ITEM 3. LEGAL PROCEEDINGS
Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not currently a party to any material legal proceedings. In addition, we are not aware of any legal or governmental proceedings against us, or contemplated to be brought against us, under the various environmental protection statutes to which we are subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON UNITS AND RELATED UNITHOLDER MATTERS
Our common units are listed and traded on the New York Stock Exchange under the symbol "NRP." As of March 1, 2003, there were an estimated 4,700 beneficial owners of our common units, and four holders of subordinated units.
The following table sets forth the high and low sales prices per common unit, as reported on the New York Stock Exchange, from October 11, 2002 (the day our common units began trading) to December 31, 2002 and the quarterly cash distribution paid per common unit and subordinated unit.
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* The prorated cash distribution relates to the period from October 17, 2002, the closing date of our initial public offering, to December 31, 2002. This distribution was declared on January 21, 2003 and paid on February 14, 2003.
In addition to common units, we have also issued subordinated units for which there is no established public trading market. The subordinated units were issued as part of our initial public offering in October 2002 and receive a quarterly distribution only after sufficient funds have been paid to the common units, as described below. All of the subordinated units are held by affiliates of our general partner.
During the subordination period, the holders of our common units are entitled to receive a minimum quarterly distribution of $0.5125 per unit ($2.05 annualized) prior to any distribution of available cash to holders of our subordinated units. The subordination period is defined generally as the period that will end on the first day of any quarter beginning after September 30, 2007 if (1) we have distributed at least the minimum quarterly distribution on all outstanding units in each of the immediately preceding three consecutive, non-overlapping four-quarter periods and (2) our adjusted operating surplus, as defined in our partnership agreement, during such periods equals or exceeds the amount that would have been sufficient to enable us to distribute the minimum quarterly distribution on all outstanding units on a fully diluted basis and the related distribution on the 2% general partner interest during those periods. In addition, 25% of the subordinated units may convert to common units on a one-for-one basis after September 30, 2005, and 25% of the subordinated units may convert to common units on a one-for-one basis after September 30. 2006, if we meet the tests set forth in our partnership agreement. If the subordination period ends, the rights of the holders of subordinated units will no longer be subordinated to the rights of the holders of common units, the subordinated units may be converted into common units and the common units will no longer be entitled to arrearages.
Our general partner, the WPP Group and Arch Coal are entitled to incentive distributions if the amount we distribute with respect to any quarter exceeds specified target levels shown below:
PERCENTAGE ALLOCATIONS OF AVAILABLE CASH FROM OPERATING SURPLUS
We must distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner. We refer to this cash as "available cash" as that term is defined in our partnership agreement. The amount of available cash may be greater than or less than the minimum quarterly distribution. We currently pay quarterly cash distributions of $0.5125 per unit. In general, we intend to increase our cash distributions in the future assuming we are able to increase our "available cash" from our operations and through acquisitions, provided there is no adverse change in our operations, economic conditions and other factors. However, we cannot guarantee that future distributions will continue at such levels.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL DATA
The following tables show selected historical financial data for Natural Resource Partners L.P. and our predecessors (Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership, New Gauley Coal Corporation and the Arch Coal Contributed Properties, collectively known as predecessors), in each case for the periods and as of the dates indicated. We derived the selected historical financial data for Natural Resource Partners L.P. as of December 31, 2002 and for the period from commencement of operations (October 17, 2002) through December 31, 2002 from the audited financial statements of Natural Resource Partners L.P. We derived the selected historical financial data for the WPP Group as of and for the years ended December 31, 1998, 1999, 2000, 2001 and for the period from January 1 through October 16, 2002 from the audited financial statements of the WPP Group, and we derived the selected historical financial data for the Arch Coal Contributed Properties as of and for the years ended December 31, 1999, 2000, 2001 and for the period from January 1 through October 16, 2002 from the audited financial statements of the Arch Coal Contributed Properties. We derived the selected historical financial data for the Arch Coal Contributed Properties as of and for the years ended December 31, 1998 from the accounting records of Arch Coal.
We derived the information in the following tables from, and the information should be read together with and is qualified in its entirety by reference to, the historical financial statements and the accompanying notes included in Item 8, "Financial Statements and Supplementary Data." The tables should be read together with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." While substantially all of the producing coal-related assets and operations of the WPP Group were contributed to us, some assets and liabilities were retained by the WPP Group.
NATURAL RESOURCE PARTNERS L.P.
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(1) No financial data is presented for these periods because Natural Resource Partners L.P. was not formed until April 9, 2002 and did not commence operations until October 17, 2002.
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
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(1) Up to the date of contribution of assets to Natural Resource Partners L.P.
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
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(1) Up to the date of contribution of assets to Natural Resource Partners L.P.
NEW GAULEY COAL CORPORATION
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(1) Up to the date of contribution of assets to Natural Resource Partners L.P.
ARCH COAL CONTRIBUTED PROPERTIES
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(1) Up to the date of contribution of assets to Natural Resource Partners L.P.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations should be read in conjunction with the historical financial statements and notes thereto included elsewhere in this filing. For more detailed information regarding the basis of presentation for the following financial information, see the notes to the historical financial statements.
After the Introduction, there is a separate section for each of Natural Resource Partners L.P., Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership, New Gauley Coal Corporation and the Arch Coal Contributed Properties. The Arch Coal Contributed Properties include the properties contributed to us by Ark Land Company, a subsidiary of Arch Coal, Inc.
INTRODUCTION
Natural Resource Partners L.P. is a master limited partnership formed by the WPP Group and Arch Coal, Inc. We engage principally in the business of owning and managing coal properties in the three major coal-producing regions of the United States: Appalachia, the Illinois basin and the Western United States. As of December 31, 2002, we controlled approximately 1.23 billion tons of proven and probable coal reserves in eight states. We completed our initial public offering in October 2002.
We lease coal reserves to experienced mine operators under long-term leases that grant the operators the right to mine our coal reserves in exchange for royalty payments. As of December 31, 2002, our reserves were located on 48 separate properties and were subject to 97 leases with 40 lessees. For the year ended December 31, 2002, approximately 55% of the coal produced from the properties contributed to us came from underground mines, and 45% came from surface mines. As of December 31, 2002, approximately 64% of our reserves were low sulfur coal. Included in our low sulfur reserves is compliance coal, which meets the standards imposed by the Clean Air Act and constitutes approximately 25% of our reserves. Coal produced from our properties is burned in electric power plants located east of the Mississippi River and in Montana and Minnesota. In the year ended December 31, 2002, our lessees produced 30.5 million tons of coal from the properties contributed to us and our total revenue was $56.6 million, including coal royalty revenues and minimums totaling $50.5 million. Approximately 16% of our lessees' 2002 coal production was metallurgical coal, which the lessees sold to steel companies in the Eastern United States, South America, Europe and Asia.
Our revenue and profitability are almost entirely dependent on our lessees' ability to mine and market our coal reserves. Coal royalties are paid to us on the basis of a percentage of the sales price of the coal, subject to a minimum royalty per ton. In addition, our leases specify minimum monthly, quarterly or annual royalties. These minimum royalties are generally recoupable over a specified period of time (usually three to five years) if sufficient royalties are generated from coal production in future periods. We do not recognize these minimum coal royalties as revenue until the applicable recoupment period has expired or they are recouped through production. Until recognized as revenue, these minimum royalties are carried as deferred revenue, a liability on the balance sheet.
Most of our coal is produced by publicly held companies with professional and sophisticated sales departments. We estimate that 80% of our coal is sold by our lessees under coal supply contracts that have terms of one year or more. Coal supply contracts with terms of one year or more are becoming increasingly rare. Thus, our coal royalty revenue stream is increasingly affected by changes in market price of coal.
During the last few years, steam coal prices have varied greatly. At the beginning of 2000, demand for steam coal was depressed due to excessive stockpiling of coal by utilities in anticipation of "Y2K" problems. By late summer of 2000, these stockpiles returned to normal levels, utilities reentered the market to buy coal, and sufficient supply was not available to meet demand. These events contributed to a rapid increase in coal prices during late 2000. These higher spot prices prevailed for most of 2001. In late 2001, prices began to decline as demand for coal fell due to unusually warm weather during the winter of 2001-2002 and the sluggish U.S. economy. The winter of 2002-2003 has been colder than normal in many parts of the U.S. As a result of the increased demand for electricity for heating, electric utilities have used substantial amounts of coal to generate electricity and have reduced the size of their stockpiles. Recently our lessees have experienced
a greater demand for coal, and spot prices have increased about 10%. The effect of spot prices on our results of operations for the near future should be limited because our lessees will receive previously contracted prices for much of their production. Coal prices are based on supply and demand, specific coal characteristics, economics of alternative fuel, and overall domestic and international economic conditions.
During 2002, approximately 20% of our coal royalty revenues were from metallurgical coal. Prices of metallurgical coal have remained relatively stable in the past two years. Metallurgical coal, because of its unique chemical characteristics, is usually priced higher than steam coal. Metallurgical coal production has gradually decreased during the past few years due to a decline in exports as a result of the strength of the U.S. dollar and increasing use of electric arc furnaces and pulverized coal, rather than metallurgical coal, for steel production. Metallurgical coal can also be used as steam coal. However, some metallurgical coal mines on our properties may only operate profitably if all or a portion of their production is sold as metallurgical coal. If the operators of these mines are unable to sell metallurgical coal, these mines may not be economically viable and may close.
In addition to coal royalty revenue, we generate nominal revenue from rentals, royalties on oil and gas and coalbed methane leases, an overriding royalty arrangement and wheelage payments, which are toll payments for the right to transport third-party coal over or through our property.
Most lessees are required to reimburse us for property taxes paid on the leased property. These property tax reimbursements are shown as revenue in the financial statements. The corresponding property tax expenses are included as "taxes other than income." The WPP Group's property tax expenses are higher than its property tax revenue because the WPP Group retained certain properties and because some of the properties contributed by the WPP Group are unleased and, therefore, no reimbursements are received.
General and administrative expenses include salary and benefits, rent, expenses and other costs related to managing the properties. An affiliate charges the WPP Group for certain finance, tax, treasury and insurance expenses. The Arch Coal Contributed Properties did not maintain stand-alone corporate treasury, legal, tax, human resources, general administration or other similar corporate support functions. Corporate general and administrative expenses were not previously allocated to the Arch Coal Contributed Properties because there was not sufficient information to develop a reasonable cost allocation. We reimburse the general partner and its affiliates for direct and indirect expenses they incur on our behalf, including general and administrative expenses.
Depletion and amortization consist primarily of depletion on the coal properties. Depletion of coal reserves is calculated on a unit-of-production basis and thus fluctuates from property to property with coal production for the period.
CRITICAL ACCOUNTING POLICIES
Coal Royalties. We recognize coal royalty revenues on the basis of tons of coal sold by our lessees and the corresponding revenue from those sales. Generally, the lessees make payments to us based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum monthly, quarterly or annual payments. These minimum royalty payments are generally recoupable over certain time periods. We initially record minimum payments as deferred revenue and recognize them as coal royalty revenues either when the lessee recoups the minimum payment through production or when the period during which the lessee is allowed to recoup the minimum payment expires.
Timber Royalties. We sell timber on a contract basis where independent contractors harvest and sell the timber and, from time to time, in a competitive bid process involving sales of standing timber on individual parcels. We recognize timber revenues when the timber has been sold or harvested by the independent contractors. Title and risk of loss pass to the independent contractors when they harvest the timber.
Depletion. We deplete coal properties on a units-of-production basis by lease, based upon coal mined in relation to the net cost of the mineral properties and estimated proved and probable tonnage in those properties. We estimate proven and probable coal reserves with the assistance of third-party mining consultants and involve the use of estimation techniques and recoverability assumptions. Our estimates of coal
reserves are updated periodically and may result in adjustments to coal reserves and depletion rates that are recognized prospectively. Timberlands are stated at cost less depletion. We determine the cost of the timber harvested based on the volume of timber harvested in relation to the amount of estimated net merchantable volume by geographic areas. We estimate our timber inventory using statistical information and data obtained from physical measurements and other information gathering techniques. These estimates are updated annually and may result in adjustments of timber volumes and depletion rates, which are recognized prospectively. Changes in these estimates have no effect on our cash flow.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred with the associated asset retirement cost being capitalized as a part of the carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure requirements that provide a description of asset retirement obligations and a reconciliation of changes in the components of those obligations. Adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of " and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The objective of SFAS No. 144 is to establish one accounting model for long-lived assets to be disposed of by sale as well as resolve implementation issues related to SFAS No. 121. The adoption of SFAS No. 144, effective January 1, 2002, did not have a material impact on our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. The provisions of this Statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Adoption of SFAS No. 145 on January 1, 2003 did not have a material impact on our financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities", which supercedes EITF No. 94-3, "Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard is not expected to have a significant impact on our financial statements.
RESULTS OF OPERATIONS
NATURAL RESOURCE PARTNERS L.P.
FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002) THROUGH DECEMBER 31, 2002 (IN THOUSANDS, EXCEPT PER TON DATA)
FROM COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002) THROUGH DECEMBER 31, 2002
Revenues. During the period from commencement of operations (October 17, 2002) through the period ending December 31, 2002, coal royalty revenues were $11.5 million on 7.3 million tons of coal produced. Approximately 74.4% of the coal production came from the Appalachian region, 17.3% from the Northern Powder River Basin and 8.3% from the Illinois Basin.
Expenses. From commencement of operations (October 17, 2002) through the period ending December 31, 2002, total expenses were $7.3 million. Total expenses include depletion and amortization of $4.5 million, general and administrative of $1.1 million, taxes other than income of $1.3 million and other coal-related expense of $0.4 million.
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
The following table sets forth 2002 and 2001 coal royalty revenues from the properties that were contributed to NRP at the consummation of its initial public offering on October 17, 2002. These coal royalty revenues represent production from the properties, for the years ending December 31, 2002 and 2001, respectively. Coal royalty revenues were generated from the properties in each of the following areas: Appalachia, Illinois Basin and Northern Powder River Basin.
COAL ROYALTY REVENUES FROM CONTRIBUTED PROPERTIES
Coal royalty revenues, for the year ended December 31, 2002 were $49.6 million compared to $41.8 million for the year ended December 31, 2001, an increase of $7.8 million, or 19%. In 2002, production increased by 1.5 million tons, from 29.0 million tons to 30.5 million tons or 5.2%, compared to 2001. The increases in production and coal royalties were primarily due to:
Appalachia. Production from our West Fork property increased from 222,000 tons to 2.1 million tons, and coal royalty revenues increased from $357,000 to $4.7 million because a longwall mine moved onto the property from adjacent property. On our Eunice property, production increased from 1.8 million tons to 2.6 million tons, and coal royalty revenues increased from $2.7 million to $4.6 million because a longwall mine
was on our property for a greater portion of the year and was subject to a higher royalty rate. On our Welch/ Wyoming property, production increased from 222,000 tons to 609,000 tons, and coal royalty revenues increased from $361,000 to $1.3 million because a new mine, which began production during 2001, operated on the property for the entire year. On our Dorothy property, production increased from 652,000 tons to 1.0 million tons, and coal royalty revenues increased from $1.1 million to $2.0 million. This increase was due to increased production from a surface mine and the resumption of mining at a temporarily idled mine. On our Kingston property, production increased from 740,000 tons to 1.1 million tons, and coal royalty revenues increased from $1.3 million to $1.8 million. This increase was primarily due to a new mine starting on the property during the year.
These increases were partially offset by lower production and coal royalty revenues from our Rockhouse and Boone-Lincoln properties. On our Rockhouse property, production decreased from 322,000 tons to 34,000 tons, and coal royalty revenues decreased from $791,000 to $82,000 because a mine on the property ceased production. On our Boone-Lincoln property, production decreased from 670,000 tons to 195,000 tons, and coal royalty revenues decreased from $1.3 million to $389,000. This decrease was due to lower production on the property from the active surface mine and the temporary idling of the underground mine on the property. This mine has since been restarted.
Aggregate production from our Beaver Creek, Thomas and Stony River properties increased from 333,000 tons to 812,000 tons due to higher production as the lessee concentrated production on our property. This resulted in coal royalty revenues increasing from $792,000 to $1.7 million. This increase was partially offset by a decrease in production from our New Gauley property from 441,000 tons to 282,000 tons due to a combination of market-based reductions and adverse geologic conditions in the mine during part of the year. This resulted in a decrease of coal royalty revenues from $985,000 to $683,000.
On our Evans-Laviers property, production decreased from 3.8 million tons to 3.4 million tons. Coal royalty revenues decreased from $5.1 million to $4.4 million. This decrease was due to the idling a higher-royalty-rate surface mine for part of the year.
Acquisition. In addition to the above increases, the acquisition of properties from El Paso on December 4, 2002 resulted in additional production of 504,000 tons and coal royalty revenues of $601,000 in 2002.
Illinois Basin. On our Trico property, production increased to 486,000 tons from 253,000 tons because a mine that began operating in 2001 produced for an entire year. This resulted in coal royalty revenues increasing to $682,000 from $343,000. This increase was offset by lower production on our Cummings/ Hocking-Wolford property. Production decreased from 1.5 million tons to 1.1 million tons, and coal royalty revenues decreased from $1.5 million to $1.1 million. This decrease was due to a larger proportion of the production from the mine being on adjacent property.
Northern Powder River. Production from our Western Energy property decreased from 4.9 million tons to 3.7 million tons. This resulted in a decrease in coal royalty revenues from $5.3 million to $4.3 million. This decrease was due to the typical variations in production resulting from the checkerboard ownership pattern of the mine. This pattern causes variations in the proportions of the total mine production on our property.
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1 THROUGH OCTOBER 16, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Revenues. Total revenues for the nine and one-half month period in 2002 were $22.6 million compared to $26.0 million for the full year 2001, a decrease of $3.4 million, or 15%, of which $3.1 million was due to a sale of assets in 2001.
