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EX-31.1 - EXHIBIT 31.1 - NATURAL RESOURCE PARTNERS LPexhibit3119302015.htm
EX-32.2 - EXHIBIT 32.2 - NATURAL RESOURCE PARTNERS LPexhibit3229302015.htm
EX-31.2 - EXHIBIT 31.2 - NATURAL RESOURCE PARTNERS LPexhibit3129302015.htm
EX-32.1 - EXHIBIT 32.1 - NATURAL RESOURCE PARTNERS LPexhibit3219302015.htm
EX-95.1 - EXHIBIT 95.1 - NATURAL RESOURCE PARTNERS LPexhibit9519302015.htm


 
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, 2015
or
¨
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.)
601 Jefferson Street, Suite 3600
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 or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
ý
Accelerated Filer
 
¨
Non-accelerated Filer
¨  (Do not check if a smaller reporting company)
Smaller Reporting Company
 
¨

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, 2015 there were 122,299,825 Common Units outstanding.
 




NATURAL RESOURCE PARTNERS, L.P.
TABLE OF CONTENTS


1



Part 1.
Financial Information 
Item 1.
Consolidated Financial Statements

NATURAL RESOURCE PARTNERS L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for unit information)
 
September 30, 2015
 
December 31, 2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
61,156

 
$
50,076

Accounts receivable, net
54,888

 
66,455

Accounts receivable—affiliates
7,450

 
9,494

Inventory
6,849

 
5,814

Prepaid expenses and other
2,661

 
4,279

Total current assets
133,004

 
136,118

Land
25,022

 
25,243

Plant and equipment, net
71,194

 
60,093

Mineral rights, net
1,144,809

 
1,781,852

Intangible assets, net
58,269

 
60,733

Equity in unconsolidated investment
262,347

 
264,020

Long-term contracts receivable—affiliate
48,520

 
50,008

Goodwill
4,840

 
52,012

Other assets
16,864

 
14,645

Other assets—affiliate
1,525

 

Total assets
$
1,766,394

 
$
2,444,724

LIABILITIES AND CAPITAL
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
11,377

 
$
22,465

Accounts payable—affiliates
2,566

 
950

Accrued liabilities
54,895

 
43,533

Current portion of long-term debt, net
80,983

 
80,983

Total current liabilities
149,821

 
147,931

Deferred revenue
79,242

 
73,207

Deferred revenueaffiliates
83,654

 
87,053

Long-term debt, net
1,323,708

 
1,374,336

Long-term debt, netaffiliate
19,923

 
19,904

Other non-current liabilities
9,839

 
22,138

Commitments and contingencies (see Note 13)

 

Partners’ capital:
 
 
 
Common unitholders’ interest (122,299,825 units outstanding)
106,011

 
709,019

General partner’s interest
(60
)
 
12,245

Accumulated other comprehensive loss
(2,350
)
 
(459
)
Total partners’ capital
103,601

 
720,805

Non-controlling interest
(3,394
)
 
(650
)
Total capital
100,207

 
720,155

Total liabilities and capital
$
1,766,394

 
$
2,444,724


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

2



NATURAL RESOURCE PARTNERS L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per unit data)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
Revenues and other income:
 
 
 
 
 
 
 
Coal related revenues
$
35,469

 
$
39,675

 
$
94,452

 
$
107,593

Coal related revenues—affiliates
19,535

 
25,518

 
70,938

 
65,334

Aggregates related revenues
42,326

 
2,655

 
114,158

 
9,614

Oil and gas related revenues
12,416

 
9,601

 
42,485

 
37,481

Equity in earnings of unconsolidated investment
12,617

 
9,685

 
36,739

 
28,865

Property taxes
2,528

 
3,520

 
8,602

 
10,865

Other
588

 
955

 
5,412

 
2,727

Total revenues and other income
125,479

 
91,609

 
372,786

 
262,479

 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
Coal related expenses
649

 
3,383

 
2,474

 
4,623

Coal related expenses—affiliates, net
(68
)
 

 
41

 

Aggregates related expenses, net
31,107

 
(244
)
 
86,314

 
(170
)
Oil and gas related expenses
3,049

 
2,147

 
9,809

 
6,359

General and administrative
5,140

 
4,825

 
14,829

 
13,543

General and administrative—affiliates
4,144

 
3,083

 
11,465

 
9,177

Depreciation, depletion and amortization
26,624

 
18,621

 
82,676

 
49,618

Property, franchise and other taxes
4,286

 
4,767

 
14,490

 
15,836

Asset impairments
626,838

 

 
630,641

 
5,624

Total operating expenses
701,769

 
36,582

 
852,739

 
104,610

 
 
 
 
 
 
 
 
Income (loss) from operations
(576,290
)
 
55,027

 
(479,953
)
 
157,869

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Interest expense
(23,711
)
 
(18,862
)
 
(69,997
)
 
(57,759
)
Interest income

 
8

 
16

 
75

Other expense, net
(23,711
)
 
(18,854
)
 
(69,981
)
 
(57,684
)
 
 
 
 
 
 
 
 
Net income (loss)
(600,001
)
 
36,173

 
(549,934
)
 
100,185

Less: net loss attributable to non-controlling interest
1,244

 

 

 

Net income (loss) attributable to NRP
$
(598,757
)
 
$
36,173

 
$
(549,934
)
 
$
100,185

 
 
 
 
 
 
 
 
Net income (loss) attributable to partners:
 
 
 
 
 
 
 
Limited partners
(586,013
)
 
35,450

 
(538,166
)
 
98,181

General partner
(12,744
)
 
723

 
(11,768
)
 
2,004

 
 
 
 
 
 
 
 
Basic and diluted net income (loss) per common unit
$
(4.79
)
 
$
0.32

 
$
(4.40
)
 
$
0.89

 
 
 
 
 
 
 
 
Weighted average number of common units outstanding
122,300

 
111,244

 
122,300

 
110,504

 
 
 
 
 
 
 
 
Net income (loss)
$
(600,001
)
 
$
36,173

 
$
(549,934
)
 
$
100,185

Add: comprehensive income (loss) from unconsolidated investment and other
(1,136
)
 
370

 
(1,891
)
 
106

Less: comprehensive loss attributable to non-controlling interest
1,244

 

 

 

Comprehensive income (loss) attributable to NRP
$
(599,893
)
 
$
36,543

 
$
(551,825
)
 
$
100,291

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

3



NATURAL RESOURCE PARTNERS L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Nine Months Ended
September 30,
 
2015
 
2014
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(549,934
)
 
$
100,185

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Asset impairment
630,641

 
5,624

Depreciation, depletion and amortization
82,676

 
49,618

Distributions from equity earnings from unconsolidated investment
34,545

 
32,225

Equity earnings from unconsolidated investment
(36,739
)
 
(28,865
)
Gain on reserve swap
(9,290
)
 
(5,690
)
Other, net
(3,033
)
 
2,142

Other, netaffiliates
(721
)
 

Change in operating assets and liabilities:
 
 
 
Accounts receivable
11,919

 
(5,072
)
Accounts receivableaffiliates
2,044

 
(2,881
)
Accounts payable
(2,769
)
 
1,662

Accounts payableaffiliates
1,616

 
94

Accrued liabilities
3,059

 
993

Deferred revenue
6,035

 
(81
)
Deferred revenueaffiliates
(3,399
)
 
11,426

Accrued incentive plan expenses
(6,417
)
 
(5,445
)
Other items, net
1,750

 
750

Other items, netaffiliates
(633
)
 
411

Net cash provided by operating activities
161,350

 
157,096

 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisition of mineral rights
(35,939
)
 
(14,035
)
Acquisition of plant and equipment and other
(8,581
)
 
(207
)
Proceeds from sale of plant and equipment and other
11,006

 
5

Proceeds from sale of mineral rights
6,941

 

Return on equity and other unconsolidated investments

 
3,633

Return on long-term contract receivablesaffiliate
2,121

 
910

Net cash used in investing activities
(24,452
)
 
(9,694
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from loans
100,000

 
2,000

Proceeds from issuance of common units

 
24,826

Capital contribution by general partner

 
507

Repayment of loans
(151,175
)
 
(69,175
)
Distributions to partners
(66,142
)
 
(118,372
)
Distributions to non-controlling interest
(2,744
)
 
(974
)
Debt issuance costs and other
(5,757
)
 
(601
)
Net cash used in financing activities
(125,818
)
 
(161,789
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
11,080

 
(14,387
)
Cash and cash equivalents at beginning of period
50,076

 
92,513

Cash and cash equivalents at end of period
$
61,156

 
$
78,126

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid during the period for interest
$
57,917

 
$
52,266

Plant, equipment and mineral rights funded with accounts payable or accrued liabilities
$
4,465

 
$

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

4



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
 
 
Units
 
Amounts
 
 
 
 
 
Balance at December 31, 2014
 
122,300

 
$
709,019

 
$
12,245

 
$
(459
)
 
$
720,805

 
$
(650
)
 
$
720,155

Costs associated with equity transactions
 

 
(22
)
 

 

 
(22
)
 

 
(22
)
Distributions to unitholders
 

 
(64,820
)
 
(1,322
)
 

 
(66,142
)
 

 
(66,142
)
Distributions to non-controlling interest
 

 

 

 

 

 
(2,744
)
 
(2,744
)
Net loss
 

 
(538,166
)
 
(11,768
)
 

 
(549,934
)
 

 
(549,934
)
Non-cash contributions
 

 

 
785

 

 
785

 

 
785

Comprehensive loss from unconsolidated investment and other
 

 

 

 
(1,891
)
 
(1,891
)
 

 
(1,891
)
Balance at September 30, 2015
 
122,300

 
$
106,011

 
$
(60
)
 
$
(2,350
)
 
$
103,601

 
$
(3,394
)
 
$
100,207

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


5


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, oil and gas, construction aggregates, frac sand 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. Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassifications had no effect on the Partnership’s overall consolidated financial position, income or cash flows. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation, have been included. The interim financial statements should be read in conjunction with the audited financial statements and related notes included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014. Interim results are not necessarily indicative of the results for a full year.

