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 September 30, 2018



¨	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 November 2, 2018 there were 12,245,920 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	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 4.	Controls and Procedures	52
Part II. Other Information
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosure	53
Item 5.	Other Information	53
Item 6.	Exhibits	54
	Signatures	55

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

NATURAL RESOURCE PARTNERS L.P.

CONSOLIDATED BALANCE SHEETS



	September 30,			December 31,
(In thousands, except unit data)	2018			2017
ASSETS	(Unaudited)
Current assets
Cash and cash equivalents	$	63,387		$	29,827
Accounts receivable, net	55,734			47,026
Accounts receivable—affiliates	22			161
Inventory	9,572			7,553
Prepaid expenses and other	4,665			5,838
Current assets of discontinued operations	988			991
Total current assets	134,368			91,396
Land	24,809			25,247
Plant and equipment, net	48,148			46,170
Mineral rights, net	869,106			883,885
Intangible assets, net	46,998			49,554
Equity in unconsolidated investment	242,901			245,433
Long-term contracts receivable	39,416			40,776
Other assets	6,188			6,547
Other assets—affiliate	—			156
Total assets	$	1,411,934		$	1,389,164
LIABILITIES AND CAPITAL
Current liabilities
Accounts payable	$	7,467		$	6,957
Accounts payable—affiliates	608			562
Accrued liabilities	14,005			16,890
Accrued liabilities—affiliates	—			515
Accrued interest	5,540			15,484
Current portion of deferred revenue	1,403			—
Current portion of long-term debt, net	75,201			79,740
Current liabilities of discontinued operations	—			401
Total current liabilities	104,224			120,549
Deferred revenue	40,885			100,605
Long-term debt, net	716,514			729,608
Other non-current liabilities	1,958			2,808
Other non-current liabilities—affiliate	—			346
Total liabilities	863,581			953,916
Commitments and contingencies (see Note 15)
Class A Convertible Preferred Units (250,000 and 258,844 units issued and outstanding at September 30, 2018 and December 31, 2017, respectively, at $1,000 par value per unit; liquidation preference of $1,500 per unit)	164,587			173,431
Partners’ capital
Common unitholders’ interest (12,245,920 and 12,232,006 units issued and outstanding at September 30, 2018 and December 31, 2017, respectively)	319,673			199,851
General partner’s interest	4,293			1,857
Warrant holders’ interest	66,816			66,816
Accumulated other comprehensive loss	(4,081		)	(3,313		)
Total partners’ capital	386,701			265,211
Non-controlling interest	(2,935		)	(3,394		)
Total capital	383,766			261,817
Total liabilities and capital	$	1,411,934		$	1,389,164

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

NATURAL RESOURCE PARTNERS L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per unit data)	2018			2017			2018			2017
Revenues and other income
Coal royalty and other	$	42,459		$	43,507		$	134,428		$	111,269
Coal royalty and other—affiliates	59			335			484			23,178
Transportation and processing services	6,853			5,571			17,238			9,717
Transportation and processing services—affiliate	—			—			—			6,013
Construction aggregates	30,398			29,553			91,055			82,399
Road construction and asphalt paving services	6,250			5,157			13,154			13,087
Equity in earnings of Ciner Wyoming	8,836			8,993			34,986			27,676
Gain on asset sales, net	163			171			1,033			3,576
Total revenues and other income	$	95,018		$	93,287		$	292,378		$	276,915
Operating expenses
Operating and maintenance expenses	$	35,134		$	32,441		$	103,403		$	93,089
Operating and maintenance expenses—affiliates	2,414			2,154			8,944			6,928
Depreciation, depletion and amortization	8,221			8,306			24,741			26,195
Amortization expense—affiliate	—			—			—			1,008
General and administrative	2,249			2,648			8,068			10,757
General and administrative—affiliates	934			1,207			2,714			3,183
Asset impairments	—			—			242			1,778
Total operating expenses	$	48,952		$	46,756		$	148,112		$	142,938

Income from operations	$	46,066		$	46,531		$	144,266		$	133,977
Other expense, net
Interest expense, net	$	(17,501	)	$	(20,032	)	$	(53,205	)	$	(63,464	)
Debt modification expense	—			—			—			(7,939		)
Loss on extinguishment of debt	—			—			—			(4,107		)
Total other expense, net	$	(17,501	)	$	(20,032	)	$	(53,205	)	$	(75,510	)

Net income from continuing operations	$	28,565		$	26,499		$	91,061		$	58,467
Loss from discontinued operations	(24		)	(433		)	(72		)	(507		)
Net income	$	28,541		$	26,066		$	90,989		$	57,960
Net loss (income) attributable to non-controlling interest	359			—			(510		)	—
Net income attributable to NRP	$	28,900		$	26,066		$	90,479		$	57,960
Less: income attributable to preferred unitholders	(7,500		)	(7,650		)	(22,500		)	(17,688		)
Net income attributable to common unitholders and general partner	$	21,400		$	18,416		$	67,979		$	40,272

Net income attributable to common unitholders	$	20,972		$	18,046		$	66,619		$	39,466
Net income attributable to the general partner	$	428		$	370		$	1,360		$	806