For the nine and one-half month period in 2002, coal royalty revenues were $17.3 million compared to $15.5 million for the full year 2001, an increase of $1.8 million, or 12%. Over these same periods, production decreased by 0.7 million tons, or 7%, from 10.3 million tons to 9.6 million tons. In addition to the differences caused by comparing twelve months in 2001 to nine and one-half months in 2002, these changes in production and coal royalties were primarily due to:
Appalachia. Production from our West Fork property increased from 222,000 tons to 1.5 million tons, and coal royalty revenues increased from $357,000 to $3.3 million because a longwall mine moved onto the property from adjacent property. On our Eunice property, production stayed constant at 1.8 million tons, and coal royalty revenues increased from $2.7 million to $3.2 million because a greater proportion of production was from a longwall mine that is subject to a higher royalty rate. On our Welch/Wyoming property, production increased from 222,000 tons to 449,000 tons, and coal royalty revenues increased from $361,000 to $1.0 million because a new mine, which began production during 2001, operated on the property for the entire nine and one-half month period. On our Dorothy property, production increased from 652,000 tons to 813,000
tons, and coal royalty revenues increased from $1.1 million to $1.6 million. This increase was due to increased production from a surface mine and the resumption of mining at a temporarily idled mine.
These increases were partially offset by lower production and coal royalty revenues from our Rockhouse property. On that property, production decreased from 322,000 tons to 34,000 tons, and coal royalty revenues decreased from $791,000 to $82,000 because a mine on the property ceased production.
Aggregate production from our Beaver Creek, Thomas and Stony River properties increased from 333,000 tons to 621,000 tons as the lessee concentrated production on our properties during the nine and one-half month period. This resulted in coal royalty revenues increasing from $792,000 to $1.4 million.
On our Evans-Laviers property, production decreased from 3.8 million tons to 2.6 million tons, and coal royalty revenues decreased from $5.1 million to $3.5 million. This decrease was due to the idling of a higher-royalty-rate surface mine for part of the nine and one-half month period.
Illinois Basin. The increases in Appalachia were offset by lower production on our Cummings/ Hocking-Wolford property. Production decreased from 1.5 million tons to 775,000 tons, and coal royalty revenues decreased from $1.5 million to $778,000. This decrease was due to a larger proportion of the production from the mine being on adjacent property during the nine and one-half month period.
Timber revenues decreased to $2.8 million in 2002 from $3.7 million in 2001, a decrease of $0.9 million, or 32%. This decrease was primarily due to 2002 being a short period of nine and one-half months.
Other revenues decreased from $2.5 million in 2001 to $1.2 million in 2002, a decrease of $1.3 million, or 50%. Of the $1.3 million decrease, $0.9 million was due to a determination that a lessee was required to pay transportation fees for 2001 that were previously unreported by the lessee for several years. Rental receipts for the nine and one-half month period were $0.3 million lower than for the full year 2001.
Expenses. Aggregate expenses for 2002 were $7.3 million compared to $5.8 million for 2001, an increase of $2.0 million, or 34%, primarily due to increased depletion associated with the purchase of the reversionary interest described below.
Other Income (Expense). Interest expense was $4.8 million for 2002 compared to $4.0 million for 2001, an increase of $0.8 million, or 20%, resulting from additional debt incurred from the acquisition of the reversionary interest from CSX.
Reversionary Interest. The previous owner of Western Pocahontas Properties Limited Partnership's coal and timber properties (CSX Corporation and certain of its affiliates) retained a reversionary interest in those properties whereby it received either a 25% or 28% interest in the properties and the net revenues of the properties after July 1, 2001, and in the net proceeds of any property sale occurring prior to July 1, 2001. Western Pocahontas purchased the reversionary interest related to its Kentucky properties in 2001 and the remainder of the interest in March 2002. In 2001, Western Pocahontas accrued $1.9 million related to the reversionary interest.
Net Income. Net income was $10.1 million in 2002 compared to $14.5 million in 2001, a decrease of $4.4 million, or 30%. This is primarily due to 2002 being a short period of nine and one half months.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Revenues. Total revenues in 2001 were $26.0 million compared to $22.5 million in 2000, an increase of $3.5 million, or 15%.
Coal royalty revenues in 2001 were $15.5 million compared to $11.6 million in 2000, an increase of $3.9 million, or 33%. Over these same periods, production increased by 2.9 million tons, or 39%, from 7.4 million tons to 10.3 million tons. The increases in production and coal royalties were primarily due to:
Eastern Kentucky. Production from the Evans-Laviers property increased 2.6 million tons, from 1.2 million tons to 3.8 million tons, which resulted in increased coal royalty revenues of $3.8 million. This increase was primarily due to the opening of a new deep mine late in 2000, a large underground mine reaching
full production in 2001 and the reopening of a temporarily idled surface and highwall mine in July 2001 at a higher royalty rate. On the Chesapeake Mineral property, production increased by 218,000 tons in 2001 due to the reopening of the mine under new ownership. This was partially offset by the reduction of production at another lease on this property. Overall, coal royalty revenues increased at the Chesapeake Mineral property by $269,000.
Southern West Virginia. Production from the Eunice property decreased by 1.3 million tons, from 3.1 million tons to 1.8 million tons, resulting in a decrease in coal royalty revenues of $1.1 million. This decrease was due primarily to the closure of a longwall mine as a result of adverse geologic conditions and surface mining being performed on adjacent property during the year. This decrease in production was partially offset by an increase in production from the Dorothy-Sarita property of 301,000 tons, from 351,000 tons to 652,000 tons, which resulted in increased coal royalty revenues of $400,000. This increase in production was due to the addition of a surface and highwall mine. On the Rockhouse Fork property, production decreased by 148,000 tons, from 470,000 tons to 322,000 tons, and coal royalty revenues fell by $348,000. This decrease in production was due to geologic conditions, a change in contractors by the lessee, and a decision to mine a thinner part of the coal seam.
Timber revenues decreased to $3.7 million in 2001 from $4.2 million in 2000, a decrease of $0.5 million, or 13%. The decrease was due to a one-time sale of timber in 2000 for $700,000 on a parcel in Northern Appalachia, which contained 1.5 million board feet of timber.
Gain on sale of property was $3.1 million in 2001 and $4.0 million in 2000. These gains were related to the sale of 1,928 and 1,391 acres of land in 2001 and 2000, respectively.
Other revenues increased to $2.5 million in 2001 from $1.3 million in 2000, an increase of $1.2 million, or 92%. This increase was due to a determination that a lessee was required to pay transportation fees that were previously unreported by the lessee for several years.
Expenses. Aggregate expenses for 2001 were $5.8 million compared to $5.9 million for 2000, a decrease of $0.1 million, or 1%, primarily due to a decrease in property taxes that was partially offset by increased depletion attributed to higher coal production.
Other Income (Expense). Interest expense was $4.0 million for 2001 compared to $4.2 million for 2000, a decrease of $0.2 million, or 5%. This decrease was due to scheduled principal reduction of debt.
Reversionary Interest. As described above, Western Pocahontas purchased the reversionary interest related to its Kentucky properties in 2001 and the remainder of the interest in March 2002. In 2001, Western Pocahontas Properties accrued $1.9 million related to the reversionary interest.
Net Income. Net income was $14.5 million in 2001 compared to $12.8 million in 2000, an increase of $1.7 million or 13%. This increase was primarily due to increased coal production by our lessees and correspondingly higher royalty payments.
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1 THROUGH OCTOBER 16, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Revenues. Total revenues for the nine and one-half month period in 2002 were $6.5 million compared to $8.8 million for the full year 2001, a decrease of $2.3 million, or 35%. For the nine and one-half month period in 2002, coal royalty revenues were $5.9 million compared to $7.5 million for the full year 2001, a decrease of $1.6 million, or 27%. Over these respective periods, production decreased by 3.5 million tons, or 41%, from 8.5 million tons to 5.0 million tons. These changes in production and coal royalties were primarily due to:
Northern Powder River. Production from our Western Energy property decreased from 4.9 million tons to 3.7 million tons. This resulted in a decrease in coal royalty revenues from $5.3 million to $3.3 million. These differences are primarily due to 2002 being a short period of nine and one-half months.
Lease and easement income in 2002 was $474,000 compared to $787,000 in 2001. This decrease is a result of a decline in surface mining activity as well as 2002 being a short period of nine and one-half months.
Gain on sale of property was $439,000 in 2001, and there were no property sales for the nine and one-half months in 2002.
Other Income (Expense). Interest expense was $1.9 million for 2002 compared to $3.7 million for 2001, a decrease of $1.8 million, or 95%. In addition to the differences caused by the difference in the length of periods, this decrease resulted from a reduction in the interest rate and a decline in the amount of debt outstanding.
Net Income. Net income was $2.3 million for 2002 compared to $2.6 million for 2001, a decrease of $0.3 million, or 13%. This decrease primarily resulted from a reduction in interest expense that was partially offset by lower coal royalties.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Revenues. Total revenues in 2001 were $8.8 million compared to $9.4 million in 2000, a decrease of $0.6 million, or 6%. Coal royalty revenues in 2001 were $7.5 million compared to $8.0 million in 2000, a decrease of $0.5 million, or 6%. Over these periods, production decreased by 663,000 tons, or 7%, from 9.2 million tons to 8.5 million tons. These decreases in production and coal royalties were primarily due to:
Production from the Western Energy property decreased by 783,000 tons, from 5.7 million tons to 4.9 million tons, which resulted in decreased royalty revenues of $1.1 million. This decrease in production was the result of the typical variations which can result from the checkerboard ownership pattern in this mine. This ownership pattern causes mining operations to periodically move from the property to contiguous unowned property and back again.
Production from the Big Sky property increased by 0.4 million tons, from 1.4 million to 1.8 million tons, which resulted in increased royalty revenues of $0.4 million. These increases were due to the favorable location of mining operations relative to the checkerboard ownership pattern.
Lease and easement income in 2001 was $787,000 compared to $583,000 in 2000. This increase was primarily attributable to surface use payments relating to increased mining on our surface property.
Gain on sale of property was $439,000 in 2001, compared to $709,000 in 2000.
Other Income (Expense). Interest expense was $3.7 million for 2001 compared to $4.7 million for 2000, a decrease of $1.0 million, or 21%. This decrease primarily resulted from a reduction in the outstanding principal balance of debt combined with a reduction in interest rates from an average of 9.3% in 2000 to 7.5% in 2001.
Net Income. Net income was $2.6 million for 2001 compared to $2.3 million for 2000, an increase of $0.3 million, or 14%. This increase primarily resulted from a reduction in interest expense that was partially offset by lower coal royalties.
NEW GAULEY COAL CORPORATION
STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1 THROUGH OCTOBER 16, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Revenues. Total revenues for the nine and one-half month period in 2002 were $1.5 million compared to $1.7 million for the full year 2001, a decrease of $0.2 million, or 13%. Coal royalty revenues in 2002 were $1.4 million compared to $1.6 million in 2001, a decrease of $0.2 million, or 14%. Over these same periods, production decreased by 239,000 tons, or 50%, from 718,000 tons to 479,000 tons. In addition to the differences caused by comparing twelve months in 2001 to nine and one-half months in 2002, these changes in production and coal royalties were primarily due to:
A decrease in production from our West Virginia property from 441,000 tons to 230,000 tons. Coal royalty revenues decreased from $985,000 to $561,000 due to a combination of market-based reductions and adverse geologic conditions in the mine during part of the nine and one-half month period of 2002. This decrease was partially offset by increased coal royalty revenues on our Alabama properties.
Expenses. Aggregate expenses for the nine and one-half month period in 2002 were $232,000 compared to $298,000 for 2001, a decrease of $66,000, or 28%. This decrease was due primarily to a decrease in depletion expense.
Net Income. Net income was $1.1 million for 2002 compared to $1.2 million for 2001, a decrease of $0.1 million, or 9%. This decrease was primarily due to 2002 being a short period of nine and one-half months.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Revenues. Total revenues in 2001 were $1.7 million compared to $1.0 million in 2000, an increase of $0.7 million, or 70%. Coal royalty revenues in 2001 were $1.6 million compared to $1.0 million in 2000, an increase of $0.6 million, or 60%. Over these same periods, production increased by 362,000 tons, or 102%, from 356,000 tons to 718,000 tons. This increase in production and coal royalties was primarily due to:
Appalachia. Production from the West Virginia property increased by 292,000 tons, from 149,000 tons to 441,000 tons, which resulted in increased royalty revenues of $687,000. This increase resulted from the lessee's mining operations moving onto New Gauley Coal Corporation's property from adjacent reserves and an increase in the royalty rate.
Expenses. Aggregate expenses for 2001 were $298,000 compared to $212,000 for 2000, an increase of $86,000, or 41%. This increase was due primarily to increased depletion associated with the increased production during the period.
Net Income. Net income was $1.2 million for 2001 compared to $0.7 million for 2000, an increase of $0.5 million, or 71%. This increase was primarily due to increased coal royalty revenues.
ARCH COAL CONTRIBUTED PROPERTIES
STATEMENT OF REVENUES AND DIRECT COSTS AND EXPENSES
FOR THE PERIOD FROM JANUARY 1 THROUGH OCTOBER 16, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Revenues. Revenues for the nine and one-half month period in 2002 were $17.3 million, a decrease of $3.5 million as compared to twelve months in 2001. In addition to the differences caused by comparing twelve months in 2001 to nine and one-half months in 2002, these changes in production and coal royalties were primarily due to:
Appalachia. On our Kingston property, production increased from 740,000 tons to 894,000, and coal royalty revenues increased from $1.3 million to $1.5 million. This increase was primarily due to a new mine starting on the property during the year. On our Boone-Lincoln property, production decreased from 670,000 tons to 158,000 tons, and coal royalty revenues decreased from $1.3 million to $322,000. This decrease was
due to lower production on the property from the active surface mine and the temporary idling of the underground mine on the property. This mine has since been restarted.
Illinois basin. On our Trico property, production increased to 376,000 tons from 253,000 tons due to a mine that began operating in 2001 producing for nine and one-half months. This resulted in coal royalty revenues increasing to $528,000 from $343,000.
Direct costs and expenses. Direct costs and expenses in 2002 were $6.6 million compared to $7.6 million in 2001, an decrease of $1.0 million, or 13%. This decrease was largely due to depletion resulting from the nine and one-half month period being compared to a full year. Depletion expense decreased $1.5 million to $4.8 million in 2002 from $6.3 million in 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Revenues. Revenues in 2001 were $20.8 million compared with $18.3 million in 2000, an increase of $2.5 million, or 14%.
Coal royalty revenues in 2001 were $18.4 million compared to $16.2 million in 2000, an increase of $2.2 million, or 14%. Production increased by 1.4 million tons, or 14%, from 9.9 million tons to 11.3 million tons. The increases in production and coal royalties were primarily attributable to the following:
Eastern Kentucky. Production from the Central Appalachia properties increased 1.2 million tons, from 6.2 million tons to 7.4 million tons, which resulted in increased coal royalty revenues of $2.0 million. This increase was due primarily to increased production at various surface and underground mines at the Lynch property of 1.1 million tons, from 2.0 million tons in 2000 to 3.1 million tons in 2001. Production at the Lone Mountain property also increased from 2.2 million tons in 2000 to 2.8 million tons in 2001 due to the installation of additional equipment at the lessee's mine.
Other royalty revenues for 2001 were $1.4 million compared to $0.9 million in 2000, an increase of $0.5 million. Other royalty revenues are primarily attributable to override royalties associated with coal mined by lessees. Override royalties were $1.2 million in 2001 compared to $0.8 million in 2000.
Direct costs and expenses. Direct costs and expenses in 2001 were $7.7 million compared to $6.6 million in 2000, an increase of $1.1 million, or 16%. This increase was largely due to increased depletion resulting from the increased production during the period. Depletion expense increased $1.0 million to $6.4 million in 2001 from $5.4 million in 2000.
RELATED PARTY TRANSACTIONS
PARTNERSHIP AGREEMENT
Our general partner will not receive any management fee or other compensation for its management of Natural Resource Partners. However, in accordance with the partnership agreement, our general partner and its affiliates will be reimbursed for expenses incurred on our behalf. All direct general and administrative expenses will be charged to us as incurred. 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 will also be reimbursed. Cost reimbursements due our general partner may be substantial and will reduce our cash available for distribution to unitholders. In 2002, the reimbursements to our general partner for services performed by WPP totaled $256,000. For additional information, please read "Certain Relationships and Related Transactions -- Omnibus Agreement."
AGREEMENTS WITH ARK LAND COMPANY
Concurrently with our initial public offering in October 2002, we entered into four coal mining leases with Ark Land Company, a subsidiary of Arch Coal, Inc. The Ark Land leases grant them the right to mine our coal on the following properties:
- Lone Mountain located in Kentucky, which contains 47.1 million tons of proven and probable reserves as of December 31, 2002;
- Pardee located in Kentucky and Virginia, which contains 20.4 million tons of proven and probable reserves as of December 31, 2002;
- Boone/Lincoln located in West Virginia, which contains 18.5 million tons of proven and probable reserves as of December 31, 2002; and
- Campbell's Creek located in West Virginia, which contains 9.8 million tons of proven and probable reserves as of December 31, 2002.
Coal royalty revenues payable under these leases based on 2002 actual production were $9.5 million, representing 19.2% of our total coal royalty revenues for the year ended December 31, 2002. If no production had taken place in 2002, minimum royalties of $5.75 million would have been payable under the leases.
The Ark Land leases have an initial term of either eight or ten years, each with an automatic year-to-year extension until the earlier to occur of (1) delivery of notice by Ark Land that it will not renew the lease or (2) all mineable and merchantable coal has been mined. The leases provide for payments to us based on the higher of a percentage of the gross sales price or a fixed minimum per ton of coal sold from our properties, with minimum annual royalty payments. Under the Ark Land leases, minimum royalty payments are credited against future production royalties.
The leases are intended to retain some of the legal rights Ark Land possessed when it owned the properties. For this reason, the leases contain some terms and provisions that are different from our third-party coal leases negotiated at arm's length. Some of the more significant differences include:
- Ark Land has the ability to sublease the leased property without our prior approval, although it remains responsible for sublessee performance;
- minimum royalty payments from Ark Land continue to be payable during the initial lease term even if all mineable and merchantable coal has been mined from the property;
- royalties for coal sold to any affiliates may be based on a gross selling price below the market value of the coal;
- the indemnities provided by Ark Land to us do not survive the termination of the leases;
- we only have a limited ability to terminate the leases;
- Ark Land has royalty-free wheelage rights on the leased properties; and
- the leases do not impose a legal duty to diligently mine the maximum amount of coal possible from the leased property.