In March 2015, the Partnership recorded an out-of-period adjustment to correct an error in depletion expense related to its oil and gas royalty interests owned by BRP LLC, a joint venture with International Paper Company in which the Partnership owns a 51% interest. Depletion expense for the nine months ended September 30, 2015 included a credit of $3.8 million to adjust the impact of depletion expense recorded in prior periods. After evaluating the quantitative and qualitative aspects of the error and the out-of-period adjustment to the Partnership’s financial results, management has determined that the misstatement and the out-of-period adjustment are not material to the prior period financial statements.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) amended its guidance on revenue recognition. The core principle of this amendment 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. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with earlier adoption not permitted. This guidance can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. The Partnership is currently evaluating the impact of the provisions of this guidance on its consolidated financial position, results of operations and cash flows.

In April 2015, the FASB issued authoritative guidance which intended to simplify the presentation of debt issuance costs in financial statements. This guidance requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. This guidance is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. This guidance will be applied retrospectively to each prior period presented. The Partnership is currently evaluating the impact of the provisions of this guidance on its consolidated balance sheets.

In July 2015, the FASB issued authoritative guidance which intended to simplify the measurement of inventory. This guidance requires an entity to measure inventory at the lower of cost or net realizable value. The amendments do not apply to inventory that is measured using last-in, first-out or the retail inventory method. This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. This guidance should be applied on a prospective basis. The Partnership is currently evaluating the impact of the provisions of this guidance on its consolidated financial position, results of operations and cash flows.

6


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


2.
Acquisitions

VantaCore Acquisition

On October 1, 2014, the Partnership completed its acquisition of VantaCore Partners LLC (“VantaCore”), a privately held company specializing in the construction materials industry, for $200.6 million in cash and common units. At the time of acquisition, VantaCore operated three hard rock quarries, six sand and gravel plants, two asphalt plants, one underground limestone mine and a marine terminal. VantaCore is headquarted in Philadelphia, Pennsylvania and its current operations are located in Pennsylvania, West Virginia, Tennessee, Kentucky and Louisiana.
 
The Partnership accounted for the transaction as a business combination under the acquisition method of accounting. Accordingly, the Partnership conducted assessments of net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated fair values on the acquisition date, while transaction and integration costs associated with the acquisitions were expensed as incurred. The fair value of these assets and liabilities was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement. The results of operations of the acquisition have been included in our consolidated financial statements since the acquisition date.

In the first quarter 2015, the purchase price allocation was adjusted as more detailed analysis was completed and additional information was obtained about the facts and circumstances for various items of VantaCore’s plant and equipment that existed as of acquisition date. As a result of this adjustment, plant and equipment was increased by $22.5 million with a corresponding decrease to goodwill. In the second quarter 2015, the purchase price allocation was adjusted as more detailed analysis was completed and additional information was obtained about the facts and circumstances for VantaCore’s right to mine and intangible assets that existed as of the acquisition date. As a result of this adjustment, Mineral rights, net and Intangible assets, net were increased by $24.7 million with a corresponding decrease to Goodwill. Measurement-period adjustments were not material to prior period financial statements and were recorded during the period in which the amount of the adjustment was determined. The accounting for the VantaCore acquisition was completed in the second quarter of 2015 and is summarized as follows:
 
October 1, 2014
 
(In thousands)
Consideration
 
Cash
$
168,978

NRP common units
31,604

Total consideration given
$
200,582

Allocation of Purchase Price
 
Current assets
$
37,222

Land, property and equipment
62,911

Mineral rights
111,500

Other assets
4,347

Current liabilities
(16,953
)
Asset retirement obligation
(3,285
)
Goodwill
4,840

Fair value of net assets acquired
$
200,582


Revenue and net income attributable to the VantaCore during the three months ended September 30, 2015 was $39.2 million and $2.9 million, respectively, and for the nine months ended September 30, 2015 was $107.0 million and $4.5 million, respectively. 

Sanish Field Acquisition

On November 12, 2014, the Partnership acquired non-operated oil and gas working interests in the Sanish Field of the Williston Basin from an affiliate of Kaiser-Francis Oil Company for $339.1 million.
 
The Partnership accounted for the transaction as a business combination under the acquisition method of accounting. Accordingly, the Partnership conducted assessments of net assets acquired and recognized amounts for identifiable assets acquired

7


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


and liabilities assumed at their estimated fair values on the acquisition date, while transaction and integration costs associated with the acquisitions were expensed as incurred. The fair value of these assets and liabilities was estimated using a discounted cash flow technique with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement. Significant inputs used to determine the fair value include estimates of: (i) reserves, including estimated oil and natural gas reserves and risk-adjusted probably reserves; (ii) future commodity prices; (iii) production costs, (iv) capital expenditures, (v) production and (vi) discount rates. The results of operations of the acquisition have been included in our consolidated financial statements since the acquisition date. The accounting for the Sanish Field acquisition was completed in the second quarter of 2015 without significant changes during the measurement period and is summarized as follows:
 
November 12, 2014
 
(In thousands)
Consideration
 
Cash
$
339,093

Allocation of Purchase Price
 
Mineral rights - proven oil and gas properties
298,293

Mineral rights - probable and possible oil and gas resources
40,800

Fair value of net assets acquired
$
339,093


Revenue and net loss attributable to the Sanish Field acquisition during the three months ended September 30, 2015 was $7.2 million and $197.8 million, respectively, and for the nine months ended September 30, 2015 was $31.6 million and $197.0 million, respectively. The net loss includes non-cash impairment expense of $194.5 million for the three and nine months ended September 30, 2015.

Pro Forma Financial Information

The following unaudited pro forma financial information (in thousands) presents a summary of the Partnership’s consolidated results of operations for the three and nine months ended September 30, 2014, assuming the VantaCore and Sanish Field acquisitions had been completed as of January 1, 2014, including adjustments to reflect the values assigned to the net assets acquired:
 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
(Unaudited)
Revenues and other income except aggregates related and oil and gas related revenues
$
79,256

 
$
215,345

Aggregates related revenues
52,735

 
134,995

Oil and gas related revenues
25,622

 
88,150

Total revenues and other income
$
157,613

 
$
438,490

 
 
 
 
Net income
$
37,091

 
$
106,615

Basic and diluted net income per common unit
$
0.33

 
$
0.95


3.
Equity Investment

We account for our 49% investment in Ciner Wyoming LLC (“Ciner Wyoming”, and formerly "OCI Wyoming LLC") using the equity method of accounting. Ciner Wyoming distributed $12.7 million and $10.3 million to us in the three months ended September 30, 2015 and 2014, respectively, and Ciner Wyoming distributed $34.5 million and $35.9 million to us in the nine months ended September 30, 2015 and 2014, respectively.


8


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


The difference between the amount at which our investment in Ciner Wyoming is carried and the amount of underlying equity in Ciner Wyoming’s net assets was $155.3 million and $162.7 million as of September 30, 2015 and December 31, 2014, 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.

Our equity in the earnings of Ciner Wyoming is summarized as follows (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
Income allocation to NRP’s equity interests
$
13,806

 
$
11,170

 
$
40,319

 
$
33,300

Amortization of basis difference
(1,189
)
 
(1,485
)
 
(3,580
)
 
(4,435
)
Equity in earnings of unconsolidated investment
$
12,617

 
$
9,685

 
$
36,739

 
$
28,865


The results of Ciner Wyoming’s operations are summarized as follows (in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
Sales
$
117,340

 
$
109,785

 
$
359,970

 
$
338,996

Gross profit
32,750

 
28,487

 
96,565

 
83,210

Net income
28,175

 
22,795

 
82,283

 
67,952


The financial position of Ciner Wyoming is summarized as follows (in thousands):
 
September 30, 2015
 
December 31, 2014
 
(Unaudited)
 
 
Current assets
$
153,095

 
$
200,622

Noncurrent assets
233,012

 
202,282

Current liabilities
44,566

 
47,704

Noncurrent liabilities
127,676

 
149,192


4.
Plant and Equipment

The Partnership’s plant and equipment consist of the following (in thousands):
 
September 30, 2015
 
December 31, 2014
 
(Unaudited)
 
 
Plant and equipment at cost
$
105,248

 
$
89,759

Construction in process
993

 
457

Less accumulated depreciation
(35,047
)
 
(30,123
)
Total plant and equipment, net
$
71,194

 
$
60,093


Depreciation expense related to the Partnership’s plant and equipment totaled $3.9 million and $1.3 million for the three months ended September 30, 2015 and 2014, respectively. Depreciation expense related to the Partnership’s plant and equipment totaled $12.9 million and $3.8 million for the nine months ended September 30, 2015 and 2014, respectively. The Partnership recorded $0.0 million and $2.3 million of asset impairment expense related to a coal preparation plant for the three and nine months ended September 30, 2015, respectively.

9



 

10


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


5.
Mineral Rights

The Partnership’s mineral rights consist of the following (in thousands):
 
September 30, 2015
 
December 31, 2014
 
(Unaudited)
 
 
Coal
$
1,196,091

 
$
1,541,572

Oil and Gas
181,740

 
560,395

Aggregates
189,640

 
211,490

Other
14,948

 
15,014

Less: accumulated depletion and amortization
(437,610
)
 
(546,619
)
Total mineral rights, net
$
1,144,809

 
$
1,781,852


Depletion expense related to the Partnership’s mineral rights totaled $21.8 million and $16.5 million for the three months ended September 30, 2015 and 2014, respectively. Depletion expense related to the Partnership’s mineral rights totaled $66.6 million and $43.2 million for the nine months ended September 30, 2015 and 2014, respectively.

