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Note 3 - Class A Convertible Preferred Units and Warrants

9 Months Ended

Sep. 30, 2023

3. Class A Convertible Preferred Units and Warrants

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

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

After March 2, 2022 and prior to March 2, 2025, the holders of the preferred units may elect to convert up to 33% of the outstanding preferred units in any 12-month period into common units if the volume weighted average trading price of our common units (the "VWAP") for the 30 trading days immediately prior to date notice is provided is greater than $51.00. In such case, the number of common units to be issued upon conversion would be equal to the per unit purchase price plus the value of any accrued and unpaid distributions divided by an amount equal to a 7.5% discount to the VWAP for the 30 trading days immediately prior to the notice of conversion. Rather than have the preferred units convert to common units in accordance with the provisions of this paragraph, NRP would have the option to elect to redeem the preferred units proposed to be converted for cash at a price equal to the per unit purchase price plus the value of any accrued and unpaid distributions.

On or after March 2, 2025, the holders of the preferred units may elect to convert the preferred units to common units at a conversion rate equal to the Liquidation Value divided by an amount equal to a 10% discount to the VWAP for the 30 trading days immediately prior to the notice of conversion. The “liquidation value” will be an amount equal to the greater of: (1) (a) the per unit purchase price multiplied by (i) prior to March 2, 2020, 1.50, (ii) on or after March 2, 2020 and prior to March 2, 2021, 1.70 and (iii) on or after March 2, 2021, 1.85, less (b)(i) all preferred unit distributions previously made by NRP and (ii) all cash payments previously made in respect of redemption of any PIK units; and (2) the per unit purchase price plus the value of all accrued and unpaid distributions.

To the extent the holders of the preferred units have not elected to convert their preferred units before March 2, 2029, NRP has the right to force conversion of the preferred units at a price equal to the liquidation value divided by an amount equal to a 10% discount to the VWAP for the 30 trading days immediately prior to the notice of conversion.

In addition, NRP has the ability to redeem at any time (subject to compliance with its debt agreements) all or any portion of the preferred units and any outstanding PIK units for cash. The redemption price for each outstanding PIK unit is $1,000 plus the value of any accrued and unpaid distributions per PIK unit. The redemption price for each preferred unit is the liquidation value divided by the number of outstanding preferred units. The preferred units are redeemable at the option of the preferred purchasers only upon a change in control.

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

The holders of the preferred units have the right to vote with holders of NRP’s common units on an as-converted basis and have other customary approval rights with respect to changes of the terms of the preferred units. In addition, Blackstone has certain approval rights over certain matters as identified in the restated partnership agreement. GoldenTree also has more limited approval rights that will expand once Blackstone's ownership goes below the minimum preferred unit threshold (as defined below). These approval rights are not transferrable without NRP's consent. In addition, the approval rights held by Blackstone and GoldenTree will terminate at such time that Blackstone (together with their affiliates) or GoldenTree (together with their affiliates), as applicable, no longer own at least 20% of the total number of preferred units issued on the closing date, together with all PIK units that have been issued but not redeemed (the "minimum preferred unit threshold").

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

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

Accounting for the Preferred Units and Warrants

Classification

The preferred units are accounted for as temporary equity on NRP's Consolidated Balance Sheets due to certain contingent redemption rights that may be exercised at the election of preferred purchasers. The warrants are accounted for as equity on NRP's Consolidated Balance Sheets.

Initial Measurement

The net transaction price was allocated to the preferred units and warrants based on their relative fair values at inception date. NRP allocated the transaction issuance costs to the preferred units and warrants primarily on a pro-rata basis based on their relative inception date allocated values.

Subsequent Measurement

Preferred Units

Subsequent adjustment of the preferred units will not occur until NRP has determined that the conversion or redemption of all or a portion of the preferred units is probable of occurring. Once conversion or redemption becomes probable of occurring, the carrying amount of the preferred units will be accreted to their redemption value over the period from the date the feature is probable of occurring to the date the preferred units can first be converted or redeemed.