We believe that the production and minimum royalty rates contained in the Ark Land leases are consistent with current market royalty rates.
Ark Land owns an overriding royalty interest in leased coal reserves mined by Black Beauty Coal Company ("Black Beauty"), an affiliate of Peabody Energy, from property located in Knox County, Indiana. Ark Land has retained the overriding royalty interest following the consummation of the initial public offering. However, Ark Land and Arch Coal, Inc. entered into a Royalty Pass-Through Agreement and Guaranty with one of our subsidiaries at closing to pass through to us any royalties paid to Ark Land by Black Beauty under the overriding royalty interest, and Arch Coal, Inc. will guarantee that to the extent of the royalties paid to Ark Land. Annual advance overriding royalty payments, against which production royalties under the leases are
credited, are received by Ark Land in June of each year. In 2001, Ark Land received less than $1 million from the overriding royalty interest, or less than 2% of our partnership's 2001 revenues. This term of this pass-through agreement expires upon the termination of the overriding royalty interest.
In May 2002, Ark Land received a notice from Black Beauty asserting that Black Beauty is no longer obligated to pay the $400,000 advance overriding royalty payments to Ark Land associated with a portion of the underlying leased property beginning when the next payment would be due on June 29, 2003. In response, Ark Land has notified Black Beauty that Ark Land disagrees with Black Beauty's right to terminate these payments and intends to assert its right to receive these payments. We cannot assure you as to whether Ark Land will ultimately be successful in this dispute, or whether or when we will receive any or all of the amounts in dispute from Ark Land under our royalty pass-through agreement.
On November 20, 2002, after the closing of our initial public offering, we agreed with Arch to terminate this royalty pass-through agreement and guaranty and to substitute in its place an amendment to the lease covering these reserves. The amendment requires Ark Land to pay us a non-recoupable quarterly rental payment equal to the quarterly minimums that were due under the royalty pass-through agreement. This amendment is at least as favorable to us as the pass-through agreement.
For more information about our related party transactions, please read Item 13, "Certain Relationships and Related Transactions."
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS AND CAPITAL EXPENDITURES
Historically, each of the WPP Group and the Arch Coal Contributed Properties satisfied their working capital requirements and funded capital expenditures, other than property acquisitions, with cash generated from operations. Funds for property acquisitions have generally been obtained through borrowings.
We believe that cash generated from operations and our borrowing capacity under our new facility will be sufficient to meet our working capital requirements and anticipated capital expenditures for the next several years. We are actively pursuing additional property acquisitions; accordingly, we are currently in discussions with our banks to increase our revolving credit facility to provide for additional acquisitions. We intend to fund any acquisitions with borrowings under our revolving credit facility and proceeds from the issuance of additional common units. A minimal portion of our capital expenditures will be maintenance capital expenditures, which will be deducted from our operating surplus for the period. Our ability to satisfy any debt service obligations, to fund planned capital expenditures, to make acquisitions and to pay distributions to our unitholders will depend upon our future operating performance, which will be affected by prevailing economic conditions in the coal industry, changes in capital markets, and financial, business and other factors, some of which are beyond our control. For a more complete discussion of factors that will affect cash flow we generate from our operations, please read "Risks Related to Our Business." Our capital expenditures have historically been minimal.
Maintenance capital expenditures are capital expenditures made to replace partially or fully depreciated assets in order to maintain the existing operating capacity of our assets and to extend their useful lives. Expansion capital expenditures are capital expenditures made to expand the existing operating capacity of our assets, whether through construction or acquisition. We treat maintenance capital expenditures that do not extend the useful life of existing assets as operating expenses as we incur them.
Net cash provided by operations during the period following our initial public offering, from October 17, 2002 through December 31, 2002, was $6.7 million, substantially all of which was coal royalty revenues, partially offset by an increase in accounts receivable and changes in other operating assets and liabilities.
Net cash used in investing activities during the period from October 17, 2002 through December 31, 2002 was $57.4 million for the acquisition of the El Paso coal properties. In December 2002, we acquired mineral rights to approximately 120 million tons of coal reserves from subsidiaries of El Paso Corporation for $57 million in cash that we borrowed under our revolving credit facility. Approximately one-half of the
reserves are located in Kentucky, and the remainder are in Virginia and West Virginia. Some of these reserves were leased to and mined by a subsidiary of El Paso Corporation, and some are subject to an overriding royalty interest. The acquisition consisted of approximately 177,000 acres of mineral property (including approximately 25,000 surface acres). Other revenue from the property will arise from timber harvests, surface leases and oil and gas royalty. We also acquired an overriding royalty interest in coal in North Dakota.
Subsequent to year-end, Coastal Coal sold their mining operations to Alpha Natural Resources.
Cash provided by financing activities in the period from October 17, 2002 through December 31, 2002 was $58.5 million. This was primarily attributable to the borrowings under our revolving credit facility used to finance the acquisition of properties from El Paso.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
DESCRIPTION OF CREDIT FACILITY
In connection with our initial public offering of common units, our operating company entered into a three-year, $100 million revolving credit facility. The revolving credit facility includes a $12.0 million distribution loan sub-limit that can be used for funding quarterly distributions. The remainder of the revolving credit facility is available for general limited partnership and limited liability company purposes, including future acquisitions, but may not be used to fund quarterly distributions.
Our obligations under the revolving credit facility are unsecured but will be guaranteed by us and our operating subsidiaries.
We may prepay all loans at any time without penalty. We must reduce all borrowings under the distribution loan sub-facility to zero for a period of at least 15 consecutive days once during each twelve-month period.
Indebtedness under the revolving credit facility bears interest, at our option, at either:
- the higher of the federal funds rate plus 0.50% or the prime rate as announced by the agent bank; or
- at a rate equal to LIBOR plus an applicable margin ranging from 1.25% to 1.75%.
We incur a commitment fee on the unused portion of the revolving credit facility at a rate of 0.50% per annum.
The revolving credit facility prohibits us from making distributions to unitholders and distributions in excess of available cash if any potential default or event of default, as defined in the credit agreement, occurs or would result from the distribution. In addition, the revolving credit facility contains various covenants limiting our operating company's and its subsidiaries' ability to:
- incur indebtedness;
- grant liens;
- engage in mergers and acquisitions or change the nature of our business;
- amend our organizational documents or the omnibus agreement;
- make loans and investments;
- sell assets; or
- enter into transactions with affiliates.
The credit agreement also contains covenants requiring us to maintain:
- a ratio of consolidated indebtedness to consolidated EBITDA (as defined in the credit agreement) that does not exceed 2.5 to 1.0 for the four most recent quarters; and
- a ratio of consolidated EBITDA to consolidated interest expense of at least 4.0 to 1.0 for the four most recent quarters.
If an event of default exists under the credit agreement, the lenders may accelerate the maturity of any indebtedness outstanding under the credit agreement and exercise other rights and remedies. Each of the following will constitute an event of default:
- failure to pay any principal, interest, fees or other amount when due;
- failure to pay any indebtedness, other than indebtedness under the revolving credit facility, in excess of $1 million when due or the occurrence and continuance of any other default beyond the applicable grace period, if any, if the default permits or causes the acceleration of the indebtedness or termination of any commitment to lend;
- bankruptcy or insolvency events;
- termination of existence;
- failure to comply with the loan documents, subject to certain grace periods;
- any representation, warranty or document provided is determined to have been materially untrue when made or provided;
- entry and the failure to pay, bond, stay or contest adverse judgments or similar processes in excess of $1 million more than any applicable insurance coverage; and
- any of the following changes in control:
- we cease to own all of the member interests of the operating company;
- our general partner ceases to own directly all of our general partner interests; or
- Corbin J. Robertson, Jr., the WPP Group and one or more of their direct or indirect subsidiaries cease to own more than 50% of the partnership interests of our general partner.
On December 4, 2002, we borrowed $57.5 million under our revolving credit facility for the acquisition of coal assets from El Paso Corporation. We recorded interest expense of $200,000 in the fourth quarter, consisting of actual interest expense of $117,000 accruing at a rate of 2.72% for 27 days, as well as commitment and other fees associated with the revolving credit facility.
CONTRACTUAL OBLIGATIONS
The following table reflects our long-term non-cancelable contractual obligations as of December 31, 2002 (in millions):
INFLATION
Inflation in the United States has been relatively low in recent years and did not have a material impact on operations for the years ended December 31, 2000, 2001 and 2002.
ENVIRONMENTAL
The operations of our lessees are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. The terms of substantially all of our leases impose liability on the relevant lessees for all environmental and reclamation liabilities arising under those laws and regulations on the relevant lessees. However, if a particular lessee is not
financially capable of fulfilling those obligations, there is a possibility that regulatory authorities could attempt to assign the liabilities to us as the landowner. We would contest such an assignment.
FORWARD-LOOKING STATEMENTS
Statements included in this Form 10-K are 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 capital expenditures, acquisitions and dispositions, expected commencement dates of coal mining, projected quantities of future coal production by our lessees producing coal from our reserves leased, projected demand or supply for coal that will affect sales levels, prices and royalties realized by us.
These forward-looking statements are made based upon management's current plans, expectations, estimates, assumptions and beliefs concerning future events impacting us and therefore involve a number or 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. Please read "Risks Related to Our Business" for important factors that could cause our actual results of operations or our actual financial condition to differ.
RISKS RELATED TO OUR BUSINESS
- We may not have sufficient cash from operations to pay the minimum quarterly distribution following establishment of cash reserves and payment of fees and expenses, including payments to our general partner.
- A substantial or extended decline in coal prices could reduce our coal royalty revenues and the value of our coal reserves.
- Our lessees' coal mining operations are subject to operating risks that could result in lower coal royalty revenues to us.
- We depend on a limited number of primary operators for a significant portion of our coal royalty revenues, and the loss of or reduction in production from any of our major operators could reduce our coal royalty revenues.
- We may not be able to terminate our leases if any of our lessees declare bankruptcy, and we may experience delays and be unable to replace lessees that do not make royalty payments.
- If our lessees do not manage their operations well, their production volumes and our coal royalty revenues could decrease.
- Due to our lack of asset diversification, adverse developments in the coal industry could reduce our coal royalty revenues.
- Any decrease in the demand for metallurgical coal could result in lower coal production by our lessees, which would thereby reduce our coal royalty revenues.
- We may not be able to expand and our business will be adversely affected if we are unable to replace or increase our reserves or obtain other mineral reserves through acquisitions.
- Any change in fuel consumption patterns by electric power generators resulting in a decrease in the use of coal could result in lower coal production by our lessees, which would reduce our coal royalty revenues.
- Current conditions in the coal industry may make it difficult for our lessees to extend existing contracts or enter into supply contracts with terms of one year or more, which could adversely affect the stability and profitability of their operations and adversely affect our coal royalty revenues.
- Competition within the coal industry may adversely affect the ability of our lessees to sell coal, and excess production capacity in the industry could put downward pressure on coal prices.
- Lessees could satisfy obligations to their customers with coal from properties other than ours, depriving us of the ability to receive amounts in excess of minimum royalty payments.
- Fluctuations in transportation costs and the availability or reliability of transportation could reduce the production of coal mined from our properties.
- Our reserve estimates depend on many assumptions that may be inaccurate, which could materially adversely affect the quantities and value of our reserves.
- Our lessees' work forces could become increasingly unionized in the future.
- We may be exposed to changes in interest rates because our current borrowings under our revolving credit facility may be subject to variable interest rates based upon LIBOR.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, which includes adverse changes in commodity prices and interest rates as discussed below:
COMMODITY PRICE RISK
We are dependent upon the efficient marketing of the coal mined by our lessees. Our lessees sell the coal under various long-term and short-term contracts as well as on the spot market. In previous years, a large portion of these sales were under long term contracts. Current conditions in the coal industry may make it difficult for our lessees to extend existing contracts or enter into supply contracts with terms of one year or more. Our lessees' failure to negotiate long-term contracts could adversely affect the stability and profitability of our lessees' operations and adversely affect our coal royalty revenues. As more coal is sold on the spot market, coal royalty revenues may become more volatile due to fluctuations in spot coal prices.
INTEREST RATE RISK
Our exposure to changes in interest rates results from our current borrowings under our revolving credit facility, which may be subject to variable interest rates based upon LIBOR. To date, we have not deemed it necessary to enter into any financial instruments to hedge our interest rate risk because interest rates have remained at historically low levels. Management intends to monitor interest rates and may enter into interest rate instruments to protect against increased borrowing costs. At December 31, 2002, the Partnership had outstanding $57.5 million in variable interest rate debt. If LIBOR rates were to increase by 100 basis points, annual interest expense would increase by $575,000, assuming the same principal amount remained outstanding during the year.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NATURAL RESOURCE PARTNERS L. P.
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Partners of Natural Resource Partners L. P.
We have audited the accompanying consolidated balance sheet of Natural Resource Partners L. P. as of December 31, 2002, and the related consolidated statements of income, partners' capital and cash flows for the period from commencement of operations (October 17, 2002) through December 31, 2002. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Natural Resource Partners L. P. at December 31, 2002 and the consolidated results of its operations and its cash flows for the period from commencement of operations (October 17, 2002) through December 31, 2002, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
February 11, 2003 Houston, Texas
NATURAL RESOURCE PARTNERS L. P.
CONSOLIDATED BALANCE SHEET
The accompanying notes are an integral part of these financial statements.
NATURAL RESOURCE PARTNERS L. P.
CONSOLIDATED STATEMENT OF INCOME FROM COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002) THROUGH DECEMBER 31, 2002 (IN THOUSANDS, EXCEPT PER UNIT DATA)
The accompanying notes are an integral part of these financial statements.
NATURAL RESOURCE PARTNERS L. P.
STATEMENT OF PARTNERS' CAPITAL (IN THOUSANDS, EXCEPT UNIT DATA)
The accompanying notes are an integral part of these financial statements.
NATURAL RESOURCE PARTNERS L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002) THROUGH DECEMBER 31, 2002 (IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
Natural Resource Partners L.P. (the "Partnership"), a Delaware limited partnership, was formed in April 2002 to own and manage certain coal royalty producing properties contributed to the Partnership by Western Pocahontas Properties Limited Partnership, ("WPP"), Great Northern Properties Limited Partnership, ("GNP"), New Gauley Coal Corporation, ("NGCC") and Arch Coal, Inc. (collectively "predecessors" or "predecessor companies"). The predecessor companies contributed assets to the Partnership on October 17, 2002. There were no operations in the Partnership prior to the contribution if the assets from the predecessor companies. Therefore, the statements of income, partners' capital and cash flows are presented from the date of commencement of operations (October 17, 2002) through December 31, 2002.
The chief executive officer of the Partnership's managing general partner controls the general partners of WPP and GNP and is the controlling shareholder of NGCC. He also controls the general partner of the Partnership. In accordance with EITF 87-19, "Change of Accounting Basis in Master Limited Partnership Transactions," the assets of WPP, GNP and NGCC were contributed to the Partnership at historical costs. The assets contributed by Arch Coal, Inc., which consisted solely of land and coal reserves were recorded at their fair values.
The Partnership engages principally in the business of owning and managing coal properties in the three major coal-producing regions of the United States: Appalachia, the Illinois Basin and the Western United States. As of December 31, 2002, the Partnership controlled approximately 1.23 billion tons of proven and probable coal reserves in eight states. The Partnership does not operate any mines. The Partnership leases coal reserves, through its wholly owned subsidiary, NRP (Operating) LLC, to experienced mine operators under long-term leases that grant the operators the right to mine the Partnership's coal reserves in exchange for royalty payments. The Partnership's lessees are generally required to make payments to the Partnership based on the higher of a percentage of the gross sales price or a fixed price per ton of coal sold, in addition to a minimum payment.
The Partnership completed its initial public offering of 2,598,750 common units at a price of $20.00 per unit on October 17, 2002 and received aggregate gross proceeds of $52.0 million. Since the underwriters did not exercise their over-allotment option, GNP and NGCC purchased an additional 75,503 common units at a price of $20.00 per unit for aggregate gross proceeds of $1.5 million, resulting in aggregate gross proceeds of $53.5 million. In addition, WPP, GNP, NGCC and Arch contributed $0.9 million to cover transaction costs and expenses in excess of those covered by proceeds of the public offering.
Underwriting fees in connection with the offering were $3.6 million. The Partnership's net proceeds from the offering, the purchase of common units by GNP and NGCC and the contribution by WPP, GNP, NGCC and Arch Coal totaled $51.8 million. The Partnership used approximately $46.5 million of the proceeds to repay debt that was assumed from WPP, GNP and NGCC, $1.3 million to cover fees related to its revolving credit facility and $3.0 million to cover expenses related to its initial public offering, which consisted primarily of legal, accounting and other professional service costs. The remaining $1.0 million of proceeds was used to establish working capital necessary for the operation of the Partnership's business.
Concurrent with the sale of common units to the public, Arch Coal, Inc. sold 1,901,250 common units to the public at a price of $20.00 per unit resulting in aggregate gross proceeds of $38 million and net proceeds of $35.4 million. In addition, Arch Coal Inc. contributed $0.4 million and $0.6 million to the Partnership to establish working capital and cover fees related to the Partnership's revolving credit facility.
The general partner of the Partnership is NRP (GP) LP, a Delaware limited partnership, whose general partner is GP Natural Resource Partners LLC, a Delaware limited liability company.
NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of Natural Resource Partners L.P. and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated.
USE OF ESTIMATES
Preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Land and coal property are carried at historical cost for properties contributed to the Partnership by WPP, GNP and NGCC. The coal properties contributed by Arch Coal Inc. have been accounted for using purchase accounting based on their estimated fair value. Coal properties are depleted on a unit-of-production basis by lease, based upon coal mined in relation to the net cost of the mineral properties and estimated proven and probable tonnage therein.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value.
CONCENTRATION OF CREDIT RISK
Substantially all of the Partnership's accounts receivable result from amounts due from third-party companies in the coal industry. This concentration of customers may affect the Partnership's overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions. Receivables are generally not collateralized. Historical credit losses incurred by the Partnership on receivables have not been significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying value of these financial instruments approximate fair value, due to their short-term nature or variable interest rates that reflect market rates.