Impairment of Mineral Rights

The Partnership has developed procedures to periodically evaluate its long-lived assets for possible impairment. These procedures are performed throughout the year and considers both quantitative and qualitative information based on historic, current and future performance and are designed to identify impairment indicators. If an impairment indicator is identified, additional evaluation is performed for that asset that considers both quantitative and qualitative information. A long-lived asset is deemed impaired when the future expected undiscounted cash flows from its use and disposition is less than the assets’ carrying value. Impairment is measured based on the estimated fair value, which is primarily determined based upon the present value of the projected future cash flow compared to the assets’ carrying value. The inputs used by management for fair value measurements include significant inputs that are not observable in the market and thus represent a Level 3 fair value measurement for these types of assets. In addition to the evaluations discussed above, specific events such as a reduction in economically recoverable reserves or production ceasing on a property for an extended period may require that a separate impairment evaluation be completed on a significant property. The Partnership believes these discount rates were representative of what market participants would use in pricing its assets.

During the three and nine months ended September 30, 2015, the Partnership identified facts and circumstances that indicated that the carrying value of certain of its mineral rights exceed future cash flows from those assets and recorded non-cash impairment expense as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Impaired Asset Description
 
2015
 
2014
 
2015
 
2014
 
 
(Unaudited)
Oil and gas properties (1)
 
$
335,662

 
$

 
$
335,662

 
$

Coal properties (2)
 
247,815

 

 
249,362

 

Aggregates properties (3)
 
43,361

 

 
43,361

 

Total
 
$
626,838

 
$

 
$
628,385

 
$

 
 
 
 
 
(1)
Oil and gas property impairment in the third quarter of 2015 primarily resulted from declines in future expected realized commodity prices and reduced expected drilling activity on our acreage. NRP compared net capitalized costs of its oil and natural gas properties to estimated undiscounted future net cash flows. If the net capitalized cost exceeded the undiscounted future net cash flows, NRP recorded an impairment for the excess of net capitalized cost over fair value. A discounted cash flow method was used to estimate fair value. Significant inputs used to determine the fair value include estimates of: (i) oil and natural gas reserves and risk-adjusted probable reserves; (ii) future commodity prices; (iii) production costs, (iv) capital expenditures, (v) production and (vi) discount rates. The underlying commodity prices embedded in the Partnership's

11


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


estimated cash flows are the product of a process that begins with NYMEX forward curve pricing as of the measurement date, adjusted for estimated location and quality differentials.
(2)
Coal property impairment in the third quarter of 2015 primarily resulted from the continued deterioration and expectations of further reductions in global and domestic coal demand due to reduced global steel demand, sustained low natural gas prices, and continued regulatory pressure on the electric power generation industry. NRP compared net capitalized costs of its coal properties to estimated undiscounted future net cash flows. If the net capitalized cost exceeded the undiscounted future cash flows, NRP recorded an impairment for the excess of net capitalized cost over fair value. Significant inputs used to determine fair value include estimates of future cash flow, discount rate and useful economic life. Estimated cash flows are the product of a process that began with current realized pricing as of the measurement date and included an adjustment for risk related to the future realization of those cash flows.
(3)
Aggregates property impairment in the third quarter of 2015 primarily resulted from greenfield development projects that have not performed as projected, leading to recent lease concessions on minimums and royalties combined with the continued regional market decline for certain properties. NRP compared net capitalized costs of its aggregates properties to estimated undiscounted future net cash flows. If the net capitalized cost exceeded the undiscounted cash flows, NRP wrote the net cost basis down to management's estimate of fair value. A discounted cash flow model was used to estimate fair value. Significant inputs used to determine fair value include estimates of future cash flow, discount rate and useful economic life. Estimated cash flows are the product of a process that began with current realized pricing as of the measurement date and included an adjustment for risk related to the future realization of those cash flows.

6.
Intangible Assets

The Partnership’s intangible assets consist of the following (in thousands):
 
September 30, 2015
 
December 31, 2014
 
(Unaudited)
 
 
Contract intangibles
$
81,109

 
$
82,972

Other intangibles
5,076

 
3,004

Less accumulated amortization
(27,916
)
 
(25,243
)
Total intangible assets, net
$
58,269

 
$
60,733


Amortization expense related to the Partnership’s intangible assets totaled $1.0 million and $0.9 million for the three months ended September 30, 2015 and 2014, respectively. Amortization expense related to the Partnership’s intangible assets totaled $3.2 million and $2.6 million for the nine months ended September 30, 2015 and 2014, respectively.

7.
Debt and Debt—Affiliate

As used in this Note 7, references to “NRP LP” refer to Natural Resource Partners L.P. only, and not to NRP (Operating) LLC, a wholly owned subsidiary of NRP LP, or any of Natural Resource Partners L.P.’s subsidiaries. References to “Opco” refer to NRP (Operating) LLC and its subsidiaries. References to NRP Oil and Gas refer to NRP Oil and Gas LLC, a wholly owned subsidiary of NRP LP. NRP Finance Corporation (“NRP Finance”) is a wholly owned subsidiary of NRP LP and a co-issuer with NRP LP on the 9.125% senior notes described below.

12


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


As of September 30, 2015 and December 31, 2014, Debt and debt—affiliate consisted of the following (in thousands):
 
September 30, 2015
 
December 31, 2014
 
(Unaudited)
 
 
NRP LP Debt:
 
 
 
$425 million 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%
$
422,734

 
$
422,167

Opco Debt:
 
 
 
$300 million floating rate revolving credit facility, due October 2017
290,000

 

$300 million floating rate revolving credit facility, due August 2016

 
200,000

$200 million floating rate term loan, due January 2016

 
75,000

4.91% senior notes, with semi-annual interest payments in June and December, with annual principal payments in June, due in June 2018
13,850

 
18,467

8.38% senior notes, with semi-annual interest payments in March and September, with annual principal payments in March, due in March 2019
85,714

 
107,143

5.05% senior notes, with semi-annual interest payments in January and July, with annual principal payments in July, due in July 2020
38,462

 
46,154

5.31% utility local improvement obligation, with annual principal and interest payments, due in March 2021
1,153

 
1,345

5.55% senior notes, with semi-annual interest payments in June and December, with annual principal payments in June, due in June 2023
21,600

 
24,300

4.73% senior notes, with semi-annual interest payments in June and December, with annual principal payments in December, due in December 2023
67,500

 
67,500

5.82% senior notes, with semi-annual interest payments in March and September, with annual principal payments in March, due in March 2024
135,000

 
150,000

8.92% senior notes, with semi-annual interest payments in March and September, with annual principal payments in March, due in March 2024
40,909

 
45,455

5.03% senior notes, with semi-annual interest payments in June and December, with annual principal payments in December, due in December 2026
161,538

 
161,538

5.18% senior notes, with semi-annual interest payments in June and December, with annual principal payments in December, due in December 2026
46,154

 
46,154

NRP Oil and Gas Debt:
 
 
 
Reserve-based revolving credit facility due November 2019
100,000

 
110,000

Total debt and debt—affiliate
1,424,614

 
1,475,223

Less: current portion of long-term debt, net
(80,983
)
 
(80,983
)
Total long-term debt and debt—affiliate
$
1,343,631

 
$
1,394,240


NRP LP Debt

Senior Notes

In September 2013, NRP LP, together with NRP Finance as co-issuer, issued $300.0 million of 9.125% Senior Notes due 2018 at an offering price of 99.007% of par. Net proceeds after expenses from the issuance of the senior notes were approximately $289.0 million. The senior notes call for semi-annual interest payments on April 1 and October 1 of each year, and will mature on October 1, 2018.

In October 2014, NRP LP, together with NRP Finance as co-issuer, issued an additional $125.0 million of its 9.125% Senior Notes due 2018 at an offering price of 99.5% of par. The notes constitute the same series of securities as the existing $300.0 million 9.125% senior notes due 2018 issued in September 2013. Net proceeds of $122.6 million from the additional issuance of the Senior Notes were used to fund a portion of the purchase price of NRP’s acquisition of non-operated working interests in oil and gas

13


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


assets located in the Williston Basin in North Dakota. The notes call for semi-annual interest payments on April 1 and October 1 of each year and will mature on October 1, 2018.

NRP and NRP Finance have the option to redeem the NRP 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 Senior Notes (the “NRP Senior Notes Indenture”). Before April 1, 2016, NRP and NRP Finance may redeem all or part of the NRP Senior Notes at a redemption price equal to the sum of the principal plus a make whole premium at the redemption date, plus accrued and unpaid interest, if any, to the redemption date. Furthermore, before April 1, 2016, NRP and NRP Finance may on any one or more occasions redeem up to 35% of the aggregate principal amount of the notes with the net proceeds of certain public or private equity offerings at a redemption price of 109.125% of the principal amount of 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 notes issued under the 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 indenture, the holders of the notes may require NRP and NRP Finance to purchase their notes at a purchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest, if any.

The NRP Senior Notes Indenture contains covenants that, among other things, limit the ability of NRP LP and certain of its subsidiaries to incur or guarantee additional indebtedness. Under the NRP Senior Notes Indenture, NRP LP 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 NRP LP and certain of its subsidiaries to incur additional indebtedness is further limited in the event the amount of indebtedness of NRP LP and certain of its subsidiaries that is senior to NRP LP’s unsecured indebtedness exceeds certain threshholds.

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 September 30, 2015 and December 31, 2014, Opco was in compliance with the terms of the financial covenants contained in its debt agreements.

Revolving Credit Facility 

In June 2015, Opco entered into a $300.0 million Third Amended and Restated Credit Agreement (the “A&R Revolving Credit Facility”), which amended and restated Opco’s $300.0 million Second Amended and Restated Credit Agreement due August 2016. The A&R Revolving Credit Facility matures on October 2, 2017, 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.
 
Initially, indebtedness under the A&R Revolving Credit Facility bears interest, at Opco’s option, at a rate of either: 
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 2.375%; or
a rate equal to LIBOR plus 3.375%.
Borrowings under the A&R Revolving Credit Facility will bear interest at such rate until the time that Opco delivers quarterly financial statements for the quarter ending September 30, 2015 to the lenders thereunder. Following such delivery date, indebtedness under the A&R Revolving Credit Facility will bear interest, at Opco’s option, at a rate of either: 
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 1.50% to 2.50%; or
a rate equal to LIBOR plus an applicable margin ranging from 2.50% to 3.50%.
The weighted average interest rates for the borrowings outstanding under the A&R Revolving Credit Facility for the nine months ended September 30, 2015 and 2014 were 2.41% and 1.96%, respectively. The weighted average interest rates for the borrowings outstanding under the A&R Revolving Credit Facility for the three months ended September 30, 2015 and 2014 were 3.05% and 1.94%, 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 A&R Revolving Credit Facility at any time without penalty.