Income from continuing operations per common unit (see Note 5)
Basic	$	1.71		$	1.51		$	5.45		$	3.27
Diluted	$	1.30		$	1.08		4.06			2.67
Net income per common unit (see Note 5)
Basic	$	1.71		$	1.48		$	5.44		$	3.23
Diluted	$	1.30		$	1.07		4.06			2.65

Net income	$	28,541		$	26,066		$	90,989		$	57,960
Comprehensive income (loss) from unconsolidated investment and other	791			(268		)	(768		)	(1,413		)
Comprehensive income	$	29,332		$	25,798		$	90,221		$	56,547
Comprehensive loss (income) attributable to non-controlling interest	359			—			(510		)	—
Comprehensive income attributable to NRP	$	29,691		$	25,798		$	89,711		$	56,547

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

NATURAL RESOURCE PARTNERS L.P.

CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

(Unaudited)



	Common Unitholders				General Partner			Warrant Holders		Accumulated Other Comprehensive Loss			Partners' Capital Excluding Non-Controlling Interest			Non-Controlling Interest			Total Capital
	Common Unitholders
(In thousands)	Units	Amounts
Balance at December 31, 2017	12,232	$	199,851		$	1,857		$	66,816	$	(3,313	)	$	265,211		$	(3,394	)	$	261,817
Cumulative effect of adoption of accounting standard (See Note 2)	—	69,057			1,409			—		—			70,466			—			70,466
Net income ⁽¹⁾	—	88,669			1,810			—		—			90,479			510			90,989
Distributions to common unitholders and general partner	—	(16,526		)	(337		)	—		—			(16,863		)	—			(16,863		)
Distributions to preferred unitholders	—	(22,310		)	(455		)	—		—			(22,765		)	—			(22,765		)
Issuance of unit-based awards	14	410			—			—		—			410			—			410
Unit-based awards amortization and vesting	—	472			—			—		—			472			—			472
Comprehensive income (loss) from unconsolidated investment and other	—	50			9			—		(768		)	(709		)	(51		)	(760		)
Balance at September 30, 2018	12,246	$	319,673		$	4,293		$	66,816	$	(4,081	)	$	386,701		$	(2,935	)	$	383,766


(1)	Net income includes $22.5 million attributable to Preferred Unitholders that accumulated during the period, of which $22.1 million is allocated to the common unitholders and $0.5 million is allocated to the general partner.

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

NATURAL RESOURCE PARTNERS L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended September 30,
(In thousands)	2018			2017
Cash flows from operating activities
Net income	$	90,989		$	57,960
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Depreciation, depletion and amortization	24,741			26,195
Amortization expense—affiliate	—			1,008
Distributions from unconsolidated investment	34,653			31,104
Equity earnings from unconsolidated investment	(34,986		)	(27,676		)
Gain on asset sales, net	(1,033		)	(3,576		)
Debt modification expense	—			7,939
Loss on extinguishment of debt	—			4,107
Loss from discontinued operations	72			507
Asset impairments	242			1,778
Unit-based compensation expense	1,226			(23		)
Amortization of debt issuance costs and other	2,541			6,547
Other—affiliates	(190		)	(974		)
Change in operating assets and liabilities:
Accounts receivable	(7,004		)	508
Accounts receivable—affiliates	139			285
Accounts payable	670			730
Accounts payable—affiliates	46			(270		)
Accrued liabilities	(1,984		)	(7,096		)
Accrued liabilities—affiliates	(515		)	—
Accrued interest	(9,944		)	(5,322		)
Deferred revenue	9,200			(5		)
Deferred revenue—affiliates	—			(10,166		)
Other items, net	(846		)	(2,166		)
Net cash provided by operating activities of continuing operations	$	108,017		$	81,394
Net cash used in operating activities of discontinued operations	(469		)	(607		)
Net cash provided by operating activities	$	107,548		$	80,787

Cash flows from investing activities
Distributions from unconsolidated investment in excess of cumulative earnings	$	2,097		$	5,646
Proceeds from sale of assets	1,149			1,419
Return of long-term contract receivable	2,606			1,807
Return of long-term contract receivable—affiliate	—			804
Acquisition of plant and equipment and other	(9,666		)	(6,236		)
Net cash provided by (used in) investing activities of continuing operations	$	(3,814	)	$	3,440
Net cash provided by investing activities of discontinued operations	—			206
Net cash provided by (used in) investing activities	$	(3,814	)	$	3,646

NATURAL RESOURCE PARTNERS L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Nine Months Ended September 30,
(In thousands)	2018			2017
Cash flows from financing activities
Proceeds from issuance of preferred units and warrants, net	$	—		$	242,100
Proceeds from issuance of 2022 Senior Notes, net	—			103,688
Borrowings on credit facility	35,000			69,000
Repayments of loans	(55,720		)	(356,292		)
Redemption of preferred units paid-in-kind	(8,844		)	—
Distributions to common unitholders and general partner	(16,863		)	(16,850		)
Distributions to preferred unitholders	(22,765		)	(5,019		)
Contributions to discontinued operations	(469		)	(401		)
Debt issuance costs and other	(982		)	(40,187		)
Net cash used in financing activities of continuing operations	$	(70,643	)	$	(3,961	)
Net cash provided by financing activities of discontinued operations	469			401
Net cash used in financing activities	$	(70,174	)	$	(3,560	)