DEFERRED FINANCING COSTS
Deferred financing costs consists of legal and other costs related to the issuance of the Partnership's revolving credit facility. These costs are amortized over the term of the facility.
REVENUES
Coal Royalties. Coal royalty revenues are recognized on the basis of tons of coal sold by the Partnership's lessees and the corresponding revenue from those sales. Generally, the coal lessees make payments to the Partnership based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum annual or quarterly payments.
NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Minimum Royalties. Most of the Partnership's lessees must make minimum annual or quarterly payments which are generally recoupable over certain time periods. These minimum payments are recorded as deferred revenue. The deferred revenue attributable to the minimum payment is recognized as coal royalty revenues either when the lessee recoups the minimum payment through production or when the period during which the lessee is allowed to recoup the minimum payment expires.
PROPERTY TAXES
The Partnership is responsible for paying property taxes on the properties it owns. The lessees are typically responsible for reimbursing the Partnership for property taxes on the leased properties. The reimbursement of property taxes is included in revenues in the statement of income as property tax.
INCOME TAXES
The Partnership is not a taxpaying entity, as the individual partners are responsible for reporting their pro rata share of the Partnership's taxable income or loss. In the event of an examination of the Partnership's tax return, the tax liability of the partners could be changed if an adjustment in the Partnership's income is ultimately sustained by the taxing authorities.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred with the associated asset retirement cost being capitalized as a part of the carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure requirements that provide a description of asset retirement obligations and a reconciliation of changes in the components of those obligations. Adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on the Partnership's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The objective of SFAS No. 144 is to establish one accounting model for long-lived assets to be disposed of by sale as well as resolve implementation issues related to SFAS No. 121. The adoption of SFAS No. 144, effective January 1, 2002, did not have a material impact on the Partnership's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. The provisions of this Statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Adoption of SFAS No. 145 on January 1, 2003 did not have a material impact on the Partnership's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes EITF No. 94-3, "Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal
NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
activities that are initiated after December 31, 2002. The adoption of this standard is not expected to have a significant impact on the Partnership's financial statements.
3. ACQUISITION
On December 4, 2002, the Partnership purchased, through a wholly owned subsidiary, the land and mineral rights to approximately 120 million tons of coal and 25,000 acres of surface land for $57.5 million, including transaction costs, from certain subsidiaries of El Paso Corporation. El Paso Corporation retained an overriding royalty interest in certain assets. The acquisition was funded with the Partnership's revolving credit facility.
The factors used in determining the fair market value of the assets included, but were not limited to, discounted future net cash flows, the quality of the reserves, the probability of continued coal mining on the property, and marketability of the coal.
The results of operations of this transaction were included in the Partnership's consolidated financial statements since December 4, 2002.
4. PROPERTY AND EQUIPMENT
Property and equipment includes:
5. REVOLVING CREDIT FACILITY
At December 31, 2002, the Partnership had borrowed $57.5 million on its $100 million revolving credit facility. The Partnership has a $100 million unsecured revolving credit facility, which matures in October 2005, when all principal payments are due in full. The revolving credit facility allows the Partnership to elect the interest rate at (i) LIBOR plus an applicable margin ranging from 1.25% to 1.75%, based on certain financial data or (ii) the higher of the federal funds rate plus 0.50% or the prime rate as announced by the agent bank. The revolving credit facility bore interest at a rate of 2.72% at December 31, 2002. The revolving credit facility includes a $12 million distribution loan sublimit that can be used for quarterly distributions. The financial covenants require the Partnership to maintain a ratio of consolidated total indebtedness to consolidated EBITDA (as defined in the credit agreement) that does not exceed 2.5 to 1.0 and a ratio of consolidated EBITDA to consolidated interest expense of at least 4.0 to 1.0. The Partnership is currently in compliance with all of the covenants of the revolving credit facility.
6. RELATED PARTY TRANSACTIONS
Quintana Minerals Corporation, a company controlled by Corbin J. Robertson, Jr., Chairman and CEO of the Partnership's managing general partner, provided certain administrative services to the Partnership and charged it for direct costs related to the administrative services. The total expenses charged to the Partnership under this arrangement were $135,000 for the period from commencement of operations on October 17 to
NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2002. These costs are reflected in the general and administrative expenses in the accompanying statements of income.
Western Pocahontas Properties Limited Partnership provides certain administrative services for the Partnership and allocated a portion of its overhead in 2002. The total expenses charged to the Partnership under this arrangement were $256,000 for the period from commencement of operations on October 17 to December 31, 2002. These costs are reflected in the general and administrative expenses in the accompanying statements of income.
At December 31, 2002, the Partnership had accounts receivable from affiliates of $1.4 million due from Arch Coal, Inc. which is primarily made up of $436,000 in minimum royalty payments received by Arch Coal, Inc. that were due to the Partnership and a $839,000 advance rental payment from the Pardee lease. The Partnership also had accounts payable to affiliates of $667,000, which includes overhead reimbursements to Quintana Minerals Corporation and Western Pocahontas Properties of $135,000 and $256,000, respectively, as well as $276,000 for coal royalties received by Natural Resource Partners from lessees that was due to Western Pocahontas Properties.
7. COMMITMENTS AND CONTINGENCIES
LEGAL
The Partnership is involved, from time to time, in various legal proceedings arising in the ordinary course of business. While the ultimate results of these proceedings cannot be predicted with certainty, Partnership management believes these claims will not have a material effect on the Partnership's financial position, liquidity or operations.
Environmental Compliance
The operations conducted on the Partnership's properties by its lessees are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. As owner of surface interests in some properties, we may be liable for certain environmental conditions occurring at the surface properties. The terms of substantially all of the Partnership's coal leases require the lessee to comply with all applicable laws and regulations, including environmental laws and regulations. Lessees post reclamation bonds assuring that reclamation will be completed as required by the relevant permit, and substantially all of the leases require the lessee to indemnify the Partnership against, among other things, environmental liabilities. Some of these indemnifications survive the termination of the lease. Because Natural Resource Partners L. P. has no employees, Western Pocahontas employees make regular visits to the mines to ensure compliance with lease terms, but the duty to comply with all regulations rests with the lessees. Management believes that the Partnership's lessees will be able to comply with existing regulations and does not expect any lessee's failure to comply with environmental laws and regulations to have a material impact on its financial condition or results of operations. The Partnership has neither incurred, nor is aware of, any material environmental charges imposed on it related to its properties for the period ended December 31, 2002. The Partnership is not associated with any environmental contamination that may require remediation costs. However, lessees do, from time to time, conduct reclamation work on the properties under lease to them. Because the Partnership is not the permittee of the mines being reclaimed, it is not responsible for the costs associated with these reclamation operations. However, in the event any of the Partnership's lessees are unable to complete its reclamation obligations and their bonding company likewise fails to meet the obligations or provide money to the state to perform the reclamation, the Partnership could be held liable for these costs. The Partnership is also indemnified by WPP, GNP, NGCC and Arch Coal Inc., jointly and severally, for three years after the closing of the initial public offering against environmental and tax liabilities attributable to the ownership and operation of the assets contributed to the Partnership prior to the closing. The environmental indemnity is limited to a maximum of $10.0 million.
NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. MAJOR LESSEES
The Partnership depends on a few lessees for a significant portion of its revenues. Revenues from major lessees that exceed ten percent of total revenues are as follows:
9. INCENTIVE PLAN
Prior to the Partnership's initial public offering, GP Natural Resource Partners LLC, the general partner of NRP (GP) LP, the Partnership's general partner, adopted the Natural Resource Partners Long-Term Incentive Plan (the "Plan") for employees and directors of GP Natural Resource Partners LLC and its affiliates who perform services for the Partnership. The Plan provides for the granting of restricted units and unit options. The Plan permits the granting of awards covering a number of common units equal to three percent of the number of common units outstanding immediately following the Partnership's initial public offering of common units. The Plan is administered by the compensation committee of GP Natural Resource Partners LLC's board of directors. Subject to the rules of the exchange upon which the common units are listed at the time, GP Natural Resource Partners LLC's board of directors or the compensation committee also has the right to alter or amend the Plan or any part of the Plan from time to time, including increasing the number of units that may be granted. Except upon the occurrence of unusual or nonrecurring events, no change in any outstanding grant may be made that would materially reduce the benefit intended to be made available to a participant without the consent of the participant.
A restricted unit is a "phantom" unit that entitles the grantee to receive a common unit upon the vesting of the phantom unit or, in the discretion of the compensation committee, its fair market value in cash. The compensation committee may make grants under the Plan to employees and directors containing such terms as the compensation committee shall determine. The compensation committee will determine the period over which the restricted units granted to employees and directors will vest. The committee may provide for an acceleration of vesting based upon the achievement of specified financial objectives. In addition, the restricted units will vest upon a change in control of the Partnership, the general partner, or GP Natural Resource Partners LLC.
If a grantee's employment or membership on the board of directors terminates for any reason, the grantee's restricted units will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise. Common units to be delivered upon the vesting of restricted units may be common units acquired by GP Natural Resource Partners LLC in the open market, common units already owned by GP Natural Resource Partners LLC, common units acquired by GP Natural Resource Partners LLC directly from the Partnership, from another affiliate or any other person or entity or any combination thereof. GP Natural Resource Partners LLC will be entitled to reimbursement by the Partnership for the cost incurred in acquiring common units.
Unit options under the Plan will have an exercise price that may not be less than the fair market value of the units on the date of grant. In general, units will become exercisable over a period determined by the compensation committee. The compensation committee may provide for an acceleration of vesting based upon
NATURAL RESOURCE PARTNERS L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the achievement of specified financial objectives. In addition, the units will become exercisable upon a change in control as described for restricted units above. If a grantee's employment or membership on the board of directors terminates for any reason, the grantee's options will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise. Upon exercise of a unit option, GP Natural Resource Partners LLC will acquire common units as describe above for restricted units.
The general partner adopted the Natural Resource Partners Annual Incentive Compensation Plan (the "Compensation Plan") in October 2002. The Compensation Plan is designed to enhance the performance of GP Natural Resource Partners LLC's and its affiliates' key employees by rewarding them with cash awards for achieving annual financial and operational performance objectives. The compensation committee in its discretion may determine individual participants and payments, if any, for each year. The board of directors of GP Natural Resource Partners LLC may amend or change the Compensation Plan at any time. The Partnership will reimburse GP Natural Resource Partners LLC for payments and costs incurred under the Compensation Plan.
10. SUBSEQUENT EVENT
CASH DISTRIBUTIONS
On January 21, 2003, the Partnership declared a cash distribution of $0.4234 per unit. Total distributions of $9.8 million were paid on February 14, 2003.
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Partners of Western Pocahontas Properties Limited Partnership
We have audited the accompanying balance sheet of Western Pocahontas Properties Limited Partnership as of December 31, 2001, and the related statements of income, changes in partners' capital and cash flows for each of the two years in the period ended December 31, 2001 and the period from January 1, 2002 through October 16, 2002. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Western Pocahontas Properties Limited Partnership at December 31, 2001, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2001 and the period from January 1, 2002 through October 16, 2002, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
February 7, 2003 Houston, Texas
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
BALANCE SHEET
The accompanying notes are an integral part of these financial statements.
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF INCOME
The accompanying notes are an integral part of these financial statements.
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
The accompanying notes are an integral part of these financial statements.
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
Western Pocahontas Properties Limited Partnership ("the Partnership"), a Delaware limited partnership, was formed in 1986 to own and manage land and mineral rights and timber located in West Virginia, Kentucky, Alabama, Maryland and Indiana. Western Pocahontas Corporation ("WPC"), a Texas corporation, serves as the general partner. All items of income and loss of the Partnership are allocated 1% to the general partner and 99% to the limited partners.
The Partnership enters into leases with various third-party operators for the right to mine coal reserves and harvest timber on the Partnership's land in exchange for royalty payments. Generally, the coal lessees make payments to the Partnership based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum annual or quarterly payments. The timber lessees make payments to the Partnership based on pre-determined rates per board foot harvested.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
Preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash represents cash and cash equivalents placed in a defeasance trust and are pledged to the Partnership's lender for debt service requirements.
PROPERTY AND EQUIPMENT
Land, coal property and timberlands are carried at cost and include expenditures for additions and improvements, such as roads and land improvements, which substantially increase the productive lives of the existing assets. Maintenance and repair costs are expensed as incurred. Coal properties are depleted on a unit-of-production basis by lease, based upon coal mined in relation to the net cost of the mineral properties and estimated proven and probable tonnage therein. Timberlands are depleted based on the volume of timber harvested in relation to the amount of estimated merchantable timber volume.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value.
CONCENTRATION OF CREDIT RISK
Substantially all of the Partnership's accounts receivable result from amounts due from third-party companies in the coal industry. This concentration of customers may impact the Partnership's overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions. Receivables are generally not collateralized. Historical credit losses incurred by the Partnership on receivables have not been significant.
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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying value of these financial instruments approximate fair value. Fair values of debt instruments were determined using discounted cash flow techniques.
DEFERRED FINANCING COSTS
Deferred financing costs consists of legal and other costs related to the issuance of the Partnership's long-term note payable. These costs are amortized over the term of the note payable.
REVENUES
Coal Royalties. Coal royalty revenues are recognized on the basis of tons of coal sold by the Partnership's lessees and the corresponding revenue from those sales. Generally, the coal lessees make payments to the Partnership based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum annual or quarterly payments.
Timber Royalties. Timber is sold on a contract basis where independent contractors harvest and sell the timber. Timber revenues are recognized when the timber has been harvested by the independent contractors.
Minimum Royalties. Most of the Partnership's lessees must make minimum annual or quarterly payments which are generally recoupable over certain time periods. These minimum payments are recorded as deferred revenue. The deferred revenue attributable to the minimum payment is recognized as coal royalty revenues either when the lessee recoups the minimum payment through production or when the period during which the lessee is allowed to recoup the minimum payment expires.
PROPERTY TAXES
The Partnership is responsible for paying property taxes on the properties it owns. The lessees are responsible for reimbursing the Partnership for property taxes on the leased properties. The reimbursement of property taxes is included in revenues in the statement of income as property tax.
INCOME TAXES
The Partnership is not a taxpaying entity, as the individual partners are responsible for reporting their pro-rata share of the Partnership's taxable income or loss. In the event of an examination of the Partnership's tax return, the tax liability of the partners could be changed if an adjustment in the Partnership's income is ultimately sustained by the taxing authorities.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates pooling-of-interests accounting and requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. With regard to intangible assets, SFAS No. 141 states that intangible assets acquired in a business combination subsequent to June 30, 2001 should be recognized separately if the benefit of the intangible asset is obtained through contractual rights or if the intangible asset can be sold, transferred, licensed, rented to or exchanged, without regard to the acquirer's intent. The adoption of SFAS No. 141 did not have a material impact on the 2001 or 2002 financial statements. SFAS No. 142 discontinues goodwill amortization; rather, goodwill will be subject to at least an annual fair-value based impairment test. The adoption of SFAS No. 142 on January 1, 2002 did not have a material impact on our financial statements.
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred with the associated asset retirement cost being capitalized as a part of the carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure requirements that provide a description of asset retirement obligations and a reconciliation of changes in the components of those obligations. The adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on our financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The objective of SFAS No. 144 is to establish one accounting model for long-lived assets to be disposed of by sale as well as resolve implementation issues related to SFAS No. 121. The adoption of SFAS No. 144 effective January 1, 2002 did not have a material impact on our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. The provisions of this statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Adoption of SFAS No. 145 on January 1, 2003 did not have a material impact on our financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes EITF No. 94-3, "Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard did not have a significant impact on our financial statements.
3. REVERSIONARY INTEREST
The previous owner of the Partnership's coal and timber properties (CSX Corporation and certain of its affiliates, or "CSX") retained a reversionary interest in those properties whereby it receives either a 25% or 28% interest in the properties and the net revenues, as defined, from the properties after July 1, 2001, and in the net proceeds, as defined, from any property sale occurring prior to July 1, 2001.
In 2000, the Partnership sold 1,391 acres of surface land to a third party and paid $1.3 million to CSX related to its reversionary interest in the property. In 2001, the Partnership sold 1,928 acres of surface land to various third parties and paid $936,000 to CSX related to its reversionary interest in these properties (see Note 4).
In December 2001, the Partnership purchased from CSX its reversionary interest in the Partnership's Kentucky properties for $2.0 million in cash and a note payable of $7.9 million (see Note 5). The Partnership allocated $8.8 million to coal and timber properties and $1.1 million to a reduction in the reversionary interest payable for the six months ended December 31, 2001.
In March 2002, the Partnership purchased from CSX its reversionary interest in the remaining assets subject to the reversionary interest. The Partnership allocated $35 million to coal and timber properties and $1.4 million to a reduction in the reversionary interest payable for the period ended October 16, 2002. The
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
purchase was financed with a $45.0 million loan and a portion of the proceeds were used to retire the $7.9 million note that the Partnership issued in December 2001 as part of the consideration for the purchase of the reversionary interest in Kentucky (see Note 5).
4. PROPERTY AND EQUIPMENT
Property and equipment includes:
In 2000, the Partnership sold 1,391 acres of surface land and recognized a gain of $4.0 million after considering CSX's reversionary interest (see Note 3). In connection with the sale, the Partnership was required to place $1.9 million in its debt service account (see Note 5).
In 2001, the Partnership sold 1,928 acres of surface land and recognized a gain of $3.1 million after considering CSX's reversionary interest (see Note 3). In connection with the sale, the Partnership was required to place $2.1 million in its debt service account (see Note 5).
As explained in Note 3, the Partnership completed the acquisition of the reversionary interest from CSX in March 2002.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
The notes are collateralized by a mortgage on the Partnership's properties, a security interest in accounts receivable, other assets and the partners' interest in the Partnership and the common stock of WPC. The Partnership is required to maintain an aggregate minimum balance of $3.0 million in cash and cash equivalents, which is pledged to its lenders. The Partnership is allowed to make cash distributions to its partners provided no event of default exists, as defined, and the aggregate cash balance is not reduced below $4.0 million by any distribution.