14


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


The A&R Revolving Credit Facility contains financial covenants requiring Opco to maintain: 
a ratio of consolidated indebtedness to consolidated EBITDDA (as defined in the A&R Revolving Credit Facility) not to exceed:
4.0 to 1.0 for each fiscal quarter ending on or before March 31, 2016;
3.75 to 1.0 for each subsequent fiscal quarter ending on or before March 31, 2017; and
3.5 to 1.0 for each fiscal quarter ending on or after June 30, 2017; and
a 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.

The A&R Revolving 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. The A&R Revolving Credit Facility also contains customary events of default, including cross-defaults under Opco’s senior notes (as described below).

The A&R Revolving Credit Facility is collateralized and secured by liens on certain of Opco’s assets with a carrying value of $720.5 million classified as Land, Mineral rights and Plant and equipment on the Partnership’s Consolidated Balance Sheet as of September 30, 2015. 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 VantaCore’s construction aggregates mining operations, and (5) certain of Opco’s coal-related infrastructure assets.

Term Loan

During 2013, Opco entered into a $200.0 million Term Loan facility (the “Term Loan”) with a maturity date of January 23, 2016. The weighted average interest rates for the debt outstanding under the Term Loan for the nine months ended September 30, 2015 and 2014 were 2.19% and 2.23%, respectively. The weighted average interest rates for the debt outstanding under the Term Loan for the three months ended September 30, 2015 and 2014 was 2.19% for both periods.

Opco repaid $101.0 million in principal under the Term Loan during the third quarter of 2013, and repaid an additional $24.0 million during the fourth quarter of 2014. In September 2015, Opco repaid the remaining $75.0 million on the term loan using borrowings under the A&R Revolving Credit Facility.

Senior Notes

Opco made principal payments of $56.0 million on its senior notes during the nine months ended September 30, 2015. The Note Purchase Agreements relating to Opco’s 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.
The 8.38% and 8.92% 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 agreement) 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.

In connection with the entry into the A&R Revolving Credit Facility in June 2015, Opco entered into the Third Amendment to the Note Purchase Agreements (the “NPA Amendment”) that provides for the security of the senior notes by the same collateral

15


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


package pledged by Opco and its subsidiaries to secure the A&R Revolving Credit Facility, as described above. In addition, the NPA Amendment includes a covenant that provides that, in the event Opco or any of its subsidiaries is subject to any additional or more restrictive covenants under the agreements governing its material indebtedness (including the A&R Revolving Credit Facility, and all renewals, amendments or restatements thereof), such covenants shall be deemed to be incorporated by reference in the senior notes and the holders of the senior notes shall receive the benefit of such additional or more restrictive covenants to the same extent as the lenders under such material indebtedness agreement.

NRP Oil and Gas Debt

Revolving Credit Facility

In August 2013, NRP Oil and Gas entered into a 5-year, $100.0 million senior secured, reserve-based revolving credit facility in order to fund capital expenditure requirements related to the development of the oil and gas assets in which it owns non-operated working interests. In connection with the closing of the Sanish Field acquisition in November 2014, the credit facility was amended to increase its size to $500.0 million with an initial borrowing base of $137.0 million, and the maturity date thereof was extended to November 2019.
 
The maximum amount available under the credit facility is subject to semi-annual redeterminations of the borrowing base in May and November of each year, based on the value of the proved oil and natural gas reserves of NRP Oil and Gas, in accordance with the lenders’ customary procedures and practices. NRP Oil and Gas and the lenders each have a right to one additional redetermination each year. In April 2015, the lenders completed their semi-annual redetermination of the borrowing base under the NRP Oil and Gas revolving credit facility and the $137.0 million borrowing base under that facility was redetermined to $105.0 million. The Partnership repaid $10.0 million of outstanding borrowings under the NRP Oil and Gas revolving credit facility during the nine months ended September 30, 2015. At September 30, 2015 and December 31, 2014, there was $100.0 million and $110.0 million, respectively, outstanding under the NRP Oil and Gas revolving credit facility.

The credit facility is secured by a first priority lien and security interest in substantially all of the assets of NRP Oil and Gas. NRP Oil and Gas is the sole obligor under its revolving credit facility, and neither the Partnership nor any of its other subsidiaries is a guarantor of such facility. The weighted average interest rates for the debt outstanding under the credit facility for each of the nine month periods ended September 30, 2015 and 2014 was 2.57% and 1.90%, respectively. The weighted average interest rates for the debt outstanding under the credit facility for each of the three month periods ended September 30, 2015 and 2014 were 2.70% and 1.90%, respectively.

Indebtedness under the NRP Oil and Gas credit facility bears interest, at the option of NRP Oil and Gas, at either: 
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 0.50% to 1.50%; or
a rate equal to LIBOR, plus an applicable margin ranging from 1.50% to 2.50%.
NRP Oil and Gas incurs a commitment fee on the unused portion of the borrowing base under the credit facility at a rate ranging from 0.375% to 0.50% per annum.
The NRP Oil and Gas credit facility contains certain covenants, which, among other things, require the maintenance of: 
a total leverage ratio (defined as the ratio of the total debt of NRP Oil and Gas to its EBITDAX) of not more than 3.5 to 1.0; and
a minimum current ratio of 1.0 to 1.0.
As of September 30, 2015 and December 31, 2014, NRP Oil and Gas was in compliance with the terms of the financial covenants contained in its credit facility.


16


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


8.
Fair Value Measurements

The Partnership’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying amounts reported on our Consolidated Balance Sheets for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. The following table (in thousands) shows the carrying amount and estimated fair value of our other financial instruments:
 
 
September 30, 2015
 
December 31, 2014
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
 
(Unaudited)
 
 
 
 
Assets
 
 
 
 
 
 
 
Contracts receivable—affiliate, current and long-term (1)
$
5,068

 
$
5,381

 
$
4,870

 
$
5,162

Debt and debt—affiliate
 
 
 
 
 
 
 
NRP LP senior notes (2)
$
422,734

 
$
307,063

 
$
422,167

 
$
423,780

Opco senior notes and utility local improvement obligation (3)
$
611,880

 
$
442,084

 
$
668,056

 
$
672,740

Opco revolving credit facility and term loan facility (4)
$
290,000

 
$
290,000

 
$
275,000

 
$
275,000

NRP Oil and Gas revolving credit facility (4)
$
100,000

 
$
100,000

 
$
110,000

 
$
110,000

 
 
 
 
 
(1)
The Level 3 fair value is estimated by management using comparable term risk-free treasury issues with a market rate component determined by current financial instruments with similar characteristics. 
(2)
The Level 1 fair value is based upon quotations obtained for identical instruments on the closing trading prices near quarter end.
(3)
The Level 3 fair value is estimated by management using quotations obtained for comparable instruments on the closing trading prices near quarter end.
(4)
The Level 3 fair value approximates the carrying amount because the interest rates are variable and reflective of market rates and the Partnership has the ability to repay this debt at any time without penalty.
The March 31, 2015 estimated fair value of the NRP LP senior notes and Opco senior notes and local utility improvement obligation were presented incorrectly as $417.0 million and $629.5 million, respectively, and should have been presented as $378.3 million and $557.9 million, respectively. The estimated fair value disclosure had no impact on the Partnership’s overall financial position, income or cash flows.

9.
Related Party Transactions

Reimbursements to Affiliates of our General Partner

The Partnership’s general partner does not receive any management fee or other compensation for its management of Natural Resource Partners L.P. However, in accordance with the partnership agreement, the general partner and its affiliates are reimbursed for expenses incurred on the Partnership’s behalf. Direct general and administrative expenses are charged to the Partnership as incurred. The Partnership also reimburses indirect general and administrative costs, including certain legal, accounting, treasury, information technology, insurance, administration of employee benefits and other corporate services incurred by our general partner and its affiliates, Quintana Minerals Corporation and Western Pocahontas Properties Limited Partnership (“WPPLP”). In addition, the Partnership receives non-cash equity contributions from its general partner related to compensation paid directly by the general partner and not reimbursed by the Partnership. These amounts are presented as non-cash equity contributions on our Consolidated Statements of Partners' Capital.

The Partnership had Accounts payable—affiliates to Quintana Minerals Corporation of $0.7 million and $0.6 million at September 30, 2015 and December 31, 2014, respectively, for services provided by Quintana Minerals Corporation to the Partnership. The Partnership had Accounts payable—affiliates to WPPLP of $1.9 million and $0.4 million at September 30, 2015

17


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


and December 31, 2014, respectively. The Partnership had Accounts receivable—affiliates from WPPLP of $0.1 million and $0.0 million at September 30, 2015 and December 31, 2014, respectively.

Direct general and administrative expenses charged to the Partnership by its general partner for services performed by WPPLP and Quintana Minerals Corporation are as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
General and administrative—affiliates
$
4,144

 
$
3,083

 
$
11,465

 
$
9,177


The Partnership also leases an office building in Huntington, West Virginia from WPPLP and recorded $0.2 million and $0.5 million in General and administrative—affiliates in each of the three and nine months ended September 30, 2015 and 2014, respectively.

Cline Affiliates

Various companies controlled by Chris Cline, including Foresight Energy LP, lease coal reserves from the Partnership, and the Partnership provides coal transportation services to them for a fee. Mr. Cline, both individually and through another affiliate, Adena Minerals, LLC, owns a 31% interest in NRP’s general partner, as well as approximately 4.9 million of NRP’s common units. Coal related revenues from Foresight Energy LP (“Foresight Energy”) totaled $18.7 million and $24.9 million for the three months ended September 30, 2015 and 2014, respectively. Coal related revenues from Foresight Energy totaled $68.6 million and $63.1 million for the nine months ended September 30, 2015 and 2014, respectively.

