date, 1.50, (ii) on or after the third anniversary of the closing date and prior to the fourth anniversary of the closing date, 1.70 and (iii) on or after the fourth anniversary of the closing date, 1.85; less all Preferred Unit distributions made by NRP at the time of redemption; plus the value of all accrued and unpaid Preferred Unit distributions. The Preferred Units are redeemable at the option of the Preferred Unit Purchasers only upon a change in control.

The terms of the Preferred Units contain certain restrictions on NRP's ability to pay distributions on its common units. To the extent that either (i) NRP's consolidated Leverage Ratio, as defined in the Partnership's Fifth Amended and Restated Partnership Agreement dated March 2, 2017 (the "Restated Partnership Agreement"), is greater than 3.25x, or (ii) the ratio of NRP's Distributable Cash Flow (as defined in the Restated Partnership Agreement) to cash distributions made or proposed to be made is less than 1.2x (in each case, with respect to the most recently completed four-quarter period), NRP may not increase the quarterly distribution above $0.45 per quarter without the approval of the holders of a majority of the outstanding Preferred Units. In addition, if at any time after January 1, 2022, any PIK Units are outstanding, NRP may not make distributions on its common units until it has redeemed all PIK Units for cash.

The holders of the Preferred Units have the right to vote with holders of NRP’s common units on an as-converted basis and have other customary approval rights with respect to changes of the terms of the Preferred Units. In addition, Blackstone has certain approval rights over certain matters as identified in the Restated Partnership Agreement. GoldenTree also has more limited approval

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

rights that will expand once Blackstone's ownership goes below the Minimum Preferred Unit Threshold (as defined below). These approval rights are not transferrable without NRP's consent. In addition, the approval rights held by Blackstone and GoldenTree will terminate at such time that Blackstone (together with their affiliates) or GoldenTree (together with their affiliates), as applicable, no longer own at least 20% of the total number of Preferred Units issued on the closing date, together with all PIK Units that have been issued but not redeemed (the "Minimum Preferred Unit Threshold").

At the closing, pursuant to a Board Representation and Observation Rights Agreement, the Preferred Purchasers received certain board appointment and observation rights, and Blackstone appointed one director and one observer to the Board of Directors of GP Natural Resource Partners LLC.

NRP also entered into a registration rights agreement (the "Preferred Unit and Warrant Registration Rights Agreement") with the Preferred Purchasers, pursuant to which NRP is required to file (i) a shelf registration statement to register the common units issuable upon exercise of the Warrants and to cause such registration statement to become effective not later than 90 days following the closing date and (ii) a shelf registration statement to register the common units issuable upon conversion of the Preferred Units and to cause such registration statement to become effective not later than the earlier of the fifth anniversary of the closing date or 90 days following the first issuance of any common units upon conversion of Preferred Units (the "Registration Deadlines"). In addition, the Preferred Unit and Warrant Registration Rights Agreement gives the Preferred Purchasers piggyback registration and demand underwritten offering rights under certain circumstances. The shelf registration statement to register the common units issuable upon exercise of the Warrants became effective on April 20, 2017. If the shelf registration statement to register the common units issuable upon conversion of the Preferred Units is not effective by the applicable Registration Deadline, NRP will be required to pay the Preferred Purchasers liquidated damages in the amounts and upon the term set forth in the Preferred Unit and Warrant Registration Rights Agreement.

Accounting for the Preferred Units and Warrants

Classification

The Preferred Units are accounted for on NRP's consolidated balance sheet as temporary equity due to certain contingent redemption rights that may be exercised at the election of Preferred Purchasers. The Warrants are accounted for on NRP's consolidated balance sheet as a liability because of a "down-round" anti-dilution price protection provision that reduces the Warrant holders' exercise price if NRP sells common units at a price less than the current strike price (subject to certain exceptions).

Initial Measurement

The net transaction price as shown below was allocated first to the fair value of the Warrants with the remainder to the Preferred Units. NRP allocated the transaction issuance costs to the Preferred Units and Warrants primarily on a pro-rata basis based on their relative inception date allocated values. The Preferred Units and Warrants were initially recognized at fair value by allocating the transaction price as follows:



	March 2, 2017
Transaction price, gross	$	250,000
Structuring, origination and other fees to Preferred Purchasers	(7,900		)
Transaction costs to other third parties	(10,696		)
Transaction price, net	$	231,404
Allocation of net transaction price
Preferred Units, net	$	159,127
Warrants liabilities	77,986
Issuance costs allocated to Warrants and expensed	(5,709		)
Transaction price, net	$	231,404

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

Subsequent Measurement

Subsequent adjustment of the Preferred Units will not occur until NRP has determined that the conversion or redemption of all or a portion of the Preferred Units is probable of occurring. Once conversion or redemption becomes probable of occurring, the carrying amount of the Preferred Units will be accreted to their redemption value over the period from the date the feature is probable of occurring to the date the preferred stock can first be converted or redeemed. The Warrants and embedded derivatives are accounted for at fair value and are remeasured each quarter. See Note 11. Fair Value Measurements for further information regarding valuation of the warrants and embedded derivatives.