The Partnership is required to contribute cash or cash equivalents to a debt service account when the Partnership receives royalties related to coal tonnage or timber harvested greater than a predetermined amount or sells certain properties. Pursuant to these provisions, the Partnership contributed $2.1 million and $2.4 million to the debt service account for the years ended December 31, 2000 and 2001, respectively.
On December 10, 2001, the Partnership issued a $7.9 million non-interest bearing note payable to an affiliate of CSX in conjunction with the purchase of CSX's reversionary interest in properties located in
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Kentucky (see Note 3), and is subject to a Purchase and Sale Agreement between the CSX affiliate and the Partnership. The note was due and paid-off in March 2002. A discount of $152,000 was imputed for the period ended December 31, 2001 (see Note 3).
6. RELATED PARTY TRANSACTIONS
A company controlled by the owner of WPC provides certain administrative services to the Partnership and charges the Partnership for the direct costs related to the administrative services. The total expenses charged to the Partnership under this arrangement were approximately $500,000 for each of the years ended December 31, 2000 and 2001, and $330,000 for the period from January 1, 2002 through October 16, 2002. These costs are reflected in the general and administrative expenses in the accompanying statements of income.
The Partnership has a management contract to provide certain management, engineering and accounting services to Great Northern Properties Limited Partnership ("GNP"), a limited partnership which has certain common ownership with the Partnership. The contract provides for a $250,000 annual fee, which is intended to reimburse the Partnership for its expense. This fee is presented as other revenue in the accompanying statement of income. The contract may be canceled upon 90 days advance notice by GNP.
7. EMPLOYEE BENEFIT PLANS
Substantially all employees of the Partnership are covered by a noncontributory retirement plan and a defined contribution thrift plan. Under the retirement plan, the Partnership contributes annually an amount equal to one-twelfth of each participant's base compensation. Participants vest in the retirement plan based on the following:
A participant is fully vested upon termination of employment as a result of death, disability, reduction of labor force or retirement on or after age 55. For each of the years ended December 31, 2000 and 2001, the Partnership contributed approximately $90,000 to the retirement plan. No contribution was required during the period from January 1, 2002 through October 16, 2002.
Under the thrift plan, participants may contribute up to 12% of their base compensation, subject to a maximum set by IRS regulations, on a tax-deferred basis. The Partnership makes matching contributions equal to 100% of each participant's contributions to the extent of 3% of base compensation and 50% of each participant's contributions between 3% and 6% of base compensation. The Partnership's contribution is 40% vested after two years of service with the vested interest increasing by 20% for each additional year of service. A participant is fully vested as to his own contributions and is fully vested as to the Partnership's contributions upon termination of employment as a result of death, reduction of labor force, disability or retirement on or after age 55. For each of the years ended December 31, 2000 and 2001, the Partnership made matching contributions in an amount of approximately $50,000, and $28,277 during the period from January 1, 2002 through October 16, 2002.
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
LEGAL
The Partnership is involved, from time to time, in various legal proceedings arising in the ordinary course of business. While the ultimate results of these proceedings cannot be predicted with certainty, Partnership management believes these claims will not have a material effect on the Partnership's financial position, liquidity or operations.
ENVIRONMENTAL COMPLIANCE
The operations conducted on Partnership properties by its lessees are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. As owner of surface interests in some properties, the Partnership may be liable for certain environmental conditions occurring at the surface properties. The terms of substantially all of the Partnership's coal leases require the lessee to comply with all applicable laws and regulations, including environmental. The lessees obtain reclamation bonds and substantially all of the leases require the lessee to indemnify the Partnership against, among other things, environmental liabilities. Some of these indemnifications survive the termination of the lease. Employees of the Partnership regularly visit the mines to ensure compliance with lease terms, but the duty to comply with all regulations rests with the lessees. Management believes that the Partnership's lessees will be able to comply with existing regulations and does not expect any material impact on its financial condition or results of operations. The Partnership has neither incurred, nor is aware of, any material environmental charges imposed on it related to its properties for the years ended December 31, 2001, 2002 or the period ended October 16, 2002. The Partnership is not associated with any environmental contamination that may require remediation costs. However, our lessees do, from time to time, conduct reclamation work on our properties under lease to them. Because the Partnership is not the permittee of the mines being reclaimed, it is not responsible for the costs associated with these reclamation operations. Each of our lessees is required to post a bond assuring that the reclamation will be completed as required by the permit. However, in the event any of our lessees is unable to complete the reclamation obligations and their bonding company likewise fails to meet the obligations or provide money to the state to perform the reclamation, the Partnership could be held liable for these costs.
LEASE COMMITMENTS AND GUARANTEES
The total rental and lease expenses for each of the years ended December 31, 2000 and 2001 were approximately $167,000 and $142,000, respectively, and $114,000 for the period from January 1, 2002 through October 16, 2002. The minimum rental payments for the next five years are as follows in thousands:
The Partnership guaranteed a $2.0 million note payable of New Gauley Coal Corporation, the outstanding balance of which totaled approximately $1.7 million and $1.6 million at December 31, 2001 and October 16, 2002, respectively. New Gauley Coal Corporation was formerly wholly owned by the Partnership.
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. MAJOR LESSEES
The Partnership depends on a few lessees for a significant portion of its revenues. Revenues from major lessees that exceed ten percent of total revenues are as follows:
10. SEGMENT INFORMATION
Segment information has been provided in accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Partnership's reportable segments are as follows:
Coal Royalty. The coal royalty segment is engaged in managing the Partnership's coal properties.
Timber Royalty. The Partnership's timber segment is engaged in the selling of standing timber on the Partnership's properties.
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of certain financial information relating to the Partnership's segments:
11. SUBSEQUENT EVENT
In connection with the formation of Natural Resource Partners L.P. and its public offering of limited partnership units, the Partnership transferred certain coal royalty producing properties that are currently under
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
lease to coal mine operators to Natural Resource Partners L.P. on October 17, 2002, at historical cost. The Partnership also transferred a portion of its deferred revenue and long-term debt to Natural Resource Partners L.P. The Partnership retained a coal reserve property that is leased to a third party that is experiencing permitting problems. Additionally, the Partnership retained unleased coal reserve properties, surface land and timberlands.
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Partners of Great Northern Properties Limited Partnership
We have audited the accompanying balance sheet of Great Northern Properties Limited Partnership as of December 31, 2001, and the related statements of income, changes in partners' capital and cash flows for each of the two years in the period ended December 31, 2001, and the period from January 1, 2002 through October 16, 2002. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Great Northern Properties Limited Partnership at December 31, 2001, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2001, and the period from January 1, 2002 through October 16, 2002, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
February 7, 2003 Houston, Texas
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
BALANCE SHEET
The accompanying notes are an integral part of these financial statements.
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF INCOME
The accompanying notes are an integral part of these financial statements.
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
The accompanying notes are an integral part of these financial statements.
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
Great Northern Properties Limited Partnership ("the Partnership"), a Delaware limited partnership, was formed in 1992 to own and manage land and mineral rights located in Montana, North Dakota, Wyoming, Illinois and Washington. GNP Management Corporation ("GNP"), a Delaware corporation, serves as its general partner. All items of income and loss of the Partnership are allocated 1% to the general partner and 99% to the limited partners. In 1999, a limited partner's interest in the Partnership was redeemed by the partners for $1,000.
The Partnership enters into leases with various coal mine operators for the right to mine coal reserves on the Partnership's land in exchange for royalty payments. Generally, the lessees make payments to the Partnership based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum annual or quarterly payments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
Preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash represents cash and cash equivalents placed in a debt service account and is pledged to the Partnership's lender for debt service requirements.
PROPERTY AND EQUIPMENT
Land and coal property are carried at cost and include expenditures for additions and improvements, such as roads and land improvements, which substantially increase the productive lives of the existing assets. Maintenance and repair costs are expensed as incurred. Coal properties are depleted on a unit-of-production basis by lease, based upon coal mined in relation to the net cost of the mineral properties and estimated proven and probable tonnage therein.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value.
CONCENTRATION OF CREDIT RISK
Substantially all of the Partnership's accounts receivable result from amounts due from third-party companies in the coal industry. Coal royalties are principally received from two lessees (see Note 8). This concentration of customers may impact the Partnership's overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions. Receivables are generally not collateralized. Historical credit losses incurred by the Partnership on receivables have not been significant.
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying value of these financial instruments approximate fair value, due to their short-term nature or variable interest rates that reflect current market rates.
DEFERRED FINANCING COSTS
Deferred financing costs consist of legal and other costs related to the issuance of the Partnership's long-term debt. These costs are amortized over the term of the debt.
REVENUES
Coal Royalties. Coal royalty revenues are recognized on the basis of tons of coal sold by the Partnership's lessees and the corresponding revenue from those sales. Generally, the lessees make payments to the Partnership based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum annual or quarterly payments.
Lease and Easement Income. Lease and easement income is generated through contracts with third parties for use of the Partnership's land for transportation of coal mined on adjacent properties, agricultural grazing and recreational uses.
Minimum Royalties. Most of the Partnership's lessees must make minimum annual or quarterly payments which are generally recoupable over certain time periods. These minimum payments are recorded as deferred revenue. The deferred revenue attributable to the minimum payment is recognized as coal royalty revenues either when the lessee recoups the minimum payment through production or when the period during which the lessee is allowed to recoup the minimum payment expires.
PROPERTY TAXES
The Partnership is responsible for paying property taxes on the properties it owns. The lessees are responsible for reimbursing the Partnership for property taxes on the leased properties. The reimbursement of property taxes is included in revenues in the statement of income as property tax.
INCOME TAXES
The Partnership is not a taxpaying entity, as the individual partners are responsible for reporting their pro rata share of the Partnership's taxable income or loss. In the event of an examination of the Partnership's tax return, the tax liability of the partners could be changed if an adjustment in the Partnership's income is ultimately sustained by the taxing authorities.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates pooling-of-interests accounting and requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. With regard to intangible assets, SFAS No. 141 states that intangible assets acquired in a business combination subsequent to June 30, 2001 should be recognized separately if the benefit of the intangible asset is obtained through contractual rights or if the intangible asset can be sold, transferred, licensed, rented to or exchanged, without regard to the acquirer's intent. The adoption of SFAS No. 141 did not have a material impact on the 2001 or 2002 financial statements. SFAS No. 142 discontinues goodwill amortization; rather, goodwill will be subject to at least an annual fair-value based impairment test. The adoption of SFAS No. 142 on January 1, 2002 did not have a material impact on our financial statements.
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred with the associated asset retirement cost being capitalized as a part of the carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure requirements that provide a description of asset retirement obligations and a reconciliation of changes in the components of those obligations. The adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on our financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The objective of SFAS No. 144 is to establish one accounting model for long-lived assets to be disposed of by sale as well as resolve implementation issues related to SFAS No. 121. The adoption of SFAS No. 144 effective January 1, 2002 did not have a material impact on our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. The provisions of this statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Adoption of SFAS No. 145 on January 1, 2003 did not have a material impact on our financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes EITF No. 94-3, "Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard did not have a significant impact on our financial statements.
3. NONPARTICIPATING ROYALTY INTEREST
The previous owner of the Partnership's coal properties, Meridian Minerals Company ("Meridian"), a subsidiary of Burlington Resources, Inc., retained a nonparticipating royalty interest in certain properties, which were not leased at the time of acquisition, at a royalty rate ranging from 2% to 5%. Such properties are presently not leased. In the event any of the properties subject to the nonparticipating royalty interest are sold to a third party, Meridian will receive a certain percentage of the selling price as defined in the asset purchase agreement.
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment includes:
In 2001, the Partnership sold 3,194 acres of surface land in Montana and recognized a gain of $439,000.
5. LONG-TERM DEBT
Long-term debt consisted of the following:
The notes are collateralized by a mortgage on the Partnership's properties, a security interest in accounts receivable, other assets, the partners' interest in the Partnership and the debt service account established by the Partnership. The debt service account is funded quarterly with 100% of the Partnership's cash flows, defined as all cash revenue received by the Partnership, net of any operating expenses, management fees and up to a maximum of 20% of positive operating income to be used to pay the income tax liabilities of the partners as they relate to the Partnership properties, except that the Partnership may maintain $250,000 in cash for general operating purposes. The debt service account will be used to collateralize the notes until the balance of the account reaches a minimum of $10.0 million, after which the amount in excess of $10.0 million may be applied directly to the outstanding balance of the notes. The Partnership contributed $4.7 million and $2.2 million to the debt service account for the years ended December 31, 2000 and 2001, respectively, and $2.3 million for the period from January 1, 2002 through October 16, 2002.
6. RELATED PARTY TRANSACTIONS
The Partnership has a management contract to receive management, engineering and accounting services from Western Pocahontas Properties Limited Partnership ("WPP"), a limited partnership which has some common ownership with the Partnership. The contract provides for a $250,000 fee to be paid annually. Such amounts are reflected in general and administrative expenses in the statements of income. The contract may be canceled upon 90 days advance notice to the Partnership.
7. COMMITMENTS AND CONTINGENCIES
LEGAL
The Partnership is involved, from time to time, in various legal proceedings arising in the ordinary course of business. While the ultimate results of these proceedings cannot be predicted with certainty, Partnership
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
management believes these claims will not have a material effect on the Partnership's financial position, liquidity or operations.
ENVIRONMENTAL COMPLIANCE
The operations conducted on Partnership properties by its lessees are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. As owner of surface interests in some properties, the Partnership may be liable for certain environmental conditions occurring at the surface properties. The terms of substantially all of the Partnership's coal leases require the lessee to comply with all applicable laws and regulations, including environmental. The lessees obtain reclamation bonds and substantially all of the leases require the lessee to indemnify the Partnership against, among other things, environmental liabilities. Some of these indemnifications survive the termination of the lease. Employees regularly visit the mines to ensure compliance with lease terms, but the duty to comply with all regulations rests with the lessees. Management believes that the Partnership's lessees will be able to comply with existing regulations and does not expect any material impact on its financial condition or results of operations. The Partnership has neither incurred, nor is aware of, any material environmental charges imposed on it related to its properties for the years ended December 31, 2000 and 2001 and for the period ended October 16, 2002. The Partnership is not associated with any environmental contamination that may require remediation costs. However, our lessees do, from time to time, conduct reclamation work on our properties under lease to them. Because the Partnership is not the permittee of the mines being reclaimed, it is not responsible for the costs associated with these reclamation operations. Each of our lessees is required to post a bond assuring that the reclamation will be completed as required by the permit. However, in the event any of our lessees is unable to complete the reclamation obligations and their bonding company likewise fails to meet the obligations or provide money to the state to perform the reclamation, the Partnership could be held liable for these costs.
8. MAJOR LESSEES
The Partnership depends on a few lessees for a significant portion of its revenues. Revenues from major lessees that exceed ten percent of total revenues are as follows:
9. SUBSEQUENT EVENT
In connection with the formation of Natural Resource Partners L.P. and its public offering of limited partnership units, the Partnership transferred certain coal royalty producing properties that are currently under lease to coal mine operators to Natural Resource Partners L.P. on October 17, 2002, at historical cost. The Partnership also transferred a portion of its deferred revenue and long-term debt to Natural Resource Partners L.P. The Partnership retained unleased coal reserve properties and surface land.
NEW GAULEY COAL CORPORATION FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Stockholders of New Gauley Coal Corporation
We have audited the accompanying balance sheet of New Gauley Coal Corporation as of December 31, 2001, and the related statements of income, changes in stockholders' equity (deficit) and cash flows for each of the two years in the period ended December 31, 2001, and the period from January 1, 2002 through October 16, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of New Gauley Coal Corporation at December 31, 2001, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2001, and the period from January 1, 2002 through October 16, 2002, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
February 7, 2003 Houston, Texas
NEW GAULEY COAL CORPORATION
BALANCE SHEET
The accompanying notes are an integral part of these financial statements.
NEW GAULEY COAL CORPORATION
STATEMENTS OF INCOME
The accompanying notes are an integral part of these financial statements.
NEW GAULEY COAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
The accompanying notes are an integral part of these financial statements.
NEW GAULEY COAL CORPORATION
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
NEW GAULEY COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
New Gauley Coal Corporation ("the Company"), a West Virginia subchapter S corporation, was incorporated in 1918 to own and manage land and mineral rights. The Company owns property in Alabama and West Virginia.
The Company enters into leases with various coal mine operators for the right to mine coal reserves on the Company's land in exchange for royalty payments. Generally, the lessees make payments to the Company based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum annual or quarterly payments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
Preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Land and coal property are carried at cost and include expenditures for additions and improvements, such as roads and land improvements, which substantially increase the productive lives of the existing assets. Maintenance and repair costs are expensed as incurred. Coal properties are depleted on a unit-of-production basis by lease, based upon coal mined in relation to the net cost of the mineral properties and estimated proven and probable tonnage therein.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivable result from amounts due from third-party companies in the coal industry. Coal royalties are principally received from two lessees (see Note 8). This concentration of customers may impact the Company's overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in the economic or other conditions. Receivables are generally not collateralized. Historical credit losses incurred by the Company on receivables have not been significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The carrying value of these financial instruments approximate fair value. Fair values of debt instruments were determined using discounted cash flow techniques.
NEW GAULEY COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs consist of legal and other costs related to the issuance of the Company's long-term note payable. These costs are amortized over the term of the note payable.
REVENUES
Coal Royalties. Coal royalty revenues are recognized on the basis of tons of coal sold by the Company's lessees and the corresponding revenue from those sales. Generally, the lessees make payments to the Company based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum annual or quarterly payments.
Minimum Royalties. Most of the Company's lessees must make minimum annual or quarterly payments which are generally recoupable over certain time periods. These minimum payments are recorded as deferred revenue. The deferred revenue attributable to the minimum payment is recognized as coal royalty revenues either when the lessee recoups the minimum payment through production or when the period during which the lessee is allowed to recoup the minimum payment expires.
PROPERTY TAXES
The Company is responsible for paying property taxes on the properties it owns. One of the lessees is not responsible for reimbursing the Company for property taxes on the leased properties. The reimbursement of property taxes is included in revenues in the statement of income as property tax.