As of September 30, 2015 and December 31, 2014 the Partnership had Accounts receivable—affiliates from Foresight Energy of $7.2 million and $9.2 million, respectively. As of September 30, 2015, the Partnership had received $83.4 million in minimum royalty payments to date that have been recorded as Deferred revenue—affiliates since they have not been recouped by Foresight Energy.

The Partnership owns and leases rail load out and associated facilities to Foresight Energy at Foresight Energy’s Sugar Camp mine. The lease agreement is accounted for as a direct financing lease. Total projected remaining payments under the lease at September 30, 2015 were $82.7 million with unearned income of $36.2 million, and the net amount receivable was $46.5 million, of which $2.1 million is included in Accounts receivable—affiliates while the remaining is included in Long-term contracts receivable—affiliate on the accompanying Consolidated Balance Sheets.
 
Total projected remaining payments under the lease at December 31, 2014 were $86.3 million with unearned income of $39.0 million and the net amount receivable was $47.3 million, of which $1.8 million is included in Accounts receivable—affiliates while the remaining is included in Long-term contracts receivable—affiliates on the accompanying Consolidated Balance Sheets.

The Partnership holds a contractual overriding royalty interest from a subsidiary of Foresight Energy that provides for payments based upon production from specific tons at Foresight Energy’s Sugar Camp operations. This overriding royalty was accounted for as a financing arrangement and is reflected as an affiliate receivable. The net amount receivable under the agreement as of September 30, 2015 was $5.1 million, of which $1.0 million is included in Accounts receivableaffiliates while the remaining is included in Long-term contracts receivable—affiliate. The net amount receivable under the agreement as of December 31, 2014 was $5.6 million, of which $1.1 million is included in Accounts receivableaffiliate while the remaining is included in Long-term contracts receivable—affiliate on the accompanying Consolidated Balance Sheets.

During the nine months ended September 30, 2015 and 2104 the Partnership recognized a gain of $9.3 million and $5.7 million, respectively, on a reserve swap at Foresight Energy’s Williamson mine. The gain is included in Coal related revenues—affiliates on our Consolidated Statements of Comprehensive Income. The Level 3 fair value of the reserves was estimated using a discounted cash flow model. The expected cash flows were developed using estimated annual sales tons, forecasted sales prices and anticipated market royalty rates.


18


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


Long-Term DebtAffiliate

Donald R. Holcomb, one of the Partnership’s directors, is a manager of Cline Trust Company, LLC, which owns approximately 5.35 million of the Partnership’s common units and $20.0 million in principal amount of the Partnership’s 9.125% Senior Notes due 2018. The members of the Cline Trust Company are four trusts for the benefit of the children of Chris Cline, each of which owns an approximately equal membership interest in the Cline Trust Company. Mr. Holcomb also serves as trustee of each of the four trusts. Cline Trust Company, LLC purchased the $20.0 million of the Partnership’s 9.125% Senior Notes due 2018 in the Partnership’s offering of $125.0 million additional principal amount of such notes in October 2014 at the same price as the other purchasers in that offering. The balance on this portion of the Partnership’s 9.125% Senior Notes due 2018 was $19.9 million as of September 30, 2015 and is included in Long-term debt, net—affiliate on the accompanying Consolidated Balance Sheet.

Quintana Capital Group GP, Ltd.

Corbin J. Robertson, Jr. is a principal in Quintana Capital Group GP, Ltd. (“Quintana Capital”), which controls several private equity funds focused on investments in the energy business. In connection with the formation of Quintana Capital, the Partnership adopted a formal conflicts policy that establishes the opportunities that will be pursued by the Partnership and those that will be pursued by Quintana Capital. The governance documents of Quintana Capital’s affiliated investment funds reflect the guidelines set forth in the Partnership’s conflicts policy.

At September 30, 2015, a fund controlled by Quintana Capital owned a majority interest in Corsa Coal Corp. (“Corsa”), a coal mining company traded on the TSX Venture Exchange that is one of the Partnership’s lessees in Tennessee. Corbin J. Robertson III, one of the Partnership’s directors, is Chairman of the Board of Corsa. Coal related revenues from Corsa totaled $0.9 million and $0.7 million and $2.4 million and $2.2 million for the three and nine months ended September 30, 2015 and 2014, respectively.

As of September 30, 2015, the Partnership had recorded $0.3 million in minimum royalty payments to date as deferred revenue-affiliates since they have not been recouped by Corsa. The Partnership also had Accounts receivable—affiliates totaling $0.2 million and $0.3 million from Corsa at September 30, 2015 and December 31, 2014, respectively.

WPPLP Production Royalty and Overriding Royalty

For the three months ended September 30, 2015, we reversed Coal related expenses—affiliates by $0.1 million related to a non-participating production royalty payable to WPPLP pursuant to a conveyance agreement entered into in 2007. This reversal during the third quarter brings the Partnership's nine month Coal related expenses—affiliates, net to nearly zero. The Partnership had Other assets—affiliate from WPPLP of $1.5 million and $0.0 million at September 30, 2015 and December 31, 2014, respectively, related to an non-production royalty receivable from WPPLP for overriding royalty interest on a mine.

10.
Major Lessees

Revenues from lessees that exceeded ten percent of total revenues and other income for any of the periods presented below are as follows (in thousands except for percentages):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(Unaudited)
 
(Unaudited)
 
Revenues
 
Percent
 
Revenues
 
Percent
 
Revenues
 
Percent
 
Revenues
 
Percent
Foresight Energy and its affiliates
$
18,677

 
15%
 
$
24,863

 
27%
 
$
68,556

 
18%
 
$
63,116

 
24%
Alpha Natural Resources
15,429

 
12%
 
14,406

 
16%
 
33,201

 
9%
 
38,857

 
15%

The Partnership has a significant concentration of revenues with Foresight Energy and Alpha Natural Resources. The exposure is spread out over a number of different mining operations and leases. During the three months ended September 30, 2015, total revenues and other income from Alpha Natural Resources included a $6.0 million non-recurring lease assignment fee.


19



11.
Long-Term Incentive Plans

GP Natural Resource Partners LLC adopted the Natural Resource Partners Long-Term Incentive Plan (the “Long-Term Incentive Plan”) for directors of GP Natural Resource Partners LLC and employees of its affiliates who perform services for the Partnership. Under the plan a grantee will receive the market value of a common unit in cash upon vesting. A summary of activity in the outstanding grants during 2015 is as follows (in thousands):
 
Phantom Units
Outstanding grants at January 1, 2015
1,153

Grants during the year
508

Grants vested and paid during the year
(290
)
Forfeitures during the year
(49
)
Outstanding grants at September 30, 2015
1,322


Grants typically vest at the end of a four-year period and are paid in cash upon vesting. The liability fluctuates with the market value of the Partnership units and because of changes in estimated fair value determined each quarter using the Black-Scholes option valuation model. Risk free interest rates and volatility are reset at each calculation based on current rates corresponding to the remaining vesting term for each outstanding grant and ranged from 0.37% to 1.01% and 49.55% to 75.34%, respectively, at September 30, 2015. The Partnership’s average historical distribution rate of 7.69% and historical forfeiture rate of 5.71% were used in the calculation at September 30, 2015. The Partnership recorded a credit to general and administrative expenses (“G&A expenses”) related to its long term incentive plan of $0.2 million and $1.7 million for the three and nine months ended September 30, 2015, respectively, due to the decline in the market price of the Partnership’s common units during 2015. For the three and nine months ended September 30, 2014, the Partnership recorded G&A expenses of $1.1 million and $1.5 million, respectively. In connection with the Long-Term Incentive Plan, payments are typically made during the first quarter of the year. Payments of $4.4 million and $6.5 million were made during the nine month periods ended September 30, 2015 and 2014, respectively.

In connection with the phantom unit awards, the Compensation, Nominating and Governance Committee also granted tandem Distribution Equivalent Rights, or DERs, which entitle the holders to receive distributions equal to the distributions paid on the Partnership’s common units between the date the units are granted and the vesting date. The DERs are payable in cash upon vesting but may be subject to forfeiture if the grantee ceases employment prior to vesting.

The unaccrued cost associated with the unvested outstanding grants and related DERs at September 30, 2015 and September 30, 2014 was $2.3 million and $7.7 million, respectively.

12.Cash Distributions

The following table shows the distributions paid by the Partnership during the nine months ended September 30, 2015 and 2014:
 
 
 
 
 
 
Total Distributions (In thousands)
Date Paid
 
Period Covered by Distribution
 
Distribution per Common Unit
 
Common Units
 
GP Interest
 
Total
2015
 
 
 
 
 
 
 
 
 
 
February 13, 2015
 
October 1 - December 31, 2014
 
$
0.35

 
$
42,804

 
$
874

 
$
43,678

May 14, 2015
 
January 1 - March 31, 2015
 
0.09

 
11,007

 
225

 
11,232

August 14, 2015
 
April 1 - June 30, 2015
 
0.09

 
11,009

 
223

 
11,232

2014
 
 
 
 
 
 
 
 
 
 
January 31, 2014
 
October 1 - December 31, 2013
 
0.35

 
38,433

 
785

 
39,218

May 14, 2014
 
January 1 - March 31, 2014
 
0.35

 
38,634

 
787

 
39,421

August 14, 2014
 
April 1 - June 30, 2015
 
0.35

 
38,938

 
795

 
39,733



20


NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 


13.
Commitments and Contingencies

The purchase agreement for the acquisition of the Partnership’s interest in Ciner Wyoming requires it to pay additional contingent consideration to Anadarko to the extent certain performance criteria described in the purchase agreement are met at Ciner Wyoming in any of the years 2013, 2014 or 2015. During the first quarters of 2014 and 2015, the Partnership paid $0.5 million and $3.8 million, respectively, in contingent consideration to Anadarko. As of September 30, 2015, the Partnership has estimated and recorded $8.8 million as an accrued liability on its consolidated Balance Sheet, payable in the first quarter of 2016 with respect to 2015. The Partnership has no obligation to pay contingent consideration with respect to any period after 2015.