Net increase in cash and cash equivalents	$	33,560		$	80,873
Cash and cash equivalents at beginning of period	29,827			40,371
Cash and cash equivalents at end of period	$	63,387		$	121,244

Supplemental cash flow information:
Cash paid during the period for interest from continuing operations	$	58,153		$	61,857
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, natural soda ash from trona, 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, except as noted in "Revision of Previously Issued Financial Statements" below. Certain reclassifications have been made to prior period amounts on the Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows to conform with current period presentation. These reclassifications had no impact on previously reported net income or cash flows from operating, investing or financing activities.

Revision of Previously Issued Financial Statements

During the three months ended September 30, 2018, NRP identified an error related to its modified retrospective adoption of ASC 606 on January 1, 2018 for certain coal and aggregates royalty leases. As a result, the Partnership has revised its financial statements as of and for the three months ended March 31, 2018 and as of and for the three and six months ended June 30, 2018, respectively, to correct this error as presented in Note 2. Revenue from Contracts with Customers. Management has concluded that the impact of the misstatements were not material to the previously issued consolidated financial statements. Additional information regarding the error and the effect of the revisions on the previously issued consolidated financial statements is provided in Note 2. Revenue from Contracts with Customers.

Recently Adopted Accounting Standards

Revenue Recognition

On January 1, 2018, NRP adopted Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, and all the related amendments (the “new revenue standard” and "ASC 606") to all open contracts using the modified retrospective method. The adoption of the new revenue standard impacted royalty revenue from NRP's coal and aggregates royalty leases as further described below. NRP recognized a $70.5 million cumulative effect of adoption adjustment in the opening balance of partners' capital on January 1, 2018. Prior year information has not been restated and continues to be reported under the accounting standards in effect for those periods. The new revenue standard had no impact on revenues from NRP's Construction Aggregates or Soda Ash operating segments.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

A majority of NRP’s coal and aggregates royalty revenue continues to be recognized over the lease term based on production. For coal and aggregates royalty leases for which NRP expects consideration from minimum payments to be greater than consideration from production over the lease term, royalty revenue is now recognized straight-line over the lease term based on the minimum payment consideration. The cumulative effects of the changes made to the Partnership's Consolidated Balance Sheet at January 1, 2018 for the adoption of the new revenue standard were as follows:



(In thousands)	Balance at December 31, 2017		Adjustments due to ASC 606 (As Adjusted)¹			Balance at January 1, 2018
Assets
Accounts receivable, net (including affiliates)	$	47,187	$	4,875		$	52,062

Liabilities
Current portion of deferred revenue	$	—	$	1,022		$	1,022
Deferred revenue	100,605		(66,613		)	33,992

Partners’ capital
Common unitholders’ interest	$	199,851	$	69,057		$	268,908
General partner’s interest	1,857		1,409			3,266
Total partners’ capital	265,211		70,466			335,677


(1)	Refer to "Revision to Original Adoption of ASC 606" in Note 2. Revenue from Contracts with Customers for adjustments made to original adoption entries.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

The impact of adoption of the new revenue standard on NRP’s Consolidated Balance Sheet and Consolidated Statements of Comprehensive Income was as follows:



	As of September 30, 2018
(In thousands)	As Reported		Balances without Adoption of ASC 606		Effect of Change
Assets
Accounts receivable, net (including affiliates)	$	55,756	$	52,966	$	2,790
Total assets	1,411,934		1,409,144		2,790

Liabilities and capital
Current portion of deferred revenue	$	1,403	$	—	$	1,403
Deferred revenue	40,885		100,185		(59,300		)
Total liabilities	863,581		921,478		(57,897		)
Partners’ capital
Common unitholders’ interest	$	319,673	$	260,200	$	59,473
General partner’s interest	4,293		3,079		1,214
Total partners’ capital	386,701		326,014		60,687
Total liabilities and capital	1,411,934		1,409,144		2,790



	For the Three Months Ended September 30, 2018
(In thousands, except per unit data)	As Reported		Amounts without Adoption of ASC 606		Effect of Change
Coal royalty and other revenues (including affiliates)	$	42,518	$	45,680	$	(3,162	)
Net income from continuing operations	28,565		31,727		(3,162		)
Net income	28,541		31,703		(3,162		)
Net income per common unit (basic)	1.71		1.96		(0.25		)
Net income per common unit (diluted)	1.30		1.44		(0.14		)



	For the Nine Months Ended September 30, 2018
(In thousands, except per unit data)	As Reported		Amounts without Adoption of ASC 606		Effect of Change
Coal royalty and other revenues (including affiliates)	$	134,912	$	144,501	$	(9,589	)
Net income from continuing operations	91,061		100,840		(9,779		)
Net income	90,989		100,768		(9,779		)
Net income per common unit (basic)	5.44		6.22		(0.78		)
Net income per common unit (diluted)	4.06		4.50		(0.44		)