NRP recognizes Preferred Unit distributions on the date the distribution is declared. During the three and six months ended June 30, 2017, NRP declared a $2.5 million distribution on the Preferred Units from March 2, 2017 (the date of issuance) through March 31, 2017. One-half of the $2.5 million distribution was paid-in-kind through the issuance of 1,250 additional Preferred Units and the other half was paid in cash. The following table shows the financial position of the Preferred Units from initial measurement at March 2, 2017 to June 30, 2017 (in thousands):



Balance at December 31, 2016	$	—
Issuance of Preferred Units, net	159,127
Distribution paid-in-kind	1,250
Balance at June 30, 2017	$	160,377

Income available to common unitholders and the general partner is reduced by Preferred Unit distributions that accumulated during the period. During the three and six months ended June 30, 2017, NRP reduced net income attributable to common unitholders and the general partner by $7.5 million and $10.0 million, respectively, as a result of accumulated Preferred Unit distributions.

3. Net Income Per Common Unit

Basic net income per common unit is computed by dividing net income, after considering income attributable to preferred unitholders and the general partner’s interest, by the weighted average number of common units outstanding. Diluted net income per common unit includes the effect of NRP's Warrants and Preferred Units (see Note 2. Convertible Preferred Units and Warrants), if the inclusion of these items is dilutive.

The dilutive effect of the Warrants is calculated using the treasury stock method, which assumes that the proceeds from the exercise of these instruments are used to purchase common units at the average market price for the period. The calculation of the dilutive effect of the Warrants for the three and six months ended June 30, 2017, did not include the net settlement of Warrants to purchase 2.25 million of common units with a strike price of $34.00 because the impact would have been anti-dilutive.

The dilutive effect of the Preferred Units is calculated using the if-converted method. Under the if-converted method, the Preferred Units are assumed to be converted at the beginning of the period, and the resulting common units are included in the denominator of the diluted EPU calculation for the period being presented. Interest recognized during the period (including the effect of accretion of discounts and amortization of issuance costs, if any) and distributions declared in the period and undeclared distributions on the Preferred Units that accumulated during the period are added back to the numerator for purposes of the if-converted calculation.

The following table reconciles net income and weighted average units used in computing basic and diluted net income per common unit is as follows:

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017			2016
Allocation of net income:
Net income from continuing operations	$	49,817	$	48,633		$	66,788		$	74,984
Less: income attributable to preferred unitholders	7,538		—			10,038			—
Less: net income from continuing operations and income attributable to preferred unitholders allocated to the general partner	914		907			1,135			1,368
Net income from continuing operations attributable to common unitholders	$	41,365	$	47,726		$	55,615		$	73,616

Net income (loss) from discontinued operations	$	133	$	(2,187	)	$	(74	)	$	(5,111	)
Less: net income (loss) from discontinued operations attributable to the general partner	3		(44		)	(1		)	(102		)
Net income (loss) from discontinued operations attributable to common unitholders	$	130	$	(2,143	)	$	(73	)	$	(5,009	)

Net income	$	49,950	$	46,446		$	66,714		$	69,873
Less: income attributable to preferred unitholders	7,538		—			10,038			—
Less: net income and income attributable to preferred unitholders allocated to the general partner	917		863			1,134			1,266
Net income attributable to common unitholders	$	41,495	$	45,583		$	55,542		$	68,607

Basic Income (Loss) per Unit:
Weighted average common units—basic	12,232		12,232			12,232			12,232
Basic net income from continuing operations per common unit	$	3.38	$	3.90		$	4.55		$	6.02
Basic net income (loss) from discontinued operations per common unit	$	0.01	$	(0.18	)	$	(0.01	)	$	(0.41	)
Basic net income per common unit	$	3.39	$	3.73		$	4.54		$	5.61

Diluted Income (Loss) per Unit:
Weighted average common units—basic	12,232		12,232			12,232			12,232
Plus: dilutive effect of Warrants	467		—			361			—
Plus: dilutive effect of Preferred Units	9,760		—			6,517			—
Weighted average common units—diluted	22,459		12,232			19,110			12,232

Net income from continuing operations	$	49,817	$	48,633		$	66,788		$	74,984
Less: fair value adjustments for warrant liabilities	23,960		—			40,529			—
Less: net income from continuing operations and fair value adjustments for warrant liabilities allocated to the general partner	586		907			525			1,368
Diluted net income from continuing operations attributable to common unitholders	$	25,271	$	47,726		$	25,734		$	73,616

Diluted net income (loss) from discontinued operations attributable to common unitholders	$	130	$	(2,143	)	$	(73	)	$	(5,009	)

Net income	$	49,950	$	46,446		$	66,714		$	69,873
Less: fair value adjustments for warrant liabilities	23,960		—			40,529			—
Less: net income and fair value adjustments for warrant liabilities allocated to the general partner	589		863			524			1,266
Diluted net income attributable to common unitholders	$	25,401	$	45,583		$	25,661		$	68,607

Diluted net income from continuing operations per common unit	$	1.13	$	3.90		$	1.35		$	6.02
Diluted net income (loss) from discontinued operations per common unit	$	0.01	$	(0.18	)	$	—		$	(0.41	)
Diluted net income per common unit	$	1.13	$	3.73		$	1.34		$	5.61

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

4. Segment Information

The Partnership's operating segments are strategic business units that offer products and services to different customer segments in different geographies within the U.S. and that are managed accordingly. NRP has the following three operating segments:

Coal Royalty and Other—consists primarily of coal royalty and coal related transportation and processing assets. Other assets include aggregate royalty, industrial mineral royalty, oil and gas royalty and timber. The Partnership's coal reserves are primarily located in Appalachia, the Illinois Basin and the Western United States. The Partnership's aggregates and industrial minerals are located in a number of states across the United States. The Partnership's oil and gas royalty assets are located in Louisiana.