In February 2023, the Partnership received a notice from holders of the Class A Preferred Units exercising their right to either convert or redeem, at the election of NRP, an aggregate of 47,499 Class A Preferred Units. The Partnership chose to redeem the preferred units for $47.5 million in cash rather than issuing common units. In May 2023, the Partnership received a notice from holders of the Class A Preferred Units exercising their right to either convert or redeem, at the election of NRP, an aggregate of 35,834 Class A Preferred Units. The Partnership chose to redeem the preferred units for $35.8 million in cash rather than issuing common units. In June 2023, the Partnership executed a negotiated transaction with holders of the Class A Preferred Units pursuant to which it repurchased and retired an aggregate of 45,000 Class A Preferred Units for $45.0 million in cash. In August 2023, the Partnership executed a negotiated transaction with holders of the Class A Preferred Units pursuant to which it repurchased and retired an aggregate of 35,000 Class A Preferred Units for $35.0 million in cash. In September 2023, the Partnership executed a negotiated transaction with holders of the Class A Preferred Units pursuant to which it repurchased and retired an aggregate of 15,001 Class A Preferred Units for $15.0 million in cash. Of the originally issued 250,000 Class A Preferred Units, 71,666 Class A Preferred Units remain outstanding as of September 30, 2023. Following these repurchases, the Subject units were retired and are no longer outstanding, and all rights of Blackstone thereof have ceased with respect to the subject units, therefore, Blackstone's board designee resigned from the board of the Partnership's general partner.

Activity related to the preferred units is as follows:

	*Units*			*Financial*
(In thousands, except unit data)	*Outstanding*			*Position*
Balance at December 31, 2021		269,321		$	183,908
Redemption of preferred units paid-in-kind		(19,321	)		(19,321	)
Balance at December 31, 2022		250,000		$	164,587
Redemption of preferred units		(178,334	)		(117,406	)
Balance at September 30, 2023		71,666		$	47,181

Warrants

Subsequent adjustment of the warrants will not occur until the warrants are exercised, at which time, NRP may, at its option, elect to settle the warrants in common units or cash, each on a net basis. The net basis will be equal to the difference between the Partnership's common unit price and the strike price of the warrant. Once warrant exercise occurs, the difference between the carrying amount of the warrants and the net settlement amount will be allocated on a pro-rata basis to the common unitholders and general partner.

On September 18, 2023 (the "exercise date"), the Partnership negotiated a transaction with holders of the Partnership's warrants pursuant to which the Partnership repurchased and retired an aggregate of 752,500 warrants with an exercise price of $22.81 and 60,000 warrants with an exercise price of $34.00 for approximately $33.6 million in cash. As of September 30, 2023 there were 2.19 million warrants to purchase common units with a strike price of $34.00 outstanding and no warrants to purchase common units with a strike price of $22.81 outstanding. As of December 31, 2022 there were 3.0 million warrants outstanding, which included warrants to purchase 0.75 million common units at a strike price of $22.81 and warrants to purchase 2.25 million common units with a strike price of $34.00. These warrants had a $32.8 million carrying value included in warrant holders' interest within partners' capital on the Partnership's Consolidated Balance Sheets at September 30, 2023 and $48.0 million at December 31, 2022.

Activity related to the warrants is as follows:

	*Warrants*			*Financial*
(In thousands, except warrant data)	*Outstanding*			*Position*
Balance at December 31, 2021 and 2022		3,002,500		$	47,964
Warrant settlement		(812,500	)		(15,121	)
Balance at September 30, 2023		2,190,000		$	32,843

Embedded Features

Certain embedded features within the preferred unit and warrant purchase agreement are accounted for at fair value and are remeasured each quarter. See Note 10. Fair Value Measurements for further information regarding valuation of these embedded derivatives.