Recently Issued Accounting Standards

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires a lessee 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. This standard does not apply to leases that explore for or use minerals, oil, natural gas and similar non-regenerative resources, including the intangible right to explore for those natural resources and rights to use the land in which those natural resources are contained. 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 beginning after December 15, 2018 and is to be adopted using a modified retrospective approach. The Partnership is currently evaluating the impact of the provisions of this guidance on its consolidated financial statements.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

2. Revenue from Contracts with Customers

Coal Royalty and Other Segment

The following table represents the Partnership's Coal Royalty and Other segment revenues (including affiliates) by major source:



	Three Months Ended		Nine Months Ended
(In thousands)	September 30, 2018
Coal royalty revenue	$	30,709	$	96,473
Production lease minimum revenue	1,769		6,310
Minimum lease straight-line revenue	567		1,739
Wheelage revenue	1,572		5,155
Coal overriding royalty revenue	3,918		10,492
Aggregates royalty revenue	888		3,551
Oil and gas royalty revenue	1,427		5,679
Property tax revenue	1,263		3,968
Other revenue	405		1,545
Coal royalty and other revenues⁽¹⁾	$	42,518	$	134,912
Transportation and processing services revenue ⁽²⁾	6,853		17,238
Total Coal royalty and other segment revenues	$	49,371	$	152,150


(1)	Represents revenue from contracts with customers as defined under ASC 606.

(2)

Revenue from contracts with customers as defined under ASC 606 was $3.6 million and $9.6 million for the three and nine months ended September 30, 2018, respectively. The remaining transportation and processing services revenue of $3.3 million and $7.6 million for the three and nine months ended September 30, 2018, respectively, related to other NRP-owned infrastructure leased to and operated by third party operators accounted for under ASC 840, Leases.

Coal Royalty and Other segment revenues

Royalty-based leases. Approximately two-thirds of our royalty-based leases have initial terms of five to 40 years, with substantially all lessees having the option to extend the lease for additional terms. For these types of leases, the lessees generally make payments to NRP based on the greater of a percentage of the gross sales price or a fixed price per ton of mineral they mine or sell. Most of NRP’s coal and aggregates royalty leases require the lessee to pay quarterly or annual minimum amounts, either made in advance or arrears, which are generally recoupable through actual royalty production over certain time periods that generally range from three to five years.

In accordance with previous accounting standards in effect prior to January 1, 2018, NRP recognized all coal and aggregates royalty revenue over the lease term based on production. The recognition of revenue from minimum payments was deferred until either recoupment through royalty production occurred or when the recoupment period expired for unrecouped minimums.

Under the new revenue recognition standard, management has defined NRP's coal and aggregates royalty lease performance obligation as providing the lessee the right to mine and sell NRP's coal or aggregates over the lease term. The Partnership then evaluated the likelihood that consideration NRP expected to receive from its lessees resulting from production would exceed consideration expected to receive from minimum payments over the lease term.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

As a result of this evaluation, revenue recognition from the Partnership's royalty-based leases is based on either production or minimum payments as follows:

•

Production Leases: Leases for which the Partnership expects that consideration from production will be greater than consideration from minimums over the lease term. Revenue recognition for these leases is recognized over time based on production as Coal royalty revenue or Aggregates royalty revenue, as applicable. Deferred revenue from minimums is recognized as royalty revenue when recoupment occurs or as Production lease minimum revenue when the recoupment period expires. In addition, NRP recognizes breakage revenue from minimums when NRP determines that recoupment is remote. This breakage revenue is included in Production lease minimum revenue.


•	Minimum Leases: Leases for which the Partnership expects that consideration from minimums will be greater than consideration from production over the lease term. Revenue recognition for these leases is recognized straight-line over the lease term based on the minimum consideration amount as Minimum lease straight-line revenue.

This evaluation is performed at the inception of the lease and only reassessed upon modification or renewal of the lease.

The Partnership also has overriding royalty revenue interests in certain oil and gas wells and coal reserves. Revenue from these interests is recognized over time based on when the respective commodities are sold.

Wheelage. Revenue related to fees collected per ton to transport foreign coal across property owned by the Partnership that is recognized over time as transportation across our property occurs.

Other revenue. Other revenue consists primarily of rental payments and surface damage fees related to certain land owned by the Partnership and is recognized straight-line over time as it is earned. Other revenues also include property tax revenues. The majority of property taxes paid on our properties are reimbursable by the lessee and are recognized on a gross basis over time which reflects the reimbursement of property taxes by the lessee. Property taxes paid by NRP are included in Operating and maintenance expenses on the Partnership's Consolidated Statements of Comprehensive Income.

Transportation and processing services revenue. The Partnership owns transportation and processing infrastructure that is leased to third parties and collects throughput fees for which it recognizes revenue over time based on the coal tons transported over the beltlines or processed through the facilities.