Soda Ash—consists of the Partnership's 49% non-controlling equity interest in a trona ore mining operation and soda ash refinery in the Green River Basin, Wyoming. Ciner Resources LP, the Partnership's operating partner, mines the trona, processes it into soda ash, and distributes the soda ash both domestically and internationally into the glass and chemicals industries. The Partnership receives regular quarterly distributions from this business.

Construction Aggregates—consists of the Partnership's construction materials business that operates hard rock quarries, an underground limestone mine, sand and gravel plants, asphalt plants and marine terminals. The Partnership's construction aggregates business operates in Pennsylvania, West Virginia, Tennessee, Kentucky and Louisiana.

Direct segment costs and certain costs incurred at a corporate level that are identifiable and that benefit the Partnership's segments are allocated to the operating segments. These allocated costs include costs of: taxes, legal, information technology and shared facilities services and are included in Operating and maintenance expenses and Operating and maintenance expenses—affiliates, net on the Consolidated Statements of Comprehensive Income. Intersegment sales are at prices that approximate market.

Corporate and Financing includes functional corporate departments that do not earn revenues. Costs incurred by these departments include corporate headquarters and overhead, financing, centralized treasury and accounting and other corporate-level activity not specifically allocated to a segment.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

The following table summarizes certain financial information for each of the Partnership's operating segments (in thousands):



	Operating Segments
For the Three Months Ended	Coal Royalty and Other			Soda Ash		Construction Aggregates			Corporate and Financing			Total
June 30, 2017
Revenues (including affiliates)	$	49,626		$	8,389	$	33,555		$	—		$	91,570
Intersegment revenues (expenses)	68			—		(68		)	—			—
Gain on asset sales	3,184			—		177			—			3,361
Operating and maintenance expenses (including affiliates)	5,419			—		27,820			—			33,239
General and administrative (including affiliates)	—			—		—			2,883			2,883
Depreciation, depletion and amortization (including affiliates)	5,375			—		3,030			—			8,405
Other expense, net	—			—		178			409			587
Net income (loss) from continuing operations	42,084			8,389		2,636			(3,292		)	49,817
Net income from discontinued operations	—			—		—			—			133

June 30, 2016
Revenues (including affiliates)	$	77,487		$	10,188	$	31,642		$	—		$	119,317
Intersegment revenues (expenses)	30			—		(30		)	—			—
Gain (loss) on asset sales	(1,080		)	—		9			—			(1,071		)
Operating and maintenance expenses (including affiliates)	7,707			—		24,492			—			32,199
General and administrative (including affiliates)	—			—		—			4,039			4,039
Depreciation, depletion and amortization (including affiliates)	7,486			—		3,690			—			11,176
Asset impairment	91			—		—			—			91
Other expense, net	—			—		—			22,108			22,108
Net income (loss) from continuing operations	61,153			10,188		3,439			(26,147		)	48,633
Net loss from discontinued operations				—		—			—			(2,187		)

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)



	Operating Segments
For the Six Months Ended	Coal Royalty and Other		Soda Ash		Construction Aggregates			Corporate and Financing			Total
June 30, 2017
Revenues (including affiliates)	$	100,764	$	18,683	$	60,776		$	—		$	180,223
Intersegment revenues (expenses)	130		—		(130		)	—			—
Gain on asset sales	3,213		—		192			—			3,405
Operating and maintenance expenses (including affiliates)	12,803		—		52,619			—			65,422
General and administrative (including affiliates)	—		—		—			10,085			10,085
Depreciation, depletion and amortization (including affiliates)	12,348		—		6,549			—			18,897
Asset impairment	1,778		—		—			—			1,778
Other expense, net	—		—		573			20,085			20,658
Net income (loss) from continuing operations	77,178		18,683		1,097			(30,170		)	66,788
Net loss from discontinued operations	—		—		—			—			(74		)

June 30, 2016
Revenues (including affiliates)	$	116,906	$	19,989	$	56,324		$	—		$	193,219
Intersegment revenues (expenses)	52		—		(52		)	—			—
Gain on asset sales	20,845		—		9			—			20,854
Operating and maintenance expenses (including affiliates)	15,841		—		46,627			—			62,468
General and administrative (including affiliates)	—		—		—			8,211			8,211
Depreciation, depletion and amortization (including affiliates)	14,426		—		7,252			—			21,678
Asset impairment	1,984		—		—			—			1,984
Other expense, net	—		—		—			44,748			44,748
Net income (loss) from continuing operations	105,552		19,989		2,402			(52,959		)	74,984
Net loss from discontinued operations	—		—					—			(5,111		)

Total assets at June 30, 2017:
Continuing operations	980,851		248,919		190,233			8,058			1,428,061
Discontinued operations	—		—		—			—			991
Total assets at December 31, 2016:
Continuing operations	990,172		255,901		190,615			7,002			1,443,690
Discontinued operations	—		—		—			—			991

5. Discontinued Operations

In July 2016, NRP Oil and Gas sold its non-operated oil and gas working interest assets for $116.1 million in gross sales proceeds. The sale had an effective date of April 1, 2016.