INCOME TAXES
The Company is not a taxpaying entity, as the individual stockholders are responsible for reporting their pro rata share of the Company's taxable income or loss. In the event of an examination of the shareholders' tax return, the tax liability of the shareholders could be changed if an adjustment in the shareholders' income is ultimately sustained by the taxing authorities.
NEW ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates pooling-of-interests accounting and requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. With regard to intangible assets, SFAS No. 141 states that intangible assets acquired in a business combination subsequent to June 30, 2001 should be recognized separately if the benefit of the intangible asset is obtained through contractual rights or if the intangible asset can be sold, transferred, licensed, rented to or exchanged, without regard to the acquirer's intent. The adoption of SFAS No. 141 did not have a material impact on the 2001 or 2002 financial statements. SFAS No. 142 discontinues goodwill amortization; rather, goodwill will be subject to at least an annual fair-value based impairment test. The adoption of SFAS No. 142 on January 1, 2002 did not have a material impact on our financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred with the associated asset retirement cost being capitalized as a part of the carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure requirements that provide a description of asset retirement obligations and a reconciliation of changes in the components of those obligations. The adoption of SFAS No. 143 on January 1, 2003 did not have a material impact on our financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-
NEW GAULEY COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of the Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The objective of SFAS No. 144 is to establish one accounting model for long-lived assets to be disposed of by sale as well as resolve implementation issues related to SFAS No. 121. The adoption of SFAS No. 144 effective January 1, 2002 did not have a material impact on our financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections." Among other things, SFAS No. 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. The provisions of this statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. Adoption of SFAS No. 145 on January 1, 2003 did not have a material impact on our financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes EITF No. 94-3, "Liability Recognition for Certain Employment Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires companies to record liabilities for costs associated with exit or disposal activities to be recognized only when the liability is incurred instead of at the date of commitment to an exit or disposal activity. Adoption of this standard is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard did not have a significant impact on our financial statements.
3. REVERSIONARY INTEREST
The previous owner of a portion of the Company's coal properties (CSX Corporation and certain of its affiliates, or "CSX") retained a reversionary interest in certain of those properties whereby it receives a 25% interest in the properties and the net revenues, as defined, from the properties after July 1, 2001, and in the net proceeds, as defined, of any property sale occurring prior to July 1, 2001. The reversionary interest only applies to the Company's Alabama property. In March 2002, Western Pocahontas Properties Limited Partnership (the "Partnership"), who formerly owned the Company, purchased the reversionary interest from CSX. As a result of this transaction, the Alabama property is now owned 25% by the Partnership and 75% by the Company.
4. NOTE RECEIVABLE
In June 2001, the Company loaned $200,000 to a third party. The agreement requires the third party to use the proceeds to develop certain coal properties it owned. In exchange for the loan, the Company will receive a royalty on coal produced from the developed properties. The total royalty received by the Company is limited to the greater of $200,000 plus 15% interest per year or $240,000. If no royalties are received by June 2005, the third party is required to repay the note with interest. Through the period ended October 16, 2002, the Company has accrued approximately $39,000 of interest income related to this note. This agreement may be terminated at any time by the third party by repaying the note under the terms described above.
NEW GAULEY COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment includes:
In January 2001, the Company sold property to a lessee and recognized a gain of $25,000.
6. LONG-TERM DEBT
Long-term debt consisted of the following:
The note is collateralized by a mortgage on the Company's properties, a security interest in accounts receivable, other assets, the stockholders' interest in the Company and the debt service account established by the Company. The notes are guaranteed by the Partnership.
The Company is required to contribute cash or cash equivalents to a debt service account when the Company receives royalties greater than a predetermined amount or sells qualified properties. The Company was not required to contribute to the debt service account for the years ended December 31, 2001, or the period ended October 16, 2002.
7. COMMITMENTS AND CONTINGENCIES
LEGAL
The Company is involved, from time to time, in various legal proceedings arising in the ordinary course of business. While the ultimate results of these proceedings cannot be predicted with certainty, Company management believes these claims will not have a material effect on the Company's financial position, liquidity or operations.
ENVIRONMENTAL COMPLIANCE
The operations conducted on Company properties by its lessees are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. As owner of surface interests in some properties, the Company may be liable for certain environmental conditions occurring at the surface properties. The terms of substantially all of the Company's coal leases require the lessee to comply with all applicable laws and regulations, including environmental. The lessees obtain reclamation bonds and substantially all of the leases require the lessee to indemnify the Company against, among other things, environmental liabilities. Some of these indemnifications survive the termination of the lease. Employees of the Company regularly visit the mines to ensure compliance with lease terms, but the duty to comply with all regulations rests with the lessees. Management believes that the
NEW GAULEY COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's lessees will be able to comply with existing regulations and does not expect any material impact on its financial condition or results of operations. The Company has neither incurred, nor is aware of, any material environmental charges imposed on it related to its properties for the years ended December 31, 2001, and period ended October 16, 2002. The Company is not associated with any environmental contamination that may require remediation costs. However, our lessees do, from time to time, conduct reclamation work on our properties under lease to them. Because the Company is not the permittee of the mines being reclaimed, it is not responsible for the costs associated with these reclamation operations. Each of our lessees is required to post a bond assuring that the reclamation will be completed as required by the permit. However, in the event any of our lessees is unable to complete the reclamation obligations and their bonding company likewise fails to meet the obligations or provide money to the state to perform the reclamation, the Company could be held liable for these costs.
8. MAJOR LESSEES
The Company depends on a few lessees for a significant portion of its revenues. Revenues from major lessees that exceed ten percent of total revenues are as follows:
9. SUBSEQUENT EVENT
In connection with the formation of Natural Resource Partners L.P. and its public offering of limited partnership units, the Company transferred certain coal royalty producing properties that are currently under lease to coal mine operators to Natural Resource Partners L.P. on October 17, 2002 at historical cost The Company transferred a portion of its deferred revenue and all its long-term debt to Natural Resource Partners L.P. The Company retained unleased coal reserve properties.
ARCH COAL CONTRIBUTED PROPERTIES FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors Arch Coal, Inc.
We have audited the accompanying statements of assets purchased and liabilities assumed as of December 31, 2001, and the related statements of revenues and direct costs and expenses for the period January 1, 2002 through October 16, 2002 and the years ended December 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 1, the accompanying financial statements have been prepared solely to present the assets purchased and liabilities assumed of the properties acquired by Natural Resource Partners, L.P. from Arch Coal, Inc. as of December 31, 2001 and the revenue and direct costs and expenses of the acquired properties for the period January 1, 2002 through October 16, 2002 and the years ended December 31, 2001 and 2000, for the purpose of complying with the requirements of the Securities and Exchange Commission and are not intended to be a complete presentation of the financial position and results of operations of the acquired properties on a stand-alone basis.
In our opinion, the financial statements referred to above present fairly, in all material respects, the assets purchased and liabilities assumed of the properties acquired from Arch Coal, Inc. as of December 31, 2001, and the revenues and direct costs and expenses of the acquired properties for the period January 1, 2002 through October 16, 2002 and the years ended December 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
February 11, 2003 St. Louis, Missouri
ARCH COAL, INC. CONTRIBUTED PROPERTIES
STATEMENTS OF ASSETS PURCHASED AND LIABILITIES ASSUMED
The accompanying notes are an integral part of these financial statements
ARCH COAL CONTRIBUTED PROPERTIES
STATEMENT OF REVENUES AND DIRECT COSTS AND EXPENSES
The accompanying notes are an integral part of these financial statements
ARCH COAL CONTRIBUTED PROPERTIES
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Ark Land Company ("Ark Land") is a wholly owned subsidiary of Arch Coal, Inc. ("Arch Coal"). Ark Land owns and manages land and mineral rights primarily located in the Western, Central Appalachian and the Illinois Basins. In conjunction with the formation of Natural Resource Partners L. P. ("NRP"), Ark Land contributed a number of owned land and coal interests on which coal leasing activity occurs ("Contributed Properties") to NRP. Ark Land retained owned land and mineral reserves with no leasing activity as well as other land and mineral reserves controlled through leasing arrangements. The accompanying statements have been prepared on Ark Land's historical cost basis in the Contributed Properties.
The Contributed Properties was not a legal entity and, except for revenues earned from the properties and certain direct costs and expenses of the properties and assets acquired and liabilities assumed, no separate financial information was maintained. The Contributed Properties did not maintain stand-alone corporate treasury, legal, tax, human resources, general administration and other similar corporate support functions. Corporate general and administrative expenses have not been allocated to the Contributed Properties, nor were they allocated in connection with the preparation of the accompanying statements because there was not sufficient information to develop a reasonable cost allocation. Because the separate and distinct accounts necessary to present a balance sheet and income statements of the Contributed Properties were not maintained for the period from January 1 through October 16, 2002 and for the two years ended December 31, 2001. Statements of Revenues and Direct Costs and Expenses were prepared.
The accompanying Statements of Revenues and Direct Costs and Expenses and Statement of Assets Purchased and Liabilities Assumed are not intended to be a complete presentation of financial position and the results of operations of the Contributed Properties. The accompanying financial statements have been prepared to comply with the requirements of the Securities and Exchange Commission for inclusion in the annual report on Form 10-K of NRP.
With respect to cash flows, the Contributed Properties did not maintain cash accounts. Cash receipts and expenditures are maintained by Ark Land. A description of cash flows directly attributable to the Contributed Properties is included in Note 6.
2. ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
Preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
COAL PROPERTIES
Coal properties are carried at cost. Coal properties are depleted on a unit-of-production basis by lease, based upon coal mined in relation to the net cost of the mineral properties and estimated proven tonnage therein. Depletion occurs either as Arch Coal mines on the property, or as others mine on the property through leasing transactions.
ASSET IMPAIRMENT
If facts and circumstances suggest that a long-lived asset may be impaired, the carrying value is reviewed. If this review indicates that the value of the asset will not be recoverable, as determined based on projected undiscounted cash flows related to the asset over its remaining life, then the carrying value of the asset is reduced to its estimated fair value.
ARCH COAL CONTRIBUTED PROPERTIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REVENUES
Coal Royalties. Coal royalty revenues are recognized on the basis of tons of coal sold by the Contributed Properties' lessees and the corresponding revenue from those sales. Generally, the coal lessees make payments to the Contributed Properties based on the greater of a percentage of the gross sales price or a fixed price per ton of coal they sell, subject to minimum annual or quarterly payments.
Minimum Royalties. Most of the Contributed Properties' lessees must make minimum annual or quarterly payments which are generally recoupable over certain time periods. These minimum payments are recorded as deferred revenue. The deferred revenue attributable to the minimum payment is recognized as coal royalty revenues either when the lessee recoups the minimum payment through production or when the period during which the lessee is allowed to recoup the minimum payment expires.
PROPERTY TAXES
Ark Land is responsible for paying property taxes on the properties it owns. The lessees are responsible for reimbursing Ark Land for property taxes on the leased properties. The reimbursement of property taxes is included in revenues in the statement of revenues and direct costs and expenses as property tax.
NEW ACCOUNTING STANDARDS
While these financial statements are not intended to be a complete presentation of financial statements prepared in conformity with accounting principles generally accepted in the United States, the following recent accounting pronouncements are included in consideration of potential impacts associated with the accounts included in these financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred with the associated asset retirement cost being capitalized as a part of the carrying amount of the long-lived asset. SFAS No. 143 also includes disclosure requirements that provide a description of asset retirement obligations and a reconciliation of changes in the components of those obligations. The Contributed Properties have adopted SFAS No. 143 effective January 1, 2003 and it did not have a material affect.
3. RELATED PARTY TRANSACTIONS
Certain of the Contributed Properties were leased to affiliates of Arch Coal that mine on the properties. Contracted royalty rates from these affiliates ("affiliate royalties") for the period from January 1, 2002 through October 16, 2002 and the two years ended December 31, 2001 were 6.5% of the gross sales price of coal sold from the property using underground mining methods and 7.5% of the gross sales price of coal sold from the property using surface mining methods, which are similar to those that are received from third parties. Affiliate royalties amounted to $7.7 million, $10.5 million and $10.2 million during the period from January 1, 2002 through October 16, 2002 and the two years ended December 31, 2001.
ARCH COAL CONTRIBUTED PROPERTIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. MAJOR LESSEES
The Contributed Properties depended on a few lessees for a significant portion of its revenues. Revenues from major lessees that exceed 10% of total revenues, are as follows:
5. ENVIRONMENTAL COMPLIANCE
The operations conducted on our property by our lessees are subject to environmental laws and regulations adopted by various governmental authorities in the jurisdictions in which these operations are conducted. As owner of surface interests in some properties, Ark Land may be liable for certain environmental conditions occurring at the surface properties. The terms of substantially all of Ark Land's coal leases require the lessee to comply with all applicable laws and regulations, including environmental. The lessees obtain reclamation bonds and substantially all of the leases require the lessee to indemnify the Contributed Properties against, among other things, environmental liabilities. Some of these indemnifications survive the termination of the lease. Employees of Ark Land regularly visit the mines to ensure compliance with lease terms, but the duty to comply with all regulations rests with the lessees. Management of Ark Land believes that Ark Land's lessees will be able to comply with existing regulations and does not expect any material impact on its financial condition or results of operations of the Contributed Properties. Ark Land has neither incurred, nor is aware of, any material environmental charges imposed on it related to the Contributed Properties for the period from January 1, 2002 to October 16, 2002 and the two years ended December 31, 2001.
6. CASH FLOW
The Contributed Properties do not maintain cash accounts. Cash receipts and expenditures are maintained by Ark Land. However, the following information is provided to identify direct cash flows generated from the Contributed properties:
ARCH COAL CONTRIBUTED PROPERTIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. SUBSEQUENT EVENT
In connection with the formation of Natural Resource Partners, L.P. and the consummation of its initial public offering of limited partnership units, Arch Coal transferred certain coal royalty producing properties that are currently under lease to coal mine operators to Natural Resource Partners L.P. on October 17, 2002 at fair market value.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On April 26, 2002, each of Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership and New Gauley Coal Corporation dismissed Arthur Andersen LLP as their independent public accountants due to the adverse publicity being experienced by Arthur Andersen LLP and concerns regarding the acceptance of its audits. Ernst & Young LLP was engaged on May 3, 2002 by each of Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership and New Gauley Coal Corporation to serve as their independent auditors for the three years ended December 31, 1999, December 31, 2000 and December 31, 2001.
Arthur Andersen LLP's reports on the financial statements of each of Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership and New Gauley Coal Corporation for the past two years did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the most recent two fiscal years and through April 26, 2002:
- there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen LLP's satisfaction, would have caused them to make reference to the subject matter in connection with their reports on the financial statements of any of Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership or New Gauley Coal Corporation for such years;
- there were no reportable events, as listed in Item 304(a)(1)(v) of Regulation S-K; and
- none of Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership and New Gauley Coal Corporation consulted Ernst & Young LLP with respect to the application of accounting principles to a specified transaction either completed or proposed, or the type of audit opinion that might be rendered on the financial statements of any of Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership or New Gauley Coal Corporation, or any other matters or reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE MANAGING GENERAL PARTNER
As a master limited partnership we do not employ any of the people responsible for the management of our properties. Instead, we reimburse our managing general partner, GP Natural Resource Partners LLC, for its services. All directors and officers are elected by our managing general partner. The following table sets forth information concerning the directors and officers of GP Natural Resource Partners LLC. Each officer and director is elected for their respective office or directorship on an semi-annual basis.
- ---------------
(1) First elected an officer or director during the formation of the Partnership in April 2002.
(2) Elected as an officer or director at the first board meeting of the Partnership's general partner in October 2002.
(3) Elected as a director in January 2003.
Corbin J. Robertson, Jr. is the Chief Executive Officer and the Chairman of the Board of Directors of GP Natural Resource Partners LLC. Mr. Robertson has served as the Chief Executive Officer and Chairman of the Board of the general partners of Western Pocahontas Properties Limited Partnership since 1986, Great Northern Properties Limited Partnership since 1992 and Quintana Minerals Corporation since 1978 and as Chairman of the Board of Directors of New Gauley Coal Corporation since 1986. Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership and New Gauley Coal Corporation are all affiliates of Natural Resource Partners L.P. He also serves as Chairman of the Board of the Baylor College of Medicine and of the Cullen Trust for Higher Education and on the boards of the American Petroleum Institute, the National Petroleum Council, the Texas Medical Center and the World Health and Golf Association.
Nick Carter is the President and Chief Operating Officer of GP Natural Resource Partners LLC. He has also served as President of the general partner of Western Pocahontas Properties Limited Partnership and New Gauley Coal Corporation since 1990 and as President of the general partner of Great Northern Properties Limited Partnership from 1992 to 1998. Western Pocahontas Properties Limited Partnership, Great Northern Properties Limited Partnership and New Gauley Coal Corporation are all affiliates of Natural Resource Partners L.P. Prior to 1990, Mr. Carter held various positions with MAPCO Coal Corporation and was engaged in the private practice of law. He is President of the National Council of Coal Lessors, the
immediate past Chair of the West Virginia Chamber of Commerce and a board member of the Kentucky Coal Association.
Dwight L. Dunlap is the Chief Financial Officer and Treasurer of GP Natural Resource Partners LLC. Mr. Dunlap has served as Vice President-Treasurer of Quintana Minerals Corporation and as Chief Financial Officer, Treasurer and Secretary of the general partner of Western Pocahontas Properties Limited Partnership and Great Northern Properties Limited Partnership since 2000. Mr. Dunlap has worked for Quintana Minerals since 1982 and has served as Vice President and Treasurer since 1987. Mr. Dunlap is a Certified Public Accountant with over 25 years of experience in financial management, accounting and reporting including six years of audit experience with a Big Four international public accounting firm.
Kevin F. Wall is a Vice President and Chief Engineer of GP Natural Resource Partners LLC. Mr. Wall has served as Vice President -- Engineering for the general partner of Western Pocahontas Properties Limited Partnership since 1998 and the general partner of Great Northern Properties Limited Partnership since 1992. He has also served as the Vice President -- Engineering of New Gauley Coal Corporation since 1998. He has performed duties in the land management, planning, project evaluation, acquisition and engineering areas since 1981. He is a Registered Professional Engineer in West Virginia and is a member of the American Institute of Mining, Metallurgical, and Petroleum Engineers and of the National Society of Professional Engineers. Mr. Wall also serves on the Board of Directors of Leadership Tri-State and is a past president of the West Virginia Society of Professional Engineers.