Contract modifications

Contract modifications that impact goods or services or the transaction price are evaluated in accordance with ASC 606. A majority of our contract modifications pertain to our coal and aggregates royalty contracts and include, but are not limited to, extending the lease term, changes to royalty rates, floor prices or minimum consideration, assignment of the contract, or termination due to the exhaustion of merchantable and mineable reserves. In accordance with the transition guidance in paragraph 606-10-65-1, revenues from contracts that were modified before January 1, 2018 were not retrospectively restated for those modifications and instead reflected the aggregate effect of those modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price to the satisfied and unsatisfied performance obligation.

Contract Assets and Liabilities

Contract assets include receivables from contracts with customers and are recorded when the right to consideration becomes unconditional. Receivables are recognized when the minimums are contractually owed, production occurs or minimums accrued for based on the passage of time.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

Contract liabilities represent minimum consideration received, contractually owed or earned based on the passage of time. The following table details the Partnership's Coal Royalty and Other segment receivables and liabilities resulting from contracts with customers:



	September 30,		January 1,
(In thousands)	2018		2018
Receivables
Total accounts receivable, net (including affiliates)⁽¹⁾	$	29,485	$	25,443
Prepaid expenses and other ⁽²⁾	2,673		2,830

Contract liabilities
Current portion of deferred revenue	$	1,403	$	1,022
Deferred revenue	40,885		33,992


(1)	Included in this amount is $2.3 million and $1.9 million of accounts receivable related to accrued minimum consideration as of September 30, 2018 and January 1, 2018, respectively.


(2)	Prepaid expenses and other includes notes receivable from contracts with customers.

The following table shows the activity related to the Partnership's Coal Royalty and Other segment deferred revenue:



(In thousands)	Nine Months Ended September 30, 2018
Balance at December 31, 2017	$	100,605
Cumulative adjustment for change in accounting principle ⁽¹⁾	(65,591		)
Balance at January 1, 2018 (current and non-current)	$	35,014
Recognition of previously deferred revenue	(11,694		)
Accrued minimum payments due	3,837
Cash received for minimum payments	15,131
Balance at September 30, 2018 (current and non-current)	$	42,288


(1)	Included in this amount is $(67.5) million recognized in Partners' capital and $1.9 million of accrued minimum consideration recognized in Accounts receivable, net.

The following table shows the Partnership's Coal Royalty and Other segment revenue recognized during the three and nine months ended September 30, 2018 that was included in the deferred revenue balance at the beginning of the period:



	Three Months Ended		Nine Months Ended
(In thousands)	September 30, 2018
Production leases - revenue impact
Recoupments recognized in Coal and aggregates royalty revenue	$	3,166	$	8,554
Breakage revenue recognized in Production lease minimum revenue	273		867
Expiration of unrecouped minimums recognized in Production lease minimum revenue	497		846
Minimum leases - revenue impact
Minimum lease amortization recognized in Minimum lease straight-line revenue	483		1,427
Total previously deferred revenue recognized	$	4,419	$	11,694

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

Remaining Performance Obligations

The Partnership's non-cancelable annual minimum payments due under the lease terms of its coal and aggregates royalty leases are as follows:



Lease Term ⁽¹⁾	Weighted Average Remaining Years as of September 30, 2018	Annual Minimum Payments (In thousands)
1 - 5 years	0.3	$	8,562
5 - 10 years	1.6	13,292
10+ years	9.5	34,205


(1)	The Partnership applied the practical expedient for disclosing remaining performance obligations for contracts with an expected duration of one year or less, and have excluded those contracts from this disclosure.

The Partnership's non-cancelable annual minimum payments on its coal and aggregates royalty leases are recognized as revenue as discussed above. In addition, the Partnership's non-cancelable annual minimum payments due under terms of its coal and aggregates overriding royalty agreements include a $1.8 million annual minimum that expires in 2023 and a $1.0 million minimum that expires upon exhaustion of the mineable and recoverable coal reserves, respectively.

Construction Aggregates Segment

The Partnership's Construction Aggregates segment revenues from contracts with customers by major source are as follows:



	Three Months Ended		Nine Months Ended
(In thousands)	September 30, 2018
Crushed stone, sand and gravel	$	16,618	$	48,427
Delivery and fuel income	10,825		32,587
Other revenues	2,955		10,041
Total construction aggregates revenues	$	30,398	$	91,055
Road construction and asphalt paving services	6,250		13,154
Total construction aggregates segment revenues	$	36,648	$	104,209

Construction Aggregates segment revenues

The majority of the Construction Aggregates segment revenues is recognized at a point in time with the exception of revenue related to construction contracts, which is recognized on the percentage-of-completion method as discussed below. The majority of the Partnership's construction contracts have an original expected duration of one year or less. As such, the Partnership has elected to apply the practical expedient and not disclose remaining performance obligations for contracts with an original expected duration of one year or less. Additional discussion of the Partnership's major sources of Construction Aggregates segment revenue are as follows:

Crushed stone, sand and gravel and other revenues. Revenue from the sale of crushed stone, sand, gravel and asphalt is recognized based on a fixed price when title is transferred to the buyer and collectibility of the sales proceeds is reasonably assured (typically occurs when products are picked up or delivered to the customer). Other revenues consist of brokered stone sales and barge and service revenues. Brokered stone sales include aggregates purchases from third party quarries, which are then sold and transported to customers and recorded as revenue at the time of delivery. The purchase price of aggregates from third party quarries are recorded as expenses. Barge and service revenues relate to loading and unloading services at marine terminals and are recorded as revenue at the time the service is performed.