The Partnership's exit from its non-operated oil and gas working interest business represented a strategic shift to reduce debt and focus on its soda ash, coal royalty and construction aggregates business segments. As a result, the Partnership classified the operating results, cash flows and assets and liabilities of its non-operated oil and gas working interest assets as discontinued operations in its consolidated statements of comprehensive income and consolidated statements of cash flows for all periods presented. The Partnership transitioned the remaining investments in royalty interests in oil and natural gas properties into the Coal Royalty and Other operating segment during the third quarter of 2016.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

The following table (in thousands) presents summarized financial results of the Partnership's discontinued operations in the Consolidated Statements of Comprehensive Income:



	Three Months Ended June 30,					Six Months Ended June 30,
	2017		2016			2017			2016
Revenues and other income:
Oil and gas	$	7	$	9,511		$	22		$	16,435
Gain (loss) on asset sales	136		(184		)	57			(184		)
Total revenues and other income	143		9,327			79			16,251

Operating expenses:
Operating and maintenance expenses (including affiliates)	10		5,871			153			10,252
Depreciation, depletion and amortization	—		3,286			—			7,527
Asset impairments	—		427			—			564
Total operating expenses	10		9,584			153			18,343

Interest expense	—		(1,930		)	—			(3,019		)
Income (loss) from discontinued operations	$	133	$	(2,187	)	$	(74	)	$	(5,111	)

The following table (in thousands) presents the carrying amounts of the Partnership's assets and liabilities of discontinued operations in the Consolidated Balance Sheets:



	June 30,		December 31,
	2017		2016
ASSETS
Current assets:
Accounts receivable, net (including affiliates) (1)	$	991	$	991
Total current assets	991		991
Total assets of discontinued operations	$	991	$	991

LIABILITIES
Current liabilities:
Other (including affiliates) (1)	$	98	$	353
Total current liabilities	98		353
Total liabilities of discontinued operations	$	98	$	353


(1)	See Note 12. Related Party Transactions for additional information on the Partnership's related party assets and liabilities.

The following table (in thousands) presents supplemental cash flow information of the Partnership's discontinued operations:



	Six Months Ended June 30,
	2017		2016
Cash paid for interest	$	—	$	1,489

Capital expenditures related to the Partnership's discontinued operations were $0.0 million and $3.8 million during the six months ended June 30, 2017 and 2016, respectively.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

6. Equity Investment

The Partnership accounts for its 49% investment in Ciner Wyoming using the equity method of accounting. Ciner Wyoming distributed $24.5 million and $22.1 million to the Partnership in the six months ended June 30, 2017 and 2016, respectively.

The difference between the amount at which the investment in Ciner Wyoming is carried and the amount of underlying equity in Ciner Wyoming's net assets was $147.9 million and $150.0 million as of June 30, 2017 and December 31, 2016, respectively. This excess basis relates to plant, property and equipment and right to mine assets. The excess basis difference that relates to property, plant and equipment is being amortized into income using the straight-line method over a weighted average of 28 years. The excess basis difference that relates to right to mine assets is being amortized into income using the units of production method.

The Partnership's equity in the earnings of Ciner Wyoming is summarized as follows (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Income allocation to NRP’s equity interests	$	9,274		$	11,388		$	20,754		$	22,384
Amortization of basis difference	(885		)	(1,200		)	(2,071		)	(2,395		)
Equity in earnings of unconsolidated investment	$	8,389		$	10,188		$	18,683		$	19,989

The results of Ciner Wyoming’s operations are summarized as follows (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Sales	$	119,737	$	116,698	$	246,309	$	231,082
Gross profit	24,219		28,732		52,916		56,983
Net Income	18,926		23,241		42,354		45,682

The financial position of Ciner Wyoming is summarized as follows (in thousands):



	June 30,		December 31,
	2017		2016
Current assets	$	157,198	$	134,616
Non-current assets	233,313		235,427
Current liabilities	53,713		55,396
Non-current liabilities	130,600		98,425

The purchase agreement for the acquisition of the Partnership’s interest in Ciner Wyoming required the Partnership to pay additional contingent consideration to Anadarko to the extent certain performance criteria described in the purchase agreement were met by Ciner Wyoming in any of the years 2013, 2014 or 2015. During the first quarters of 2014, 2015 and 2016, the Partnership paid contingent consideration of $0.5 million, $3.8 million and $7.2 million, respectively, in contingent consideration to Anadarko for performance criteria met by Ciner Wyoming in 2013, 2014 and 2015, respectively.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

7. Plant and Equipment

The Partnership’s plant and equipment consist of the following (in thousands):



	June 30,			December 31,
	2017			2016
Plant and equipment at cost	$	83,339		$	79,171
Construction in process	58			557
Less accumulated depreciation	(34,575		)	(30,285		)
Total plant and equipment, net	$	48,822		$	49,443

Depreciation expense related to the Partnership's plant and equipment totaled $2.5 million and $3.0 million for the three months ended June 30, 2017 and 2016, respectively. Depreciation expense related to the Partnership's plant and equipment totaled $5.4 million and $6.5 million for the six months ended June 30, 2017 and 2016, respectively.