Kathy E. Hager is the Vice President, Investor Relations for GP Natural Resource Partners LLC. Ms. Hager joined the partnership in July 2002. She was the Principal of IR Consulting Associates from 2001 to July 2002 and from 1980 through 2000 held various financial and investor relations positions with Santa Fe Energy Resources, most recently as Vice President -- Public Affairs. She is a Certified Public Accountant. Ms. Hager has served on the local board of directors of the National Investor Relations Institute and has maintained professional affiliations with various energy industry organizations. She has also served on the Executive Committee and as a National Vice President of the Institute of Management Accountants.
Charles H. Kerr is the Secretary of GP Natural Resource Partners LLC. Mr. Kerr has worked for Quintana Minerals Corporation, an affiliate of the Partnership, where he is currently Vice-President of Land/Legal, since 1983. His responsibilities have included acquisitions and divestitures, land/legal management and administration, strategic planning and contract and agreement negotiation and administration. Prior to joining Quintana, he worked for two independent oil and gas companies.
Kenneth Hudson is the Controller of GP Natural Resource Partners LLC. He has served as Controller of the general partner of Western Pocahontas Properties Limited Partnership and of New Gauley Coal Corporation since 1988 and of the general partner of Great Northern Properties Limited Partnership since 1992. He was also Controller of Blackhawk Mining Co., Quintana Coal Co. and other related operations from 1985 to 1988. Prior to that time, Mr. Hudson worked in public accounting.
Robert T. Blakely is a member of the Board of Directors of GP Natural Resource Partners LLC. He currently serves as President of Performance Enhancement Group, a company involved in the acquisition of companies manufacturing high performance and racing automotive engine components. He previously served as Executive Vice President and Chief Financial Officer of Lyondell Chemical from 1999 through 2002, Executive Vice President and Chief Financial Officer of Tenneco, Inc. from 1981 until 1999 as well as a Managing Director at Morgan Stanley. He recently completed a four-year term on the Financial Accounting Standards Advisory Council and currently serves as a trustee of Cornell University, where he serves as Chairman of Cornell's Finance Committee and a member of the Executive Committee of the Board. Mr. Blakely was recently named to the Board of Directors of Lufkin Industries.
David M. Carmichael is a member of the Board of Directors of GP Natural Resource Partners LLC. He currently is a private investor. Mr. Carmichael is the former Vice Chairman of KN Energy and the former Chairman and Chief Executive Officer of American Oil and Gas Corporation, CARCON Corporation and WellTech, Inc. He has served on the Board of Directors of Tom Brown, Inc. since 1997 and ENSCO International since 2001. He also currently serves as a trustee of the Texas Heart Institute.
Robert B. Karn III is a member of the Board of Directors of GP Natural Resource Partners LLC. He currently is a consultant and serves on the Board of Directors of various entities. He was the partner in charge of the coal mining practice worldwide for Arthur Andersen from 1981 until his retirement in 1998. He retired as Managing Partner of the St. Louis office's Financial and Economic Consulting Practice. Mr. Karn is a Certified Public Accountant, Certified Fraud Examiner and has served as President of numerous organizations. He also currently serves on the Board of Directors of Peabody Energy.
Steven F. Leer is a member of the Board of Directors of GP Natural Resource Partners LLC. Mr. Leer has also served as President, Chief Executive Officer and a director of Arch Coal, Inc. since 1992. He is also a Director of the Norfolk Southern Corporation, a past Chairman of the Center for Energy and Economic Development and a past Chairman of the National Coal Council.
S. Reed Morian is a member of the Board of Directors of GP Natural Resource Partners LLC. Mr. Morian has served as a member of the Board of Directors of the general partner of Western Pocahontas Properties Limited Partnership since 1986, New Gauley Coal Corporation since 1992 and the general partner of Great Northern Properties Limited Partnership since 1992. Mr. Morian has worked for Dixie Chemical Company since 1971 and has served as its Chairman and Chief Executive Officer since 1981. He has also served as Chairman, Chief Executive Officer and President of DX Holding Company since 1989.
David B. Peugh is a member of the Board of Directors of GP Natural Resource Partners LLC. Mr. Peugh has also served as Vice President -- Business Development of Arch Coal, Inc. since 1995. He is also a director of ZECA Corporation, a company developing an emission-free process of producing electricity from coal.
W. W. Scott, Jr. is a member of the Board of Directors of GP Natural Resource Partners LLC. Mr. Scott was Executive Vice President and Chief Financial Officer of Quintana Minerals Corporation from 1985 to 1999. He served as Executive Vice President and Chief Financial Officer of the general partner of Western Pocahontas Properties Limited Partnership and New Gauley Coal Corporation from 1986 to 1999. He served as Executive Vice President and Chief Financial Officer of the general partner of Great Northern Properties Limited Partnership from 1992 to 1999. Since 1999, he has continued to serve as a director of the general partner of Western Pocahontas Properties Limited Partnership and Quintana Minerals Corporation.
The Board of Directors of GP Natural Resource Partners LLC has formed three committees, staffed solely by independent directors, to assist it in its duties as follows:
Audit Committee: *Robert B. Karn, III -- Chairman *Robert T. Blakely -- Member David M. Carmichael -- Member - ---------------
* Determined to be Audit Committee Financial Experts pursuant to Item 401 of Regulation S-K.
Compensation, Nominating and Governance Committee: David M. Carmichael -- Chairman Robert T. Blakely -- Member Robert B. Karn, III -- Member
Conflicts Committee: Robert T. Blakely -- Chairman Robert B. Karn, III -- Member David M. Carmichael -- Member
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires directors, officers and persons who beneficially own more than ten percent of a registered class of our equity securities to file with the SEC and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of their equity securities. These people are also required to furnish us with copies of all Section 16(a) forms that they file.
Based solely upon a review of the copies of Forms 3, 4 and 5 furnished to us, or written representations from certain reporting persons that no Forms 5 were required, we believe that our officers and directors complied with all filing requirements with respect to transactions in our equity securities during 2002, except that each of Messrs. Carmichael, Leer, Morian, Peugh, Robertson and Scott filed a late Form 4, and Arch Coal filed two late Form 4's.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
We have no executive officers, but we reimburse the general partner for compensation paid to the general partners' executive officers in connection with managing NRP. NRP and its general partner were formed in April 2002, but did conduct any operations until the completion of the initial public offering of common units on October 17, 2002.
SUMMARY COMPENSATION TABLE
Corbin J. Robertson Jr., Chairman of the Board and CEO, did not receive any salary, bonus or other compensation during 2002 that was reimbursed by us to the general partner. We did not reimburse the general partner for any amount in excess of $100,000 for services rendered by any other of our executive officers during 2002.
COMPENSATION OF DIRECTORS
Each non-employee director of the general partner receives 10,000 unit options upon election to the board. Additionally, each director receives an annual retainer of $20,000, payable quarterly, plus additional fees of $2,000 annually for being a Committee Chairman and $500 per committee meeting. Each non-employee director also receives $1,000 for attending board meetings in person or $500 for participation in telephonic meetings. Both Stephen F. Leer and David B. Peugh have assigned any compensation they receive as directors of the general partner to Arch Coal, Inc., their employer.
LONG-TERM INCENTIVE PLAN
GP Natural Resource Partners LLC has adopted the Natural Resource Partners Long-Term Incentive Plan for employees and directors of GP Natural Resource Partners LLC and its affiliates who perform services for us. The long-term incentive plan consists of two components: restricted units and unit options. The long-term incentive plan currently permits the grant of awards covering a number of common units equal to three percent of the number of common units outstanding immediately following the initial public offering of common units. The plan is administered by the compensation committee of GP Natural Resource Partners LLC's board of directors. Subject to the rules of the exchange upon which the common units are listed at the time, GP Natural Resource Partners LLC's board of directors or the compensation committee may terminate or amend the long-term incentive plan at any time with respect to any units for which a grant has not yet been made. GP Natural Resource Partners LLC's board of directors or the compensation committee also has the right to alter or amend the long-term incentive plan or any part of the plan from time to time, including increasing the number of units that may be granted, subject to the rules of the exchange upon which the common units are listed at that time. Except upon the occurrence of unusual or nonrecurring events, no change in any outstanding grant may be made that would materially reduce the benefit intended to be made available to a participant without the consent of the participant.
Restricted Units. A restricted unit is a "phantom" unit that entitles the grantee to receive a common unit upon the vesting of the phantom unit or, in the discretion of the compensation committee, its fair market
value in cash. The compensation committee may make grants under the plan to employees and directors containing such terms as the compensation committee shall determine. The compensation committee will determine the period over which restricted units granted to employees and directors will vest. The committee may base its determination upon the achievement of specified financial objectives. In addition, the restricted units will vest upon a change of control of Natural Resource Partners, our general partner, or GP Natural Resource Partners LLC.
If a grantee's employment or membership on the board of directors terminates for any reason, the grantee's restricted units will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise. Common units to be delivered upon the vesting of restricted units may be common units acquired by GP Natural Resource Partners LLC in the open market, common units already owned by GP Natural Resource Partners LLC, common units acquired by GP Natural Resource Partners LLC directly from us, from another affiliate or any other person or entity or any combination of the foregoing. GP Natural Resource Partners LLC will be entitled to reimbursement by us for the cost incurred in acquiring common units. If we issue new common units upon vesting of the restricted units, the total number of common units outstanding will increase. We intend the issuance of the common units upon vesting of the restricted units under the plan to serve as a means of incentive compensation for performance and not primarily as an opportunity to participate in the equity appreciation of the common units. Therefore, plan participants will not pay any consideration for the common units they receive, and we will receive no remuneration for the units.
Unit Options. The long-term incentive plan currently permits the grant of options covering common units. The compensation committee may determine to make grants under the plan to employees and directors containing such terms as the committee shall determine consistent with the plan. Unit options will have an exercise price that may not be less than the fair market value of the units on the date of grant. In general, unit options granted will become exercisable over a period determined by the compensation committee. The compensation committee may base its determination upon the achievement of specified financial objectives. In addition, the unit options will become exercisable upon a change in control as described above. If a grantee's employment or membership on the board of directors terminates for any reason, the grantee's options will be automatically forfeited unless, and to the extent, the compensation committee provides otherwise. Upon exercise of a unit option, GP Natural Resource Partners LLC will acquire common units in the open market, directly from us, from another affiliate or any other person or entity, or use common units already owned by GP Natural Resource Partners LLC, or any combination of the foregoing. GP Natural Resource Partners LLC will be entitled to reimbursement by us for the difference between the cost incurred in acquiring these common units and the proceeds received from an optionee at the time of exercise. Thus, the cost of the unit options will be borne by us. If we issue new common units upon exercise of the unit options, the total number of common units outstanding will increase, and GP Natural Resource Partners LLC will pay us the proceeds it received from the optionee upon exercise of the unit option. The unit option plan has been designed to furnish additional compensation to employees and directors and to align their economic interests with those of common unitholders.
ANNUAL INCENTIVE PLAN
The general partner also adopted the Natural Resource Partners Annual Incentive Compensation Plan in October 2002. The annual incentive plan is designed to enhance the performance of GP Natural Resource Partners LLC and its affiliates' key employees by rewarding them with cash awards for achieving annual financial and operational performance objectives. The compensation committee in its discretion may determine individual participants and payments, if any, for each fiscal year. The board of directors of GP Natural Resource Partners LLC may amend or change the annual incentive plan at any time. We will reimburse GP Natural Resource Partners LLC for payments and costs incurred under the plan.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 1, 2003, the amount and percentage of the Partnership units beneficially held by (1) each person known to us to beneficially own 5% or more of the stock, (2) by each of the directors and executive officers and (3) by all directors and executive officers as a group. Unless otherwise noted, each of the named persons and members of the group has sole voting and investment power with respect to the units shown.
- ---------------
* Less than one percent.
(1) Based upon 11,353,658 common units issued and outstanding on March 1, 2003 and 11,353,658 subordinated units issued and outstanding on March 1, 2003. Unless otherwise noted, beneficial ownership is less than 1% of the Partnership's common units and subordinated units.
(2) Mr. Robertson may be deemed to beneficially own the 3,158,166 common units and 5,231,766 subordinated units owned by Western Pocahontas Properties Limited Partnership, and 126,107 common units and 208,907 subordinated units owned by New Gauley Coal Corporation. Also included are 66,300 common units held by William K. Robertson 1992 Management Trust and 66,400 units held by Frances C. Robertson 1992 Management Trust, both of which Mr. Robertson is the trustee, and has voting control, but not direct ownership. Also included are 16,400 common units held by Barbara Robertson, Mr. Robertson's spouse.
(3) These units may be deemed to be beneficially owned by Mr. Robertson.
(4) Arch Coal, Inc. is the parent company of Ark Land Company and may be deemed to beneficially own the units held by Ark Land Company.
(5) The address of Western Pocahontas Properties Limited Partnership and Great Northern Properties Limited Partnership is 601 Jefferson Street, Suite 3600, Houston, Texas 77002. The address of Arch Coal, Inc. and Ark Land Company is One City Place Drive Suite 300, St. Louis, Missouri 63141.
For information relating to the securities authorized for issuance under equity compensation plans, please see Item 5, "Market for Registrant's Common Units and Related Unitholder Matters."
EQUITY COMPENSATION PLAN INFORMATION
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DISTRIBUTIONS AND PAYMENTS TO THE GENERAL PARTNER AND ITS AFFILIATES
The following table summarizes the distributions and payments to be made by us to our general partner and its affiliates in connection with the formation, ongoing operation and any liquidation of Natural Resource Partners. These distributions and payments were determined by and among affiliated entities and, consequently, are not the result of arm's-length negotiations.
FORMATION STAGE The consideration received by our general partner and its affiliates for the contribution of the assets and liabilities to us............. - 6,853,658 common units;
- 11,353,658 subordinated units;
- 2% general partner interest in Natural Resource Partners;
- the incentive distribution rights; and
- the assumption of $46.5 million of indebtedness of the WPP Group.
OPERATIONAL STAGE
Distributions of available cash to our general partner and its affiliates............ We will generally make cash distributions 98% to the unitholders, including affiliates of our general partner, as holders of all of the subordinated units, and 2% to the general partner. In addition, if distributions exceed the target distribution levels, the holders of the incentive distribution rights, including our general partner, will be entitled to increasing percentages of the distributions, up to an aggregate of 48% of the distributions above the highest target level.
Assuming we have sufficient available cash to pay the full minimum quarterly distribution on all of our outstanding units for four quarters, our general partner would receive distributions of approximately $1.0 million on its 2% general partner interest and our affiliates would receive distributions of approximately $15.0 million on their common units and $24.0 million on their subordinated units.
Payments to our general partner and its affiliates.... Our general partner and its affiliates will not receive any management fee or other compensation for the management of our partnership. Our general partner and its affiliates will be reimbursed, however, for all direct and indirect expenses incurred on our behalf. Our general partner has the sole discretion in determining the amount of these expenses.
Withdrawal or removal of our general partner............... If our general partner withdraws or is removed, its general partner interest and its incentive distribution rights will either be sold to the new general partner for cash or converted into common units, in each case for an amount equal to the fair market value of those interests. See "The Partnership Agreement -- Withdrawal or Removal of the General Partner."
LIQUIDATION STAGE
Liquidation................... Upon our liquidation, the partners, including our general partner, will be entitled to receive liquidating distributions according to their particular capital account balances.
AGREEMENTS GOVERNING THE TRANSACTIONS
We and other related parties have entered into the various documents and agreements that will effect the transactions, including the vesting of assets in, and the assumption of liabilities by, our subsidiaries, and the application of the proceeds of this offering. These agreements will not be the result of arm's-length negotiations, and we cannot assure you that they, or that any of the transactions which they provide for, will be effected on terms at least as favorable to the parties to these agreements as they could have been obtained from unaffiliated third parties. All of the transaction expenses incurred in connection with these transactions, including the expenses associated with transferring assets into our subsidiaries, will be paid from the proceeds of this offering.
OMNIBUS AGREEMENT
NON-COMPETITION PROVISIONS
As part of the omnibus agreement entered into among the Partnership, our general partner, the WPP Group, Arch Coal, Ark Land Company and Robertson Coal Management LLC concurrently with the closing of the offering, the WPP Group, any entity controlled by Corbin J. Robertson, Jr. and Arch Coal, which we refer to in this section as the GP affiliates, each agreed that neither they nor their affiliates will, directly or indirectly, engage or invest in entities that engage in the following activities (each, a "restricted business") in the specific circumstances described below:
- the entering into or holding of leases with a party other than an affiliate of the GP affiliate for any GP affiliate-owned fee coal reserves within the United States; and
- the entering into or holding of subleases with a party other than an affiliate of the GP affiliate for coal reserves within the United States controlled by a paid-up lease owned by any GP affiliate or its affiliate.
"Affiliate" means, with respect to any GP affiliate or, any other entity in which such GP affiliate owns, through one or more intermediaries, 50% or more of the then outstanding voting securities or other ownership interests of such entity. Except as described below, the WPP Group, Arch Coal and their respective controlled affiliates will not be prohibited from engaging in activities in which they compete directly with us. Please see "Risk Factors -- The WPP Group and Arch Coal may engage in substantial competition with us."
A GP affiliate may, directly or indirectly, engage in a restricted business if:
- the GP affiliate was engaged in the restricted business at the closing of the offering; provided that if the fair market value of the asset or group of related assets of the restricted business subsequently exceeds $10 million, the GP affiliate must offer the restricted business to Natural Resource Partners under the offer procedures described below.
- the asset or group of related assets of the restricted business have a fair market value of $10 million or less; provided that if the fair market value of the assets of the restricted business subsequently exceeds $10 million, the GP affiliate must offer the restricted business to Natural Resource Partners under the offer procedures described below.
- the asset or group of related assets of the restricted business have a fair market value of more than $10 million and the general partner (with the approval of the conflicts committee) has elected not to cause Natural Resource Partners to purchase these assets under the procedures described below.