Delivery and fuel income. Revenue related to pass through delivery and fuel costs the Partnership incurs to deliver its products is recognized on a gross basis and is subsequently reimbursed by the customer. The related costs are recognized when incurred and are included in Operating and maintenance expenses on the Consolidated Statements of Comprehensive Income.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

Road construction and asphalt paving services revenue. Revenue related to construction contracts is recognized on the percentage-of-completion method, measured by the percentage of total costs incurred to date to the estimated total costs for each contract.

The Partnership had $23.2 million and $23.0 million in receivables from Construction Aggregates segment related contracts with customers included in Accounts receivable, net on its Consolidated Balance Sheets as of September 30, 2018 and January 1, 2018, respectively.

Revision to Original Adoption of ASC 606

During the third quarter of 2018, the Partnership identified an error related to the modified retrospective adoption of ASC 606 on January 1, 2018 for certain coal and aggregates royalty leases. Specifically, in evaluating its contracts for revenue recognition, NRP identified certain coal and aggregates royalty leases as minimum leases that should have been classified as production leases. As a result of these errors, the Partnership incorrectly accelerated the recognition of deferred revenue for these leases resulting in an overstatement of both the transition adjustment to the opening balance of Partners' capital at January 1, 2018 and revenue during the three months ended March 31, 2018 and the three and six months ended June 30, 2018, respectively. After evaluating the quantitative and qualitative aspects of the error to the Partnership's financial results, management has determined that the misstatements and the adjustments are not material to the prior period financial statements. However, in order to properly reflect the application of ASC 606 retrospectively, the Partnership has recasted its Consolidated Financial Statements as of and for the three months ended March 31, 2018 and as of and for the three and six months ended June 30, 2018, respectively.

The following table shows the effects of correcting the classification of certain coal and aggregates royalty leases in connection with the modified retrospective adoption of ASC 606 on the cumulative effects of the changes made to the Consolidated Balance Sheet at January 1, 2018:



	Balance at January 1, 2018
(In thousands)	As Originally Reported		Corrected Balance		Effect of Correction
Assets
Accounts receivable, net (including affiliates)	$	50,666	$	52,062	$	1,396

Liabilities
Current portion of deferred revenue	$	1,973	$	1,022	$	(951	)
Deferred revenue	11,858		33,992		22,134

Partners’ capital
Common unitholders’ interest	$	288,299	$	268,908	$	(19,391	)
General partner’s interest	3,662		3,266		(396		)
Total partners’ capital	355,464		335,677		(19,787		)

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

The following tables show the effect of correcting the classification of certain coal and aggregates royalty leases in connection with the modified retrospective adoption of ASC 606 on the Partnership's originally reported Consolidated Balance Sheets at March 31, 2018 and June 30, 2018:



	Balance at March 31, 2018
(In thousands)	As Originally Reported		Corrected Balance		Effect of Correction
Assets
Accounts receivable, net (including affiliates)	$	55,745	$	56,497	$	752
Total assets	1,377,206		1,377,958		752

Liabilities and capital
Current portion of deferred revenue	$	1,554	$	1,377	$	(177	)
Deferred revenue	14,622		37,072		22,450
Total liabilities	848,367		870,641		22,274
Partners’ capital
Common unitholders’ interest	$	301,344	$	280,252	$	(21,092	)
General partner’s interest	3,924		3,494		(430		)
Total partners’ capital	367,646		346,124		(21,522		)
Total liabilities and capital	1,377,206		1,377,958		752



	Balance at June 30, 2018
(In thousands)	As Originally Reported		Corrected Balance		Effect of Correction
Assets
Accounts receivable, net (including affiliates)	$	59,452	$	59,178	$	(274	)
Total assets	1,411,806		1,411,532		(274		)

Liabilities and capital
Current portion of deferred revenue	$	2,732	$	1,871	$	(861	)
Deferred revenue	17,136		40,224		23,088
Total liabilities	857,299		879,526		22,227
Partners’ capital
Common unitholders’ interest	$	326,125	$	304,074	$	(22,051	)
General partner’s interest	4,427		3,977		(450		)
Total partners’ capital	392,496		369,995		(22,501		)
Total liabilities and capital	1,411,806		1,411,532		(274		)

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

The following tables show the effect of correcting the classification of certain coal and aggregates royalty leases in connection with the modified retrospective adoption of ASC 606 on the Partnership's originally reported Consolidated Statement of Comprehensive Income for the three months ended March 31, 2018 and June 30, 2018 and the six months ended June 30, 2018:



	For the Three Months Ended March 31, 2018
(In thousands, except per unit data)	As Originally Reported		Corrected Amount		Effect of Correction
Revenues and other income
Coal royalty and other revenues (including affiliates)	$	46,210	$	44,474	$	(1,736	)
Total revenues and other income	89,026		87,290		(1,736		)