8. Mineral Rights

The Partnership’s mineral rights consist of the following (in thousands):



	June 30, 2017
	Carrying Value		Accumulated Depletion			Net Book Value
Coal properties	$	1,170,700	$	(429,079	)	$	741,621
Aggregates properties	151,236		(14,605		)	136,631
Oil and gas royalty properties	12,395		(6,723		)	5,672
Other	13,168		(1,450		)	11,718
Total	$	1,347,499	$	(451,857	)	$	895,642



	December 31, 2016
	Carrying Value		Accumulated Depletion			Net Book Value
Coal properties	$	1,170,904	$	(420,032	)	$	750,872
Aggregates properties	176,774		(39,056		)	137,718
Oil and gas royalty properties	12,395		(6,289		)	6,106
Other	14,946		(1,450		)	13,496
Total	$	1,375,019	$	(466,827	)	$	908,192

Depletion expense related to the Partnership’s mineral rights totaled $5.0 million and $7.2 million for the three months ended June 30, 2017 and 2016, respectively. Depletion expense related to the Partnership’s mineral rights totaled $11.7 million and $13.3 million for the six months ended June 30, 2017 and 2016, respectively.

2016 Sale of Royalty Properties

The Partnership completed the sale of the following assets during the six months ended June 30, 2016:

1)Oil and gas royalty and overriding royalty interests in the Coal Royalty and Other segment in several producing properties located in the Appalachian Basin for $36.4 million gross sales proceeds. The effective date of the sale was January 1, 2016, and the Partnership recorded a $19.2 million gain from this sale included in Gain on asset sales, net on its Consolidated Statement of Comprehensive Income.

2)Aggregates reserves and related royalty rights in the Coal Royalty and Other segment at three aggregates operations located in Texas, Georgia and Tennessee for $10.0 million gross sales proceeds. The effective date of the sale was February 1, 2016, and the Partnership recorded a $1.6 million gain from this sale included in Gain on asset sales, net on its Consolidated Statement of Comprehensive Income.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

9. Intangible Assets (Including Affiliate)

The Partnership's intangible assets (including affiliate) primarily consists of above market coal transportation contracts with subsidiaries of Foresight Energy LP ("Foresight Energy") in which the Partnership receives throughput fees for the handling and transportation of coal. In addition, the Partnership's intangible assets include permits, aggregates-related trade names and other agreements. The Partnership's intangible assets (including affiliate) included in the Partnership's Consolidated Balance Sheet are as follows (in thousands):



	June 30,			December 31,
	2017			2016
Intangible assets (including affiliate)	$	86,336		$	86,336
Less: accumulated amortization (including affiliate)	(35,110		)	(33,289		)
Total intangible assets, net (including affiliate)	$	51,226		$	53,047

Amortization expense related to the Partnership's intangible assets—affiliate totaled $0.2 million and $0.7 million for the three months ended June 30, 2017 and 2016, respectively. Amortization expense related to the Partnership's intangible assets—affiliate totaled $1.0 million and $1.4 million for the six months ended June 30, 2017 and 2016, respectively. Amortization expense related to the Partnership's intangible assets totaled $0.6 million and $0.3 million for the three months ended June 30, 2017 and 2016, respectively. Amortization expense related to the Partnership's intangible assets totaled $0.8 million and $0.5 million for the six months ended June 30, 2017 and 2016, respectively.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

10. Debt

As of June 30, 2017 and December 31, 2016, the Partnership's debt consisted of the following (in thousands):



	June 30,			December 31,
	2017			2016
NRP LP debt:
10.500% senior notes, with semi-annual interest payments in March and September, due March 2022, $241 million issued at par and $105 million issued at 98.75%	$	345,638		$	—
9.125% senior notes, with semi-annual interest payments in April and October, due October 2018, $300 million issued at 99.007% and $125 million issued at 99.5%	94,362			425,000
Opco debt:
Revolving credit facility, due April 2020	—			210,000
Senior notes
4.91% with semi-annual interest payments in June and December, with annual principal payments in June, due June 2018	4,594			9,187
8.38% with semi-annual interest payments in March and September, with annual principal payments in March, due March 2019	42,686			64,029
5.05% with semi-annual interest payments in January and July, with annual principal payments in July, due July 2020	30,633			30,633
5.55% with semi-annual interest payments in June and December, with annual principal payments in June, due June 2023	16,136			18,825
4.73% with semi-annual interest payments in June and December, with annual principal payments in December, due December 2023	52,204			52,204
5.82% with semi-annual interest payments in March and September, with annual principal payments in March, due March 2024	104,583			119,524
8.92% with semi-annual interest payments in March and September, with annual principal payments in March, due March 2024	31,738			36,272
5.03% with semi-annual interest payments in June and December, with annual principal payments in December, due December 2026	134,035			134,035
5.18% with semi-annual interest payments in June and December, with annual principal payments in December, due December 2026	38,262			38,262
5.31% utility local improvement obligation, with annual principal and interest payments in February, due March 2021	—			961
Total debt at face value	$	894,871		$	1,138,932
Net unamortized debt discount	(1,972		)	(1,322		)
Net unamortized debt issuance costs	(18,746		)	(11,307		)
Total debt, net	$	874,153		$	1,126,303
Less: current portion of long-term debt	173,901			138,903
Total long-term debt	$	700,252		$	987,400

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

NRP LP Debt

2018 Senior Notes

In September 2013, the Partnership, together with NRP Finance Corporation ("NRP Finance"), a wholly owned subsidiary of the Partnership, as co-issuer, issued $300.0 million of 9.125% Senior Notes at an offering price of 99.007% of par (the "2018 Senior Notes"). Net proceeds after expenses from the issuance of 2018 Senior Notes were approximately $289.0 million. Interest on the 2018 Senior Notes is paid semi-annually on April 1 and October 1, and the 2018 Senior Notes will mature on October 1, 2018. None of the Partnership's subsidiaries guarantee the 2018 Senior Notes.