- its ownership in the restricted business consists solely of a noncontrolling equity interest.
For purposes of this paragraph, "fair market value" means the fair market value as determined in good faith by the relevant GP affiliate.
The total fair market value in the good faith opinion of the WPP Group of all restricted businesses engaged in by the WPP Group, other than those engaged in by the WPP Group at closing of the offering, may not exceed $75 million. For purposes of this restriction, the fair market value of any entity engaging in a restricted business purchased by the WPP Group will be determined based on the fair market value of the entity as a whole, without regard for any lesser ownership interest to be acquired. Arch Coal is not subject to a similar restriction on the total fair market value of restricted businesses it may own.
If the WPP Group desires to acquire a restricted business or an entity that engages in a restricted business with a fair market value in excess of $10 million and the restricted business constitutes greater than 50% of the value of the business to be acquired, then the WPP Group must first offer Natural Resource Partners the opportunity to purchase the restricted business. If (1) Arch Coal desires to acquire a restricted business or an entity that engages in a restricted business with a fair market value in excess of $10 million or (2) the WPP Group desires to acquire a restricted business or an entity that engages in a restricted business with a value in excess of $10 million and the restricted business constitutes 50% or less of the value of the business to be acquired, then the GP affiliate may purchase the restricted business first and then offer Natural Resource Partners the opportunity to purchase the restricted business within six months of acquisition. For purposes of this paragraph, "restricted business" excludes a general partner interest or managing member interest, which is addressed in a separate restriction summarized below. For purposes of this paragraph only, "fair market value" means the fair market value as determined in good faith by the relevant GP affiliate.
If Natural Resource Partners wants to purchase the restricted business and the GP affiliate and the general partner, with the approval of the conflicts committee, agree on the fair market value and other terms of the offer within 60 days after the general partner receives the offer from the GP affiliate, Natural Resource Partners will purchase the restricted business as soon as commercially practicable. If the GP affiliate and the general partner, with the approval of the conflicts committee, are unable to agree in good faith on the fair market value and other terms of the offer within 60 days after the general partner receives the offer, then the GP affiliate may sell the restricted business to a third party within two years for no less than the purchase price and on terms no less favorable to the GP affiliate than last offered by Natural Resource Partners. During this two-year period, the GP affiliate may operate the restricted business in competition with Natural Resource Partners, subject to the restriction on total fair market value of restricted businesses owned in the case of the WPP Group.
If, at the end of the two year period, the restricted business has not been sold to a third party and the restricted business retains a value, in the good faith opinion of the relevant GP affiliate, in excess of $10 million, then the GP affiliate must reoffer the restricted business to the general partner. If the GP affiliate and the general partner, with the approval of the conflicts committee, agree on the fair market value and other
terms of the offer within 60 days after the general partner receives the second offer from the GP affiliate, Natural Resource Partners will purchase the restricted business as soon as commercially practicable. If the GP Affiliate and the general partner, with the concurrence of the conflicts committee, again fail to agree after negotiation in good faith on the fair market value of the restricted business, then the GP affiliate will be under no further obligation to Natural Resource Partners with respect to the restricted business, subject to the restriction on total fair market value of restricted businesses owned in the case of the WPP Group.
In addition, if during the two year period described above, a change occurs in the restricted business that, in the good faith opinion of the GP affiliate, affects the fair market value of the restricted business by more than 10 percent and the fair market value of the restricted business remains, in the good faith opinion of the relevant GP affiliate, in excess of $10 million, the GP affiliate will be obligated to reoffer the restricted business to the general partner at the new fair market value, and the offer procedures described above will recommence.
If the restricted business to be acquired is in the form of a general partner interest in a publicly-held partnership or a managing member interest in a publicly-held limited liability company, the WPP Group may not acquire such restricted business even if we decline to purchase the restricted business. If the restricted business to be acquired is in the form of a general partner interest in a non publicly-held partnership or a managing member of a non-publicly-held limited liability company, the WPP Group may acquire such restricted business subject to the restriction on total fair market value of restricted businesses owned and the offer procedures described above. If the restricted business to be acquired is in the form of a general partner interest in a partnership or a managing member interest in a limited liability company, Arch Coal may acquire such restricted business as part of a larger transaction so long as (1) it sells the interest to us or a third party within six months of the acquisition or (2) the general partner, with the approval of the conflicts committee, agrees that the restricted business will be subject to the offer procedures described in the preceding paragraphs without reference again to this paragraph. If, following the six month period, Arch Coal has made a good faith, reasonable attempt to divest the interest, but is unable to do so and Arch has not received an extension from our conflicts committee or has not offered us the opportunity to buy its competing interest, Arch Coal may opt to either (1) have its designated directors immediately resign from the board of directors of our general partner, in which case Arch Coal may continue to own and operate the competing business but will continue to relinquish its rights to designate directors of our general partner until such time as it divests the competing business, or (2) hire an independent investment banking firm to determine the fair market value of the competing business. If Arch Coal elects to obtain an independent valuation of its competing business, then:
- if Arch Coal and our general partner (with the concurrence of the conflicts committee) agree upon the price of the competing business, our partnership will purchase the competing business;
- if Arch Coal seeks to sell the competing business to our partnership at the price determined by the investment banking firm and our general partner (with the concurrence of the conflicts committee) declines to purchase the competing business, Arch Coal will be free to continue to own and operate the competing business;
- if Arch Coal does not wish to sell the competing business to our partnership at the price determined by the investment banking firm and our general partner (with the concurrence of the conflicts committee) seeks to purchase the competing business at such price, then Arch Coal's designated directors must immediately resign from the board of directors of our general partner, in which case Arch Coal may continue to own and operate the competing business. Arch Coal will continue to relinquish its rights to designate directors of our general partner until it divests the competing business.
INDEMNIFICATION
Under the omnibus agreement, the WPP Group and Arch Coal, jointly and severally, will indemnify us for (1) three years after the closing of the initial public offering against environmental liabilities associated with the properties contributed to us and occurring before the closing date of the initial public offering and (2) all tax liabilities attributable to the ownership or operation of the partnership assets prior to the closing of the initial public offering. The environmental indemnity will be limited to a maximum amount of $10.0 mil-
lion. Liabilities resulting from a change in law after the closing of the offering are excluded from the environmental indemnity.
The omnibus agreement may be amended at any time by the general partner, with the concurrence of the conflicts committee. The respective obligations of the WPP Group and Arch Coal under the omnibus agreement terminate when the WPP Group and its affiliates, or Arch Coal and its affiliates, as the case may be, cease to participate in the control of the general partner.
For information relating to our leases with Ark Land Company, please see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Related Party Transactions."
CONFLICTS OF INTEREST
Conflicts of interest exist and may arise in the future as a result of the relationships between our general partner and its affiliates (including the WPP Group and Arch Coal) on the one hand, and our partnership and our limited partners, on the other hand. The directors and officers of GP Natural Resource Partners LLC have fiduciary duties to manage GP Natural Resource Partners LLC and our general partner in a manner beneficial to its owners. At the same time, our general partner has a fiduciary duty to manage our partnership in a manner beneficial to us and our unitholders.
Whenever a conflict arises between our general partner or its affiliates, on the one hand, and our partnership or any other partner, on the other, our general partner will resolve that conflict. Our general partner may, but is not required to, seek the approval of the conflicts committee of the board of directors of our general partner of such resolution. The partnership agreement contains provisions that allow our general partner to take into account the interests of other parties in addition to our interests when resolving conflicts of interest. In effect, these provisions limit our general partner's fiduciary duties to our unitholders. The partnership agreement also restricts the remedies available to unitholders for actions taken by our general partner that might, without those limitations, constitute breaches of fiduciary duty.
Our general partner will not be in breach of its obligations under the partnership agreement or its duties to us or our unitholders if the resolution of the conflict is considered to be fair and reasonable to us. Any resolution is considered to be fair and reasonable to us if that resolution is:
- approved by the conflicts committee, although our general partner is not obligated to seek such approval and our general partner may adopt a resolution or course of action that has not received approval;
- on terms no less favorable to us than those generally being provided to or available from unrelated third parties; or
- fair to us, taking into account the totality of the relationships between the parties involved, including other transactions that may be particularly favorable or advantageous to us.
In resolving a conflict, our general partner, including its conflicts committee, may, unless the resolution is specifically provided for in the partnership agreement, consider:
- the relative interests of any party to such conflict and the benefits and burdens relating to such interest;
- any customary or accepted industry practices or historical dealings with a particular person or entity;
- generally accepted accounting practices or principles; and
- such additional factors it determines in its sole discretion to be relevant, reasonable or appropriate under the circumstances.
Conflicts of interest could arise in the situations described below, among others.
ACTIONS TAKEN BY OUR GENERAL PARTNER MAY AFFECT THE AMOUNT OF CASH AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS OR ACCELERATE THE RIGHT TO CONVERT SUBORDINATED UNITS.
The amount of cash that is available for distribution to unitholders is affected by decisions of our general partner regarding such matters as:
- amount and timing of asset purchases and sales;
- cash expenditures;
- borrowings;
- the issuance of additional units; and
- the creation, reduction or increase of reserves in any quarter.
In addition, borrowings by us and our affiliates do not constitute a breach of any duty owed by our general partner to the unitholders, including borrowings that have the purpose or effect of:
- enabling our general partner to receive distributions on any subordinated units held by our general partner or the incentive distribution rights; or
- hastening the expiration of the subordination period.
For example, in the event we have not generated sufficient cash from our operations to pay the minimum quarterly distribution on our common units and subordinated units, our partnership agreement permits us to borrow funds which may enable us to make this distribution on all outstanding units.
The partnership agreement provides that we and our subsidiaries may borrow funds from our general partner and its affiliates. Our general partner and its affiliates may not borrow funds from us or our subsidiaries.
WE DO NOT HAVE ANY OFFICERS OR EMPLOYEES AND RELY SOLELY ON OFFICERS AND EMPLOYEES OF GP NATURAL RESOURCE PARTNERS LLC AND ITS AFFILIATES.
We do not have any officers or employees and rely solely on officers and employees of GP Natural Resource Partners LLC, its affiliates and the employees of our subsidiaries. Affiliates of GP Natural Resource Partners LLC conduct businesses and activities of their own in which we have no economic interest. If these separate activities are significantly greater than our activities, there could be material competition for the time and effort of the officers and employees who provide services to our general partner. The officers of GP Natural Resource Partners LLC are not required to work full time on our affairs. These officers devote significant time to the affairs of the WPP Group or its affiliates and are compensated by these affiliates for the services rendered to them.
WE REIMBURSE OUR GENERAL PARTNER AND ITS AFFILIATES FOR EXPENSES.
We reimburse our general partner and its affiliates for costs incurred in managing and operating us, including costs incurred in rendering corporate staff and support services to us. The partnership agreement provides that our general partner determines the expenses that are allocable to us in any reasonable manner determined by our general partner in its sole discretion.
OUR GENERAL PARTNER INTENDS TO LIMIT ITS LIABILITY REGARDING OUR OBLIGATIONS.
Our general partner intends to limit its liability under contractual arrangements so that the other party has recourse only to our assets, and not against our general partner or its assets. The partnership agreement provides that any action taken by our general partner to limit its liability or our liability is not a breach of our general partner's fiduciary duties, even if we could have obtained more favorable terms without the limitation on liability.
COMMON UNITHOLDERS HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF OUR GENERAL PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH US.
Any agreements between us on the one hand, and our general partner and its affiliates, on the other, do not grant to the unitholders, separate and apart from us, the right to enforce the obligations of our general partner and its affiliates in our favor.
CONTRACTS BETWEEN US, ON THE ONE HAND, AND OUR GENERAL PARTNER AND ITS AFFILIATES, ON THE OTHER, ARE NOT BE THE RESULT OF ARM'S-LENGTH NEGOTIATIONS.
The partnership agreement allows our general partner to pay itself or its affiliates for any services rendered to us, provided these services are rendered on terms that are fair and reasonable. Our general partner may also enter into additional contractual arrangements with any of its affiliates on our behalf. Neither the partnership agreement nor any of the other agreements, contracts and arrangements between us, on the one hand, and our general partner and its affiliates, on the other, are the result of arm's-length negotiations.
All of these transactions entered into after our initial public offering are on terms that are fair and reasonable to us.
Our general partner and its affiliates have no obligation to permit us to use any facilities or assets of our general partner and its affiliates, except as may be provided in contracts entered into specifically dealing with that use. There is no obligation of our general partner or its affiliates to enter into any contracts of this kind.
COMMON UNITS ARE SUBJECT TO OUR GENERAL PARTNER'S LIMITED CALL RIGHT.
Our general partner may exercise its right to call and purchase common units as provided in the partnership agreement or assign this right to one of its affiliates or to us. Our general partner may use its own discretion, free of fiduciary duty restrictions, in determining whether to exercise this right. As a result, a common unitholder may have his common units purchased from him at an undesirable time or price. If we do not issue any equity securities prior to the expiration of the subordination period, upon the conversion of subordinated units into common units at the end of the subordination period, our general partner and its affiliates will own 80.2% of our outstanding common units and will be able to exercise this call right.
WE MAY NOT CHOOSE TO RETAIN SEPARATE COUNSEL FOR OURSELVES OR FOR THE HOLDERS OF COMMON UNITS.
The attorneys, independent auditors and others who have performed services for us in the past were retained by our general partner, its affiliates and us and have continued to be retained by our general partner, its affiliates and us. Attorneys, independent auditors and others who perform services for us are selected by our general partner or the conflicts committee and may also perform services for our general partner and its affiliates. We may retain separate counsel for ourselves or the holders of common units in the event of a conflict of interest arising between our general partner and its affiliates, on the one hand, and us or the holders of common units, on the other, depending on the nature of the conflict. We do not intend to do so in most cases. Delaware case law has not definitively established the limits on the ability of a partnership agreement to restrict such fiduciary duties.
OUR GENERAL PARTNER'S AFFILIATES MAY COMPETE WITH US.
The partnership agreement provides that our general partner is restricted from engaging in any business activities other than those incidental to its ownership of interests in us. Except as provided in our partnership agreement and in the omnibus agreement, affiliates of our general partner will not be prohibited from engaging in activities in which they compete directly with us. Please read "Omnibus Agreement."
MISCELLANEOUS
Corbin J. Robertson III, the son of our managing general partner's Chief Executive Officer, Corbin J. Robertson, Jr., is an employee of Quintana Minerals Corporation, which performs services for us from time to
time. Subsequent to year-end, Quintana Minerals Corporation was reimbursed in the amount of $5,000 as a bonus for services performed by Corbin J. Robertson III during 2002.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) of the Securities Exchange Act) within the 90 days prior to the filing date of this report. This evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Office and Chief Financial Officer of GP Natural Resource Partners LLC, our managing general partner. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective in producing the timely recording, processing, summary and reporting of information and in accumulation and communication of information to management to allow for timely decisions with regard to required disclosure.
In addition, there have been no significant changes in our internal controls or in other factors that could significantly affect these internal controls subsequent to the last date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) AND (2) FINANCIAL STATEMENTS AND SCHEDULES
Please See Item 8, "Financial Statements and Supplementary Data"
(A)(3) EXHIBITS
EXHIBIT INDEX
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* Filed herewith
(B) REPORTS ON FORM 8-K
1. A Current Report on Form 8-K (Items 5 and 7) was filed on October 22, 2002, in connection with NRP's appointment of two independent directors.
2. A Current Report on Form 8-K (Items 5 and 7) was filed on November 7, 2002, in connection with NRP's agreement to buy coal reserves from subsidiaries of El Paso Corporation.
3. A Current Report on Form 8-K (Item 9) was filed on November 27, 2002, relating to NRP's third quarter pro forma earnings and fourth quarter guidance.
4. A Current Report on Form 8-K (Items 5 and 7) was filed on December 5, 2002, in connection with the completion of NRP's acquisition of coal reserves from subsidiaries of El Paso Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned and thereunto duly authorized.
NATURAL RESOURCE PARTNERS L.P. By: NRP (GP) LP, its general partner By: GP NATURAL RESOURCE PARTNERS LLC, its general partner
By: /s/ NICK CARTER ------------------------------------ Nick Carter President and Chief Operating Officer Date: March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on or behalf and in the capacities and on the dates indicated.
Date: March 28, 2003
By: /s/ CORBIN J. ROBERTSON, JR. ------------------------------------ Corbin J. Robertson, Jr. Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
Date: March 28, 2003
By: /s/ DWIGHT L. DUNLAP ------------------------------------ Dwight L. Dunlap Chief Financial Officer and Treasurer (Principal Financial Officer)
Date: March 28, 2003
By: /s/ KENNETH HUDSON ------------------------------------ Kenneth Hudson Controller (Principal Accounting Officer)
Date: March 28, 2003
By: /s/ ROBERT T. BLAKELY ------------------------------------ Robert T. Blakely Director
Date: March 28, 2003
By: /s/ DAVID M. CARMICHAEL ------------------------------------ David M. Carmichael Director
Date: March 28, 2003
By: /s/ ROBERT B. KARN III ---------------------------------- Robert B. Karn III Director
Date: March 28, 2003
By: /s/ STEVEN F. LEER ------------------------------------ Steven F. Leer Director
Date: March 28, 2003
By: /s/ S. REED MORIAN ------------------------------------ S. Reed Morian Director
Date: March 28, 2003
By: /s/ DAVID B. PEUGH ------------------------------------ David B. Peugh Director
Date: March 28, 2003
By: /s/ W. W. SCOTT, JR. ------------------------------------ W. W. Scott, Jr. Director
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Corbin J. Robertson, Jr., certify that:
1) I have reviewed this annual report on Form 10-K of Natural Resource Partners L.P.
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function);
a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
By: /s/ CORBIN J. ROBERTSON ------------------------------------ Corbin J. Robertson, Jr. Chief Executive Officer and Chairman of the Board
Date: March 28, 2003
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Dwight L. Dunlap, certify that:
1) I have reviewed this annual report on Form 10-K of Natural Resource Partners L.P.
2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function);
a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6) The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
By: /s/ DWIGHT L. DUNLAP ------------------------------------ Dwight L. Dunlap Chief Financial Officer and Treasurer
Date: March 28, 2003
EXHIBIT INDEX
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* Filed herewith