In March 2014, Anadarko gave the Partnership written notice that it believed certain reorganization transactions conducted in 2013 within the OCI organization triggered an acceleration of the Partnership’s obligation under the purchase agreement with Anadarko to pay the additional contingent consideration in full and demanded immediate payment of such amount. The Partnership disagreed with Anadarko’s position in a written response provided to them in April 2014. In April 2015, Anadarko sent a written request for additional information regarding the OCI reorganization and indicated that they were still considering this claim against the Partnership. The Partnership responded in writing in May 2015 and does not believe the reorganization transactions triggered an obligation to pay the additional contingent consideration. The Partnership will continue to engage in discussions with Anadarko to resolve the issue to the extent necessary. However, if Anadarko were to pursue and prevail on such a claim, the Partnership would be required to pay an amount to Anadarko in excess of the amounts already paid, together with the $8.8 million accrual described above, up to the maximum amount of the additional contingent consideration, minus a deductible. Under the purchase agreement, the maximum cumulative amount of additional contingent consideration is an amount equal to the net present value of $50.0 million. Any additional amount paid by the Partnership would be considered to be additional acquisition consideration and added to Equity and other unconsolidated investments.

Since 2013, several citizen group lawsuits have been filed against landowners alleging ongoing discharges of pollutants, including selenium and conductivity, from valley fills located at reclaimed mountaintop removal mining sites in West Virginia. In each case, the mine on the subject property had been closed, the property had been reclaimed, and the state reclamation bond had been released. Any determination that a landowner or lessee has liability for discharges from a previously reclaimed mine site could result in substantial compliance costs or fines and would result in uncertainty as to continuing liability for completed and reclaimed coal mine operations. A subsidiary of the Partnership has been named as a defendant in one of these lawsuits. Given the early stage of this ongoing litigation, the Partnership currently cannot reasonably estimate a range of potential loss, if any, related to this matter.

14.
Subsequent Events

The following represents material events that have occurred subsequent to September 30, 2015 through the time of the Partnership’s filing of this Quarterly Report on Form 10-Q with the Securities and Exchange Commission:

Distribution Declared

On October 21, 2015, the Board of Directors of GP Natural Resource Partners LLC declared a distribution of $0.045 per unit to be paid by the Partnership on November 13, 2015 to unitholders of record on November 5, 2015.

NRP Oil and Gas Revolving Credit Facility

In October 2015, the lenders under the NRP Oil and Gas revolving credit facility completed their semi-annual redetermination of the borrowing base under the NRP Oil and Gas revolving credit facility and the $105.0 million borrowing base was redetermined to $88.0 million. NRP Oil & Gas repaid $15.0 million under the facility in October 2015, leaving $85.0 million of debt outstanding under the facility as of the date of this report.


21



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Information Regarding Forward-Looking Statements

Statements included in this Form 10-Q may constitute forward-looking statements. In addition, we and our representatives may from time to time make other oral or written statements which are also forward-looking statements.
Such forward-looking statements include, among other things, statements regarding: 
our business strategy;
our financial strategy;
prices of and demand for coal, oil, natural gas, aggregates and industrial minerals;
estimated revenues, expenses and results of operations;
the amount, nature and timing of capital expenditures;
our ability to make acquisitions and integrate the acquisitions we do make;
our liquidity and access to capital and financing sources;
projected production levels by our lessees, VantaCore Partners LLC (“VantaCore”), and the operators of our oil and gas working interests;
Ciner Wyoming LLC’s trona mining and soda ash refinery operations;
the impact of governmental policies, laws and regulations, as well as regulatory and legal proceedings involving us, and of scheduled or potential regulatory or legal changes; and
global and U.S. economic conditions.
These forward-looking statements speak only as of the date hereof and are made based upon management’s current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number of risks and uncertainties. We caution that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.
You should not put undue reliance on any forward-looking statements. See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 for important factors that could cause our actual results of operations or our actual financial condition to differ.
As used herein, unless the context otherwise requires: “we,” “our” and “us” refer to Natural Resource Partners L.P. and, where the context requires, our subsidiaries. References to “NRP” and “Natural Resource Partners” refer to Natural Resource Partners L.P. only, and not to NRP (Operating) LLC or any of Natural Resource Partners L.P.’s subsidiaries. References to “Opco” refer to NRP (Operating) LLC, a wholly owned subsidiary of NRP, and its subsidiaries. References to NRP Oil and Gas refer to NRP Oil and Gas LLC, a wholly owned subsidiary of NRP. NRP Finance Corporation (“NRP Finance”) is a wholly owned subsidiary of NRP and a co-issuer with NRP on the 9.125% senior notes.

Introduction

The following discussion and analysis presents management’s view of our business, financial condition and overall performance and should be read in conjunction with our consolidated financial statements and footnotes included elsewhere in this filing. Our discussion and analysis consists of the following subjects:
Executive Overview
Results of Operations
Liquidity and Capital Resources
Off-Balance Sheet Arrangements
Related Party Transactions
Recent Accounting Standards


22



Executive Overview

We are a diversified natural resource company engaged principally in the business of owning, managing and leasing a diversified portfolio of mineral properties in the United States, including interests in coal, trona and soda ash, crude oil and natural gas, construction aggregates, frac sand and other natural resources. For the nine months ended September 30, 2015, we recorded revenues and other income of $372.8 million and Adjusted EBITDA of $221.9 million. Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of Adjusted EBITDA to net income, see “-Results of Operations-Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014-Adjusted EBITDA (Non-GAAP Financial Measure).”

Our coal reserves are located in the three major U.S. coal producing regions: Appalachia, the Illinois Basin and the Western United States. We also own lignite reserves in the Gulf Coast region. We do not operate any coal mines, but lease our coal reserves to experienced mine operators under long-term leases that grant the operators the right to mine and sell our reserves in exchange for royalty payments. We also own and manage coal infrastructure assets that generate additional coal related revenues, primarily in the Illinois Basin.

We own a 49% non-controlling equity interest in a trona ore mining operation and soda ash refinery in the Green River Basin, Wyoming. Ciner Resources LP (formerly OCI Resources LP), our 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. We receive regular quarterly distributions from this business. We do not anticipate that this transaction will have any impact on the operations of Ciner Wyoming LLC (formerly OCI Wyoming LLC) going forward or future cash distributions to our interest.

We own or lease aggregates and industrial minerals located in a number of states across the country. We derive a small percentage of our aggregates and industrial minerals revenues by leasing our owned reserves to third party operators who mine and sell the reserves in exchange for royalty payments. However, the majority of our aggregates and industrial minerals revenues come through our ownership of VantaCore, which we acquired in October 2014. VantaCore specializes in the construction materials industry and operates four hard rock quarries, one underground limestone mine, six sand and gravel plants, two asphalt plants and a marine terminal. VantaCore’s operations are located in Pennsylvania, West Virginia, Tennessee, Kentucky and Louisiana.

We own various interests in oil and gas properties that are located in the Williston Basin, the Appalachian Basin, Louisiana and Oklahoma. Our interests in the Appalachian Basin, Louisiana and Oklahoma are minerals and royalty interests, while in the Williston Basin we own non-operated working interests. Our Williston Basin non-operated working interest properties generate the majority of our oil and gas revenues and include the properties acquired in the Sanish Field from an affiliate of Kaiser-Francis Oil Company in November 2014.

Current Liquidity Position

At September 30, 2015, our liquidity consisted of $61.2 million in cash and $15.0 million in combined borrowing capacity under our revolving credit facilities. During the nine months ended September 30, 2015, we reduced our debt by a net amount of $51.2 million. Opco’s $300.0 million revolving credit facility matures in October 2017, and as of September 30, 2015, we had $290.0 million outstanding thereunder. We borrowed $75.0 million under Opco’s revolving credit facility in September 2015 in order to repay Opco’s term loan in full. In October 2015, the borrowing base under the NRP Oil and Gas revolving credit facility was redetermined to $88.0 million, and we repaid $15.0 million under that credit facility, reducing our outstanding borrowings thereunder to $85.0 million. As of the date of this report, the combined borrowing capacity under our two revolving credit facilities is $13.0 million.

While we believe we have sufficient liquidity to meet our current financial needs, we have significant debt service requirements, including $80.8 million in principal payments on Opco’s senior notes each year through 2018, and our operating results continue to be impacted by the adverse conditions in the commodity markets. In April 2015, we announced a long-term plan to strengthen our balance sheet, reduce debt and enhance liquidity in order to reposition the partnership for future growth. As part of that plan, we reduced our cash distributions with respect to the first and second quarters of 2015 to $0.09 per common unit, a 75% decrease from the distribution paid with respect to fourth quarter of 2014. In October 2015, the Board declared a distribution of $0.045 per common unit with respect to the third quarter of 2015, representing an additional 50% reduction in the distribution paid with respect to the second quarter of 2015. The cash savings resulting from the distribution reductions are being used primarily to repay debt. In addition, we have announced our intention to commence processes to sell certain assets in furtherance of achieving the goals set out in our strategic plan. We have also taken steps to reduce general and administrative and other overhead costs in connection with these efforts. If we are unable to complete any asset sales and conditions in the coal and oil and gas markets continue to deteriorate, our liquidity and our ability to comply with the financial and other restrictive covenants contained in our debt agreements will be adversely affected.