In October 2014, the Partnership, together with NRP Finance as co-issuer, issued an additional $125.0 million of the 2018 Senior Notes at an offering price of 99.5% of par. The additional issuance constituted the same series of securities as the existing 2018 Senior Notes.

The Partnership and NRP Finance have the option to redeem the 2018 Senior Notes, in whole or in part, at any time on or after April 1, 2016, at fixed redemption prices specified in the indenture governing the NRP 2018 Senior Notes (the "2018 Indenture"). The 2018 Indenture contains covenants that, among other things, limit the ability of the Partnership and certain of its subsidiaries to incur or guarantee additional indebtedness. Under the 2018 Indenture, the Partnership and certain of its subsidiaries generally are not permitted to incur additional indebtedness unless, on a consolidated basis, the fixed charge coverage ratio (as defined in the indenture) is at least 2.0 to 1.0 for the four preceding full fiscal quarters. The ability of the Partnership and certain of its subsidiaries to incur additional indebtedness is further limited in the event the amount of indebtedness of the Partnership and certain of its subsidiaries that is senior to the Partnership's unsecured indebtedness exceeds certain thresholds.

In March 2017, the Partnership and NRP Finance exchanged $241 million aggregate principal amount of the 2018 Senior Notes for $241 million aggregate principal amount of a new series of 10.500% Senior Notes due 2022 (the “2022 Senior Notes”). In April 2017, the Partnership and NRP Finance redeemed $90 million in aggregate principal amount of the 2018 Senior Notes at a redemption price of 104.563%, and paid all accrued and unpaid interest thereon. In addition, pursuant to the 2022 Indenture (as defined below), the Partnership and NRP Finance will redeem any and all remaining outstanding 2018 Senior Notes at par (and pay accrued and unpaid interest thereon) within 60 days after October 1, 2017. NRP anticipates using cash on hand and available borrowings under the Opco Credit Facility in order pay the October 2017 redemption of the 2018 Senior Notes.

2022 Senior Notes

In March 2017, NRP and NRP Finance issued $346 million aggregate principal amount of 2022 Senior Notes to several holders of their 2018 Senior Notes. Of the $346 million of 2022 Senior Notes issued, $241 million in aggregate principal amount were issued in exchange for $241 million in aggregate principal amount of 2018 Senior Notes, and $105 million of the 2022 Senior Notes were issued to the holders for cash. The 2022 Senior Notes are issued under an Indenture dated as of March 2, 2017 (the "2022 Indenture"), bear interest at 10.500% per year, are payable semi-annually on March 15 and September 15, beginning September 15, 2017, and mature on March 15, 2022. The $105.0 million in 2022 Senior Notes purchased for cash were issued at a price of 98.75% (original issue discount of 1.25%), and each holder exchanging 2018 Senior Notes received a fee of 5.813% of the aggregate principal amount of all 2018 Senior Notes tendered for exchange by such holder, as well as all accrued and unpaid interest thereon. The 5.813% fee included a 4.563% call premium on the early repayment of the 2018 Senior Notes and a 1.25% fee on the exchange of the 2018 Notes for 2022 Senior Notes. This fee is accounted for as a debt issue cost, capitalized and shown net of the debt liability on our consolidated balance sheet.

NRP and NRP Finance have the option to redeem the 2022 Senior Notes, in whole or in part, at any time on or after March 15, 2019, at the redemption prices (expressed as percentages of principal amount) of 105.25% for the 12-month period beginning March 15, 2019, 102.625% for the 12-month period beginning March 15, 2020, and thereafter at 100.000%, together, in each case, with any accrued and unpaid interest to the date of redemption. Furthermore, before March 15, 2019, NRP may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 2022 Senior Notes with the net proceeds of certain public or private equity offerings at a redemption price of 110.500% of the principal amount of 2022 Senior Notes, plus any accrued and unpaid interest, if any, to the date of redemption, if at least 65% of the aggregate principal amount of the 2022 Senior Notes issued under the 2022 Indenture remains outstanding immediately after such redemption and the redemption occurs within 180 days of the closing date of such equity offering. In the event of a change of control, as defined in the 2022 Indenture, the holders of the 2022 Senior Notes may require us to purchase their 2022 Senior Notes at a purchase price equal to 101% of the principal amount of the 2022 Senior Notes, plus accrued and unpaid interest, if any.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

The 2022 Indenture contains restrictive covenants that are substantially similar to those contained in the Indenture governing the 2018 Senior Notes, except that the debt incurrence and restricted payments covenants contain additional restrictions. Under the debt incurrence covenant, NRP's non-guarantor restricted subsidiaries will not be permitted to incur additional indebtedness unless their consolidated leverage ratio is less than 3.00x (measured on a pro forma basis and assuming that the greater of (i) $150.0 million of debt (or, if less, at NRP's election, the amount of total lending commitments under any revolving credit facility) and (ii) the actual amount of debt outstanding is outstanding under any revolving credit facility); provided, however, that such non-guarantor restricted subsidiaries will be permitted to make up to $150 million in borrowings under a revolving credit facility (which amount will be reduced on a dollar-for-dollar basis to the extent we have made the election described in clause (i) above). Under the restricted payments covenant, NRP will not be able to increase the quarterly distribution on its common units or elect to pay more than 50% of the distributions required to be made on the Preferred Units in cash, unless, in each case, its consolidated leverage ratio is less than 4.00x. The 2022 Indenture also contains restrictions on NRP's ability to redeem the Preferred Units.