Income from operations	$	44,058	$	42,322	$	(1,736	)
Net income from continuing operations	26,088		24,352		(1,736		)
Net income	26,074		24,338		(1,736		)
Net income attributable to common unitholders and general partner	18,574		16,838		(1,736		)

Net income attributable to common unitholders	$	18,203	$	16,501	$	(1,702	)
Net income attributable to the general partner	371		337		(34		)

Income from continuing operations per common unit
Basic	$	1.49	$	1.35	$	(0.14	)
Diluted	1.16		1.08		(0.08		)
Net income per common unit
Basic	$	1.49	$	1.35	$	(0.14	)
Diluted	1.15		1.08		(0.07		)

Comprehensive income	$	24,949	$	23,213	$	(1,736	)



	For the Three Months Ended June 30, 2018
(In thousands, except per unit data)	As Originally Reported		Corrected Amount		Effect of Correction
Revenues and other income
Coal royalty and other revenues (including affiliates)	$	48,899	$	47,920	$	(979	)
Total revenues and other income	111,049		110,070		(979		)

Income from operations	$	56,857	$	55,878	$	(979	)
Net income from continuing operations	39,123		38,144		(979		)
Net income	39,089		38,110		(979		)
Net income attributable to NRP	38,220		37,241		(979		)
Net income attributable to common unitholders and general partner	30,720		29,741		(979		)

Net income attributable to common unitholders	$	30,105	$	29,146	$	(959	)
Net income attributable to the general partner	615		595		(20		)

Income from continuing operations per common unit
Basic	$	2.46	$	2.38	$	(0.08	)
Diluted	1.75		1.71		(0.04		)
Net income per common unit
Basic	$	2.46	$	2.38	$	(0.08	)
Diluted	1.75		1.71		(0.04		)

Comprehensive income	$	38,655	$	37,676	$	(979	)
Comprehensive income attributable to NRP	37,786		36,807		(979		)

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)



	For the Six Months Ended June 30, 2018
(In thousands, except per unit data)	As Originally Reported		Corrected Amount		Effect of Correction
Revenues and other income
Coal royalty and other revenues (including affiliates)	$	95,109	$	92,394	$	(2,715	)
Total revenues and other income	200,075		197,360		(2,715		)

Income from operations	$	100,915	$	98,200	$	(2,715	)
Net income from continuing operations	65,211		62,496		(2,715		)
Net income	65,163		62,448		(2,715		)
Net income attributable to NRP	64,294		61,579		(2,715		)
Net income attributable to common unitholders and general partner	49,294		46,579		(2,715		)

Net income attributable to common unitholders	$	48,308	$	45,647	$	(2,661	)
Net income attributable to the general partner	986		932		(54		)

Income from continuing operations per common unit
Basic	$	3.95	$	3.73	$	(0.22	)
Diluted	2.96		2.83		(0.13		)
Net income per common unit
Basic	$	3.95	$	3.73	$	(0.22	)
Diluted	2.95		2.83		(0.12		)

Comprehensive income	$	63,604	$	60,889	$	(2,715	)
Comprehensive income attributable to NRP	62,735		60,020		(2,715		)

3. Class A Convertible Preferred Units

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 "paid-in-kind units" or "PIK Units"), subject to approval by the Board of Directors.

During the three months ended March 31, 2018, the Partnership redeemed all of the outstanding PIK Units, which resulted in an $8.8 million cash payment during the period.

Activity related to the Preferred Units is as follows:



(In thousands, except unit data)	Units Outstanding		Financial Position
Balance at December 31, 2017	258,844		$	173,431
Redemption of PIK Units	(8,844	)	(8,844		)
Balance at September 30, 2018	250,000		$	164,587

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

4. Common and Preferred Unit Distributions

The Partnership makes cash distributions to common unitholders on a quarterly basis, subject to approval by the Board of Directors. As discussed in Note 3 above, the Partnership also makes distributions to the preferred unitholders.

Common Unit Distributions

Distributions made on the common units and the general partner's general partner ("GP") interest are made on a pro-rata basis in accordance with their relative percentage interests in the Partnership. The general partner is entitled to receive 2% of such distributions. The following table shows the distributions declared and paid to common unitholders during the nine months ended September 30, 2018 and 2017, respectively:



				Total Distributions (in thousands)
Date Paid	Period Covered by Distribution	Distribution per Common Unit		Common Units		GP Interest		Total
2018
February 14, 2018	October 1 - December 31, 2017	$	0.45	$	5,505	$	112	$	5,617
May 14, 2018	January 1 - March 31, 2018	$	0.45	$	5,510	$	113	$	5,623
August 14, 2018	April 1 - June 30, 2018	$	0.45	$	5,511	$	112	$	5,623

2017
February 14, 2017	October 1 - December 31, 2016	$	0.45	$	5,503	$	112	$	5,615
May 12, 2017	January 1 - March 31, 2017	$	0.45	$	5,506	$	113	$	5,619
August 14, 2017	April 1 - June 30, 2017	$	0.45	$	5,504	$	112	$	5,616