23



Current Results/Market Outlook

Our revenues and other income from sources other than coal represented 56% of our total revenues and other income in the first nine months of 2015, as compared to 34% of total revenues and other income in the first nine months of 2014. This increase is due primarily to our diversification efforts, including our acquisition of VantaCore, which generated aggregates related revenues of $106.6 million during the first nine months of 2015. As an operating construction aggregates business, VantaCore generates higher revenues but experiences lower profit margins than our royalty businesses. Coal royalty revenues were down 19% for the first nine months of 2015 compared to the first nine months of 2014, due primarily to lower coal prices in the each of the Appalachian regions during the period and in the Illinois Basin as a result primarily of lower coal production during the period. This decrease in coal royalty revenues was partially offset by an increase in other coal related revenues, which increased 58% over the 2014 period, due to increased minimums recognized as revenue, a coal reserve swap, a condemnation payment and the receipt of a fee in connection with the assignment of one of our leases. During the first nine months of 2015, our investment in Ciner Wyoming’s trona mining and soda ash production operations contributed $36.7 million in other income, up $7.9 million from the first nine months of 2014, and our oil and gas revenues increased 13% over the first nine months of 2014 due to higher production volumes resulting from the Sanish Field acquisition, which were largely offset by lower oil and natural gas prices.

Coal. Both the thermal and metallurgical coal markets remain severely challenged, and we do not anticipate that either market will recover in the near term. We expect that coal producers will continue to cut production and idle additional mines in response to market conditions, but we do not know to what extent our properties may be affected. A number of coal producers have filed petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code, and additional producers may file for bankruptcy over the next few months. Historically, our leases have generally been assumed and all pre-petition bankruptcy amounts have been cured in full in our lessees’ bankruptcy processes. In October 2015, Patriot Coal Corporation completed the sale of its assets to Blackhawk Mining and the Virginia Conservation Legacy Fund in accordance with its bankruptcy plan. All of our leases were assumed and assigned in the sale process, and we expect to receive full pre-petition cure payments. Alpha Natural Resources, which is our second largest lessee, filed for Chapter 11 bankruptcy protection in August 2015. Alpha has continued operating and paying royalties to us following the bankruptcy filing. However, we expect that Alpha will reduce production and/or idle mines during its bankruptcy process, which would result in decreased royalty payments to us to the extent such production cuts or idlings are on our properties. We estimate that Alpha owes us approximately $3.2 million in pre-petition royalties, minimum payments and property tax reimbursements, and we expect to receive all pre-petition amounts due to us with respect to any leases that are assumed in the bankruptcy process.

While producers of Central Appalachian thermal coal have struggled for an extended period due to the high cost nature of their operations, production from our Illinois Basin properties also decreased by 18% for the first nine months of 2015 as compared to the same period in 2014. Part of the decrease in production from our Illinois Basin properties is attributable to the idling of Foresight Energy LP’s Deer Run mine (which we also refer to as our Hillsboro property) as a result of elevated carbon monoxide levels at the mine beginning in March 2015. In July 2015, we received a notice from Foresight Energy declaring a resulting force majeure event at the Deer Run mine. While we are disputing Foresight Energy’s claim, the effect of a valid force majeure declaration would relieve Foresight Energy of its obligation to pay us quarterly minimum deficiency payments with respect to the Deer Run mine until mining resumes. Under the lease for the Deer Run mine, Foresight Energy is required to make minimum deficiency payments to us of $7.5 million per quarter. The amount payable to us as the minimum deficiency payment with respect to any quarter is reduced by the amount of coal royalties actually paid to us for tonnage sold at the mine with respect to that quarter. We received royalty payments on tonnage sold from coal stockpiles at the Deer Run mine during the second and third quarters of 2015, but we expect that the stockpiles will be depleted early in the fourth quarter. Foresight Energy’s failure to make the deficiency payments with respect to the second and third quarters resulted in a negative cash impact to us of $9.2 million.

The metallurgical coal markets continued to deteriorate during the third quarter of 2015, and the fourth quarter 2015 metallurgical coal benchmark price was set at a multi-year low. We derived approximately 38% of our coal royalty revenues and 30% of the related production from metallurgical coal during the first nine months of 2015. The global metallurgical coal market continues to suffer from oversupply driven in part by reduced demand from China. Domestic coal producers are also burdened by the effects of relatively strong domestic dollar which increases the production cost of U.S. coal producers relative to foreign producers.

Soda Ash. Our trona mining and soda ash refinery investment performed in line with our expectations during the first nine months of 2015 with record soda ash production volumes. The international market for soda ash continues to grow and Ciner Wyoming’s international sales were better than expected. Domestic sales volumes, which are typically sold at higher prices than soda ash sold internationally, have remained relatively stable. The cash we receive from Ciner Wyoming is in part determined by the quarterly distributions declared by Ciner Resources LP, which has increased its quarterly distribution with respect to each of the last four quarters. The distribution declared with respect to the third quarter of 2015 represents a 5% increase over the distribution paid with respect to the third quarter of 2014.

24




Aggregates. VantaCore’s construction aggregates mining and production business is largely dependent on the strength of the local markets that it serves and is also seasonal. VantaCore’s Laurel Aggregates operation in southwestern Pennsylvania serves producers and oilfield service companies operating in the Marcellus and Utica Shales and was impacted during the first nine months of 2015 by the slowing pace of exploration and development of natural gas in those areas due to low natural gas prices. Increased local construction activity partially offset these declines during the first nine months of 2015, but we expect that Laurel’s business will continue to be impacted by decreased natural gas development activities. VantaCore’s operations based in Clarksville, Tennessee and Baton Rouge, Louisiana depend on the pace of commercial and residential construction in those areas. The Clarksville operation performed in line with expectations during the third quarter, while the Baton Rouge operation volumes were lower than expected. In June 2015, VantaCore purchased a hard rock quarry operation located on the Tennessee River near Grand Rivers, Kentucky from one of NRP’s aggregates lessees that had previously idled the operation. This operation continues to lease reserves from NRP and sells its produced limestone aggregates in both the local market and downstream to river-based markets.

Oil and Natural Gas. Global oil prices declined further in the third quarter of 2015 and remain significantly lower than the same period in 2014. Although domestic crude oil production has shown signs of decline, inventories remain above the five year average indicating continued excessive supply. Production of crude is estimated to continue to decline as a result of reduced development drilling activities. Natural gas prices have also shown recent declines due to reduced demand and increased inventories.  Our oil and gas revenues will continue to fluctuate with changes in prices for oil and natural gas. As of the date of this filing, we have not hedged any of our future oil or natural gas production.

Impairment of Mineral Rights. During the third quarter, we identified facts and circumstances that indicated that the carrying value of certain mineral rights may exceed expected future cash flows from those assets, and as a result, we recognized $626.8 million of impairment expense during the three months ended September 30, 2015. Oil and gas property impairments of $335.7 million primarily resulted from declines in future expected realized commodity prices and reduced expected drilling activity on our acreage. Coal property impairments of $247.8 million primarily resulted from idled operations in Appalachia combined with the continued deterioration in the coal markets and expectations of further reductions in global and domestic coal demand due to reduced global steel demand, low natural gas prices, and continued regulatory pressure on the electric power generation industry. Aggregates property impairments of $43.4 million primarily resulted from greenfield development projects that have not performed as projected, leading to recent lease concessions on minimums and royalties combined with the continued regional market decline for certain properties. With continued weakness in the commodity markets, we will continue to closely monitor our assets for impairment.

Results of Operations

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

Adjusted EBITDA (Non-GAAP Financial Measure)

Adjusted EBITDA increased $10.0 million, or 15%, to $78.5 million in the three months ended September 30, 2015. This increase in Adjusted EBITDA is primarily related to the inclusion of VantaCore and the Sanish Field in our operating results in 2015, as well as increased distributions from our soda ash business, which was partially offset by lower coal royalty revenues in 2015 as compared to 2014.

Adjusted EBITDA is a non-GAAP financial measure that we define as net income less equity earnings in unconsolidated investment, gains on reserve swaps and income to non-controlling interest; plus distributions from equity earnings in unconsolidated investment, interest expense, gross, depreciation, depletion and amortization and asset impairments. Adjusted EBITDA, as used and defined by us, may not be comparable to similarly titled measures employed by other companies and is not a measure of performance calculated in accordance with GAAP. Adjusted EBITDA should not be considered in isolation or as a substitute for operating income, net income or loss, cash flows provided by operating, investing and financial activities, or other income or cash flow statement data prepared in accordance with GAAP. Adjusted EBITDA provides no information regarding a partnership’s capital structure, borrowings, interest costs, capital expenditures, and working capital movement or tax positions. Adjusted EBITDA does not represent funds available for discretionary use because those funds may be required for debt service, capital expenditures, working capital and other commitments and obligations. Our management team believes Adjusted EBITDA is a useful measure because it is widely used by financial analysts, investors and rating agencies for comparative purposes. Adjusted EBITDA is also a financial measure widely used by investors in the high-yield bond market. There are significant limitations to using Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain recurring items that materially affect our net income or loss, the lack of comparability of results of operations of different companies and the different methods of calculating Adjusted EBITDA reported by different companies. The following table (in thousands) reconciles net income to Adjusted EBITDA for the three months ended September 30, 2015 and 2014:

25



 
Three Months Ended
September 30,
 
2015
 
2014
 
(unaudited)
Net income (loss)
$
(600,001
)
 
$
36,173

Less: equity earnings in unconsolidated investment
(12,617
)
 
(9,685
)
Less: gain on reserve swap

 
(5,690
)
Add: asset impairments
626,838

 

Add: depreciation, depletion and amortization
26,624

 
18,621

Add: interest expense, gross
23,711

 
18,862

Add: distributions from equity earnings in unconsolidated investment
12,740

 
10,290

Add: loss to non-controlling interest
1,244

 

Adjusted EBITDA
$
78,539

 
$
68,571

Adjusted EBITDA presented in the table above differs from the EBITDDA definitions contained in Opco’s debt agreements. In calculating EBITDDA for purposes of Opco’s debt covenant compliance, pro forma effect may be given to acquisitions and dispositions made during the relevant period. See Note 7. “Debt and Debt—Affiliate” in the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a description of Opco’s debt agreements.