The 2022 Senior Notes are the senior unsecured obligations of NRP and NRP Finance. The 2022 Senior Notes rank equal in right of payment to all existing and future senior unsecured debt of NRP and NRP Finance, including the remaining outstanding 2018 Senior Notes, and senior in right of payment to any of NRP's subordinated debt. The 2022 Senior Notes are effectively subordinated in right of payment to all future secured debt of NRP and NRP Finance to the extent of the value of the collateral securing such indebtedness and are structurally subordinated in right of payment to all existing and future debt and other liabilities of our subsidiaries, including the Opco Credit Facility and each series of Opco’s existing senior notes. None of NRP's subsidiaries guarantee the 2022 Senior Notes.

As of June 30, 2017 and December 31, 2016, NRP and NRP Finance were in compliance with the terms of its debt agreements.

Opco Debt

All of Opco’s debt is guaranteed by its wholly owned subsidiaries and is secured by certain of the assets of Opco and its wholly owned subsidiaries other than NRP Trona LLC, as further described below. As of June 30, 2017 and December 31, 2016, Opco was in compliance with the terms of the financial covenants contained in its debt agreements.

Opco Credit Facility

Opco’s $180 million Third Amended and Restated Credit Agreement, as amended through March 2017 (the "Opco Credit Facility"), matures on April 30, 2020, is guaranteed by all of Opco’s wholly owned subsidiaries, and is secured by liens on certain of the assets of Opco and its subsidiaries, as further described below. Commitments under the Opco Credit Facility will be reduced to $150 million at December 31, 2017 and further reduced to $100 million at December 31, 2018 through maturity in April 2020.

Indebtedness under the Opco Credit Facility bears interest, at Opco's option, at:


•	the higher of (i) the prime rate as announced by the agent bank; (ii) the federal funds rate plus 0.50%; or (iii) LIBOR plus 1%, in each case plus an applicable margin ranging from 2.50% to 3.50%; or


•	a rate equal to LIBOR plus an applicable margin ranging from 3.50% to 4.50%.

The weighted average interest rates for the borrowings outstanding under the Opco Credit Facility for three months ended June 30, 2017 and 2016 were 0.0% and 4.11%, respectively. The weighted average interest rates for the borrowings outstanding under the Opco Credit Facility for six months ended June 30, 2017 and 2016 were 5.22% and 3.95%, respectively. Opco will incur a commitment fee on the unused portion of the revolving credit facility at a rate of 0.50% per annum. Opco may prepay all amounts outstanding under the Opco Credit Facility at any time without penalty. As of June 30, 2017, Opco had no indebtedness outstanding under the Opco Credit Facility.

The Opco Credit Facility contains financial covenants requiring Opco to maintain:


•	a leverage ratio of consolidated indebtedness to EBITDDA (as defined in the Opco Credit Facility) not to exceed 4.0x; provided, however, that if NRP increases its quarterly distribution to its common unitholders above $0.45 per common unit, the maximum leverage ratio under the Opco Credit Facility will permanently decrease from 4.0x to 3.0x.


•	a fixed charge coverage ratio of consolidated EBITDDA to consolidated fixed charges (consisting of consolidated interest expense and consolidated lease expense) of not less than 3.5 to 1.0.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

The Opco Credit Facility contains certain additional customary negative covenants that, among other items, restrict Opco’s ability to incur additional debt, grant liens on its assets, make investments, sell assets and engage in business combinations. Included in the investment covenant are restrictions upon Opco’s ability to acquire assets where Opco does not maintain certain levels of liquidity. In addition, Opco is required to use 75% of the net cash proceeds of certain non-ordinary course asset sales to repay the Opco Credit Facility (without any corresponding commitment reduction) and use the remaining 25% of the net cash proceeds to offer to repay its senior notes on a pro rata basis, as described below under “—Opco Senior Notes.” The Opco Credit Facility also contains customary events of default, including cross-defaults under Opco’s senior notes.

The Opco Credit Facility is collateralized and secured by liens on certain of Opco’s assets with carrying values of $655.2 million and $673.0 million classified as Land, Plant and equipment and Mineral rights on the Partnership’s Consolidated Balance Sheet as of June 30, 2017 and December 31, 2016, respectively. The collateral includes (1) the equity interests in all of Opco’s wholly owned subsidiaries, other than NRP Trona LLC (which owns a 49% non-controlling equity interest in Ciner Wyoming), (2) the personal property and fixtures owned by Opco’s wholly owned subsidiaries, other than NRP Trona LLC, (3) Opco’s material coal royalty revenue producing properties, (4) real property associated with certain of NRP's construction aggregates business, and (5) certain of Opco’s coal-related infrastructure assets.

Opco Senior Notes

Opco has issued several series of private placement senior notes (the "Opco Senior Notes") with various interest rates and principal due dates. As of June 30, 2017 and December 31, 2016, the Opco Senior Notes had cumulative principal balances of $454.9 million and $503.0 million, respectively. The Opco Senior Notes are guaranteed by all of Opco's wholly owned subsidiaries and are secured by the same collateral as the Opco Credit Facility. Opco made mandatory principal payments of $48.1 million and $48.3 million during the six months ended June 30, 2017 and 2016, respectively.