Preferred Unit Distributions

The following table shows the distributions declared and paid to Preferred Unitholders during the nine months ended September 30, 2018 and 2017, respectively:



Date Paid	Period Covered by Distribution	Distribution per Preferred Unit		Total Distribution Declared (in thousands)
2018
February 7, 2018	October 1 - December 31, 2017	$	30.00	$	7,765
May 14, 2018	January 1 - March 31, 2018	$	30.00	$	7,500
August 14, 2018	April 1 - June 30, 2018	$	30.00	$	7,500

2017
May 30, 2017	March 2 - March 31, 2017	$	5.00	$	2,500
August 29, 2017	April 1 - June 30, 2017	$	15.00	$	7,538

Income available to common unitholders and the general partner is reduced by Preferred Unit distributions that accumulated during the period. During the three and nine months ended September 30, 2018, NRP reduced net income attributable to common unitholders and the general partner by $7.5 million and $22.5 million, respectively, as a result of accumulated Preferred Unit distributions earned during the period. The $7.5 million Preferred Unit distribution earned during the three months ended September 30, 2018 will be paid on November 14, 2018.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

5. 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 general partner interest, by the weighted average number of common units outstanding. Diluted net income per common unit includes the effect of NRP's Preferred Units and Warrants, if the inclusion of these items is 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 net income per unit calculation for the period being presented. 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 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 nine months ended September 30, 2018 and 2017, respectively, did not include the net settlement of Warrants to purchase 2.25 million common units with a strike price of $34.00 because the impact would have been anti-dilutive.

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

The following table reconciles the numerators and denominators of the basic and diluted net income per common unit computations and calculates basic and diluted net income per common unit:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per unit data)	2018			2017			2018			2017
Allocation of net income:
Net income from continuing operations	$	28,565		$	26,499		$	91,061		$	58,467
Add (less): net loss (income) attributable to non-controlling interest	359			—			(510		)	—
Less: income attributable to preferred unitholders	(7,500		)	(7,650		)	(22,500		)	(17,688		)
Net income from continuing operations attributable to common unitholders and general partner	$	21,424		$	18,849		$	68,051		$	40,779
Less: net income from continuing operations attributable to the general partner	(428		)	(379		)	(1,361		)	(816		)
Net income from continuing operations attributable to common unitholders	$	20,996		$	18,470		$	66,690		$	39,963

Net loss from discontinued operations	$	(24	)	$	(433	)	$	(72	)	$	(507	)
Less: net loss from discontinued operations attributable to the general partner	—			9			1			10
Net loss from discontinued operations attributable to common unitholders	$	(24	)	$	(424	)	$	(71	)	$	(497	)

Net income	$	28,541		$	26,066		$	90,989		$	57,960
Add (less): net loss (income) attributable to non-controlling interest	359			—			(510		)	—
Less: income attributable to preferred unitholders	(7,500		)	(7,650		)	(22,500		)	(17,688		)
Net income attributable to common unitholders and general partner	$	21,400		$	18,416		$	67,979		$	40,272
Less: net income attributable to the general partner	(428		)	(370		)	(1,360		)	(806		)
Net income attributable to common unitholders	$	20,972		$	18,046		$	66,619		$	39,466

Basic income (loss) per common unit:
Weighted average common units—basic	12,246			12,232			12,243			12,232
Basic net income from continuing operations per common unit	$	1.71		$	1.51		$	5.45		$	3.27
Basic net loss from discontinued operations per common unit	$	—		$	(0.03	)	$	(0.01	)	$	(0.04	)
Basic net income per common unit	$	1.71		$	1.48		$	5.44		$	3.23

NATURAL RESOURCE PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except per unit data)	2018			2017			2018			2017
Diluted income (loss) per common unit:
Weighted average common units—basic	12,246			12,232			12,243			12,232
Plus: dilutive effect of Warrants	470			225			474			330
Plus: dilutive effect of Preferred Units	9,124			11,523			9,124			8,909
Weighted average common units—diluted	21,840			23,980			21,841			21,471

Net income from continuing operations	$	28,565		$	26,499		$	91,061		$	58,467
Add (less): net loss (income) attributable to non-controlling interest	359			—			(510		)	—
Diluted net income from continuing operations attributable to common unitholders and general partner	$	28,924		$	26,499		$	90,551		$	58,467
Less: diluted net income from continuing operations attributable to the general partner	(578		)	(530		)	(1,811		)	(1,169		)
Diluted net income from continuing operations attributable to common unitholders	$	28,346		$	25,969		$	88,740		$	57,298

Diluted net loss from discontinued operations attributable to common unitholders	$	(24	)	$	(424	)	$	(71	)	$	(497	)

Net income	$	28,541		$	26,066		$	90,989		$	57,960
Add (less): net loss (income) attributable to non-controlling interest	359			—			(510		)	—
Diluted net income attributable to common unitholders and general partner	$	28,900		$	26,066		$	90,479		$	57,960
Less: diluted net income attributable to the general partner	(578		)	(521		)	(1,810		)	(1,159		)
Diluted net income attributable to common unitholders	$	28,322		$	25,545		$	88,669		$	56,801
<