Distributable Cash Flow (Non-GAAP Financial Measure)

Our distributable cash flow represents net cash provided by operating activities, plus returns on unconsolidated equity investments, proceeds from sales of assets, and returns on long-term contract receivablesaffiliate less maintenance capital expenditures and distributions to non-controlling interest. Although distributable cash flow is a non-GAAP financial measure, we believe it is a useful adjunct to net cash provided by operating activities under GAAP. Distributable cash flow is not a measure of financial performance under GAAP and should not be considered as an alternative to cash flows from operating, investing or financing activities. Distributable cash flow may not be calculated the same for us as for other companies. The following table (in thousands) reconciles net cash provided by operating activities to distributable cash flow for the three months ended September 30, 2015 and 2014
 
Three Months Ended
September 30,
 
2015
 
2014
 
(Unaudited)
Net cash provided by operating activities
$
55,240

 
$
57,458

Add: proceeds from sale of plant and equipment and other
5,751

 
5

Add: proceeds from sale of mineral rights
1,660

 

Add: return on long-term contract receivablesaffiliate
984

 
310

Less: maintenance capital expenditures (1)
(5,628
)
 

Distributable cash flow
$
58,007

 
$
57,773


(1)
Maintenance capital expenditures primarily consist of costs to maintain the long-term productive capacity of our oil and gas non-operating working interest business and VantaCore.


26



Diversified Natural Resource Revenues and Other Income

The following table shows our diversified sources of revenues and other income in the three months ended September 30, 2015 and 2014:
 
Coal Related
Revenues (Including Affiliates)
 
Aggregates
Related
Revenues
 
Industrial
Minerals Other
Income
(Ciner Wyoming)
 
Oil and Gas
Related
Revenues
 
Other
Revenues
 
Total
 
(Unaudited) (In thousands except for percentages)
2015
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
55,004

 
$
42,326

 
$
12,617

 
$
12,416

 
$
3,116

 
$
125,479

Percentage of total
44
%
 
34
%
 
10
%
 
10
%
 
2
%
 
 
2014
 
 
 
 
 
 
 
 
 
 
 
Revenues
$
65,193

 
$
2,655

 
$
9,685

 
$
9,601

 
$
4,475

 
$
91,609

Percentage of total
71
%
 
3
%
 
11
%
 
10
%
 
5
%
 
 

27



Coal Related Revenues (including affiliates)

Total coal related revenues comprised approximately 44% and 71% of our total revenues and other income for the three months ended September 30, 2015 and 2014, respectively. The table below presents coal royalty production and revenues derived from our major coal producing regions and the significant categories of other coal related revenues:
 
Three Months Ended
September 30,
 
Increase
(Decrease)
 
Percentage
Change
 
2015
 
2014
 
 
(In thousands, except percent and per ton data) (Unaudited)
Coal royalty production (tons)
 
 
 
 
 
 
 
Appalachia
 
 
 
 
 
 
 
Northern
1,518

 
2,060

 
(542
)
 
(26
)%
Central
4,642

 
5,432

 
(790
)
 
(15
)%
Southern
851

 
1,017

 
(166
)
 
(16
)%
Total Appalachia
7,011

 
8,509

 
(1,498
)
 
(18
)%
Illinois Basin
2,722

 
3,526

 
(804
)
 
(23
)%
Northern Powder River Basin
1,301

 
1,054

 
247

 
23
 %
Gulf Coast
361

 
281

 
80

 
28
 %
Total coal royalty production
11,395

 
13,370

 
(1,975
)
 
(15
)%
Average coal royalty revenue per ton
 
 
 
 
 
 
 
Appalachia
 
 
 
 
 
 
 
Northern
$
0.50

 
$
0.90

 
$
(0.40
)
 
(44
)%
Central
3.76

 
4.69

 
(0.93
)
 
(20
)%
Southern
4.18

 
5.04

 
(0.86
)
 
(17
)%
Total Appalachia
3.10

 
3.81

 
(0.71
)
 
(19
)%
Illinois Basin
4.05

 
4.08

 
(0.03
)
 
(1
)%
Northern Powder River Basin
2.80

 
2.91

 
(0.11
)
 
(4
)%
Gulf Coast
4.26

 
3.40

 
0.86

 
25
 %
Combined average coal royalty revenue per ton
$
3.33

 
$
3.80

 
$
(0.47
)
 
(12
)%
Coal royalty revenues
 
 
 
 
 
 
 
Appalachia
 
 
 
 
 
 
 
Northern
$
763

 
$
1,844

 
$
(1,081
)
 
(59
)%
Central
17,440

 
25,470

 
(8,030
)
 
(32
)%
Southern
3,561

 
5,130

 
(1,569
)
 
(31
)%
Total Appalachia
21,764

 
32,444

 
(10,680
)
 
(33
)%
Illinois Basin
11,015

 
14,403

 
(3,388
)
 
(24
)%
Northern Powder River Basin
3,641

 
3,069

 
572

 
19
 %
Gulf Coast
1,537

 
954

 
583

 
61
 %
Total coal royalty revenue
$
37,957

 
$
50,870

 
$
(12,913
)
 
(25
)%
Other coal related revenues
 
 
 
 
 
 
 
Override revenue
$
433

 
$
771

 
$
(338
)
 
(44
)%
Transportation and processing fees
5,338

 
5,589

 
(251
)
 
(4
)%
Minimums recognized as revenue
3,234

 
1,396

 
1,838

 
132
 %
Coal reserve swap

 
5,690

 
(5,690
)
 
N/A

DOH property sale
1,641

 

 
1,641

 
100
 %
Lease assignment fee
6,000

 

 
6,000

 
100
 %
Wheelage
401

 
877

 
(476
)
 
(54
)%
Total other coal related revenues
$
17,047

 
$
14,323

 
$
2,724

 
19
 %
Total coal related revenues and coal related revenues—affiliates
$
55,004

 
$
65,193

 
$
(10,189
)
 
(16
)%


28



Coal prices continue to be depressed, which has negatively affected our coal related revenues. Further declines or a continued low price environment could have an additional adverse effect on our coal related revenues. Coal production, as well as coal revenues, were down in each of the three Appalachian regions and in the Illinois Basin, while we saw increases in coal production and coal royalty revenues in the Northern Powder River Basin and the Gulf Coast for the three months ended September 30, 2015 as compared to the same period in 2014. The average coal royalty revenue per ton decreased throughout all of our regions, with the exception of the Gulf Coast during the three months ended September 30, 2015 when compared to the same quarter last year.

Other coal related revenues for the three months ended September 30, 2015 increased $2.7 million, or 19% compared to the same period in 2014. This increase was primarily a result of a $6.0 million lease assignment fee, $1.8 million increased minimums recognized as revenue primarily due to the recoupment period under our lease relating to Foresight Energy’s Macoupin mine expiring in 2015 and a $1.6 million public roadway condemnation payment. Offsetting this increase, was a $5.7 million decline in coal reserve swap income relative to the third quarter of 2014.

Aggregates Related Revenues and Industrial Minerals Other Income

Total aggregates related revenues and total industrial minerals other income represented approximately 44% and 14% of our total revenues and other income for the three months ended September 30, 2015 and 2014, respectively. The table below presents the major categories of our aggregates related revenues and industrial minerals other income:
 
Three Months Ended
September 30,
 
Increase
(Decrease)
 
Percentage
Change
 
2015
 
2014
 
 
(In thousands, except percent and ton data) (Unaudited)
VantaCore
 
 
 
 
 
 
 
Tonnage sold
2,126

 
N/A

 
N/A

 
N/A

Revenues
$
39,208

 
N/A

 
N/A

 
N/A

Operating expenses
$
31,107

 
N/A

 
N/A

 
N/A

 
 
 
 
 
 
 
 
Aggregates royalty related revenues
$
3,118

 
$
2,655

 
$
463

 
17
%
 
 
 
 
 
 
 
 
Total aggregates related revenues
$
42,326

 
$
2,655

 
$
39,671

 
1,494
%
 
 
 
 
 
 
 
 
Industrial minerals other income and cash distributions
 
 
 
 
 
 
 
Equity in earnings of unconsolidated investment
$
12,617

 
$
9,685

 
$
2,932

 
30
%
Cash distributions from equity earnings in unconsolidated investment
$
12,740

 
$
10,290

 
$
2,450

 
24
%

VantaCore

VantaCore operates four hard rock quarries, one underground limestone mine, six sand and gravel plants, two asphalt plants and a marine terminal. We recognized $39.2 million of aggregates related revenues from VantaCore’s operations in the three months ended September 30, 2015.

Industrial Minerals Other Income and Cash Distributions

For the three months ended September 30, 2015, equity in the earnings of the Ciner Wyoming trona mining and soda ash production business was $12.6 million, and we received $12.7 million in cash distributions from Ciner Wyoming. For the three months ended September 30, 2014, we recorded equity in the earnings of Ciner Wyoming of $9.7 million and received $10.3 million in cash distributions.


29



Oil and Natural Gas Revenues

Total oil and gas revenues comprised approximately 10% of our total revenues and other income for each of the three months ended September 30, 2015 and 2014. The table below presents oil and gas production and revenues derived from our major oil and gas producing regions and the significant categories of oil and gas related revenues:
 
Three Months Ended
September 30,
 
Increase
(Decrease)
 
Percentage
Change
 
2015
 
2014
 
 
(in thousands, except per unit data) (Unaudited)
Williston Basin non-operated working interests:
 
 
 
Production volumes:
 
 
 
Oil (MBbl)
276

 
77

 
199

 
258
 %
Natural gas (Mcf)
192

 
90

 
102

 
113
 %
NGL (MBbl)
33

 
8

 
25

 
313
 %
Total production (MBoe)
341

 
100

 
241

 
241
 %
Average sales price per unit:
 
 
 
Oil (Bbl)
$
39.24

 
$
84.65

 
$
(45.41
)
 
(54
)%
Natural gas (Mcf)
2.62

 
5.11

 
(2.49
)
 
(49
)%
NGL (Bbl)
3.48

 
41.00

 
(37.52
)
 
(92
)%
Revenues:
 
 
 
Oil
$
10,829

 
$
6,518

 
$
4,311

 
66
 %
Natural gas
503

 
460

 
43