The Note Purchase Agreements relating to the Opco Senior Notes contain covenants requiring Opco to:


•	maintain a ratio of consolidated indebtedness to consolidated EBITDDA (as defined in the note purchase agreement) of no more than 4.0 to 1.0 for the four most recent quarters;


•	not permit debt secured by certain liens and debt of subsidiaries to exceed 10% of consolidated net tangible assets (as defined in the note purchase agreement); and


•	maintain the ratio of consolidated EBITDDA (as defined in the note purchase agreement) to consolidated fixed charges (consisting of consolidated interest expense and consolidated operating lease expense) at not less than 3.5 to 1.0.

In addition, the Note Purchase Agreements include a covenant that provides that, in the event NRP Operating or any of its subsidiaries is subject to any additional or more restrictive covenants under the agreements governing its material indebtedness (including the Opco Credit Facility and all renewals, amendments or restatements thereof), such covenants shall be deemed to be incorporated by reference in the Note Purchase Agreements and the holders of the Notes shall receive the benefit of such additional or more restrictive covenants to the same extent as the lenders under such material indebtedness agreement.

The 8.38% and 8.92% Opco Senior Notes also provide that in the event that Opco’s leverage ratio of consolidated indebtedness to consolidated EBITDDA (as defined in the Note Purchase Agreements) exceeds 3.75 to 1.00 at the end of any fiscal quarter, then in addition to all other interest accruing on these notes, additional interest in the amount of 2.00% per annum shall accrue on the notes for the two succeeding quarters and for as long thereafter as the leverage ratio remains above 3.75 to 1.00. Opco has not exceeded the 3.75 to 1.00 ratio at the end of any fiscal quarter through June 30, 2017.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

In September 2016, Opco amended the Opco Senior Notes. Under this amendment, Opco agreed to use certain asset sale proceeds to make mandatory prepayment offers on the Opco Senior Notes as follows:


•	until the earlier of the time that (1) Opco has sold $300 million of assets and (2) June 30, 2020, Opco will be required to make prepayment offers to the holders of the Opco Senior Notes using 25% of the net cash proceeds from certain asset sales; and


•	after the earlier to occur of the dates above, Opco will be required to make prepayment offers to the holders of the Opco Senior Notes using an amount of net cash proceeds from certain asset sales that will be calculated pro-rata based on the amount of Opco Senior Notes then outstanding compared to the other total Opco senior debt outstanding that is being prepaid.

The mandatory prepayment offers described above will be made pro-rata across each series of outstanding Opco Senior Notes and will not require any make-whole payment by Opco. In addition, the remaining principal and interest payments on the Opco Senior Notes will be adjusted accordingly based on the amount of Opco Senior Notes actually prepaid. The prepayments do not affect the maturity dates of any series of the Opco Senior Notes.

11. Fair Value Measurements

The Partnership’s financial instruments consist of cash and cash equivalents, accounts receivable, contracts receivable—affiliate, accounts payable, debt and convertible preferred units. The carrying amounts reported on the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature.

Fair Value—Disclosure Only

The following table (in thousands) shows the carrying amount and estimated fair value of the Partnership's debt and contracts receivable—affiliate:



	June 30, 2017				December 31, 2016
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Debt:
NRP 2018 Senior Notes (1)	$	93,940	$	95,777	$	420,097	$	412,250
NRP 2022 Senior Notes (1)	328,852		369,401		—		—
Opco Senior Notes and utility local improvement obligation (2)	451,361		486,143		500,174		488,814
Opco Revolving Credit Facility (3)	—		—		206,032		210,000

Assets:
Contracts receivable, current and long-term (2)	44,551		30,917		46,742		32,554


(1)	The Level 1 fair value is based upon quotations obtained for identical instruments on the closing trading prices near period end.


(2)	The Level 3 fair value is estimated by management using quotations obtained for comparable instruments on the closing trading prices near period end.


(3)	The Level 3 fair value approximates the outstanding borrowing amount because the interest rates are variable and reflective of market rates and the terms of the credit facility allow the Partnership to repay this debt at any time without penalty.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

Fair Value—Recurring

The Warrants issued in March 2017 are reported on the Partnership's consolidated balance sheets as a liability at Level 3 fair value using a binomial lattice model under the option pricing method. This model incorporates transaction details such as contractual terms, the Partnership’s common unit price, risk free interest rates, dividend yield and volatility. A significant decrease in the volatility or a significant decrease in the Partnership’s unit price, in isolation, would result in a significantly lower fair value measurement, and vice versa. The binomial lattice model utilized the following assumptions on the following dates (fair value in thousands):



Warrant Valuation Model Key Assumptions	March 2, 2017			June 30, 2017
Closing price of NRP common units	$	41.95		$	27.55
Risk-free interest rate	2.38		%	2.18		%
Expected dividend yield	4.29		%	6.53		%
Expected volatility	45.00		%	50.00		%

The Warrants are recorded as non-current liabilities on the Partnership's consolidated balance sheets. Changes in the estimated fair value of the Warrants result in the recognition of other income or expense. The following table (in thousands) sets forth a summary of the beginning and ending balance sheet amounts and the changes in fair value of the Partnership's Level 3 Warrant liabilities that are measured at fair value on a recurring basis:



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
Beginning balance	$	61,417		$	—	$	—		$	—
Issuance of new Warrants	—			—		77,986			—
Fair value adjustments for Warrant liabilities	(23,960		)	—		(40,529		)	—
Ending balance (1)	$	37,457		$	—	$	37,457		$	—