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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-31465
NATURAL RESOURCE PARTNERS L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 35-2164875
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 JEFFERSON STREET, SUITE 3600
HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(713) 751-7507
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At May 14, 2003, there were outstanding 11,353,658 Common Units and 11,353,658
Subordinated Units.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Natural Resource Partners L.P.:
Consolidated Balance Sheet as of March 31, 2003 and December 31, 2002....................... 3
Consolidated Statement of Income For the Three Months Ended March 31, 2003.................. 4
Consolidated Statement of Cash Flows For the Three Months Ended March 31, 2003.............. 5
Notes to Consolidated Financial Statements.................................................. 6
Western Pocahontas Properties Limited Partnership:
Statement of Income For the Three Months Ended March 31, 2002............................... 11
Statement of Cash Flows For the Three Months Ended March 31, 2002........................... 12
Notes to Financial Statements............................................................... 13
Great Northern Properties Limited Partnership:
Statement of Income For the Three Months Ended March 31, 2002.............................. 14
Statement of Cash Flows For the Three Months Ended March 31, 2002 ......................... 15
Notes to Financial Statements.............................................................. 16
New Gauley Coal Corporation:
Statement of Income For the Three Months Ended March 31, 2002.............................. 17
Statement of Cash Flows For the Three Months Ended March 31, 2002.......................... 18
Notes to Financial Statements.............................................................. 19
Arch Coal Contributed Properties:
Statement of Revenues and Direct Costs and Expenses - Three Months Ended March 31, 2002 20
Notes to Financial Statements.............................................................. 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction.............................................................................. 22
Results of Operations:
Natural Resource Partners L.P............................................................. 25
Western Pocahontas Properties Limited Partnership......................................... 28
Great Northern Properties Limited Partnership............................................. 30
New Gauley Coal Corporation............................................................... 31
Arch Coal Contributed Properties.......................................................... 32
Related Party Transactions................................................................ 32
Liquidity and Capital Resources........................................................... 33
Contractual Obligations and Commercial Commitments........................................ 34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK............................................................................ 36
ITEM 4. CONTROLS AND PROCEDURES................................................................ 38
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................................... 39
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................................. 39
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................................................ 39
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS......................................................................... 39
ITEM 5. OTHER INFORMATION...................................................................... 39
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................... 39
SIGNATURES..................................................................................... 40
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER................................................... 41
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER................................................... 42
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURAL RESOURCE PARTNERS L. P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents................................. $ 12,959 $ 7,753
Accounts receivable....................................... 6,836 7,593
Accounts receivable - affiliate........................... 114 1,450
Other 348 511
----------- ------------
Total current assets................................... 20,257 17,307
Property and equipment, at cost.............................. 445,283 433,430
Less accumulated depreciation and depletion.............. (64,938) (59,243)
----------- ------------
Net property and equipment............................... 380,345 374,187
Loan financing costs, net.................................... 1,115 1,225
----------- ------------
Total assets........................................ $ 401,717 $ 392,719
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable........................................ $ 224 $ 735
Accounts payable - affiliate............................ 222 667
Incentive plans - current portion....................... 185 --
Property and franchise taxes payable.................... 1,411 1,731
Accrued interest........................................ 145 200
----------- ------------
Total current liabilities ......................... 2,187 3,333
Deferred revenue............................................. 13,673 13,252
Long-term incentive plans.................................... 61 --
Long-term debt ............................................. 69,000 57,500
Partners' capital:
Common units (11,353,658 units outstanding) ........... 147,746 148,646
Subordinated units (11,353,658 units outstanding)....... 162,421 163,322
General partners' interest.............................. 6,629 6,666
----------- ------------
Total partners' capital............................ 316,796 318,634
----------- ------------
Total liabilities and partners' capital............ $ 401,717 $ 392,719
=========== ============
The accompanying notes are an integral part of these financial statements.
3
NATURAL RESOURCE PARTNERS L. P.
CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
REVENUES:
Coal royalties............................................. $ 15,409
Property taxes............................................. 888
Minimums recognized as revenue............................. 804
Override royalties......................................... 461
Other .................................................... 508
----------
Total revenues........................................ 18,070
OPERATING COSTS AND EXPENSES:
Depletion and amortization................................. 5,804
General and administrative................................. 2,176
Taxes other than income .................................. 1,160
Override payments.......................................... 388
Coal royalty payments...................................... 150
-----------
Total operating costs and expenses.................... 9,678
-----------
INCOME FROM OPERATIONS 8,392
OTHER INCOME (EXPENSE)
Interest expense......................................... (466)
Interest income....................................... 47
-----------
NET INCOME .................................................. $ 7,973
===========
General partners' net income............................... $ 159
===========
Limited partners' net income............................... $ 7,814
===========
BASIC AND DILUTED NET INCOME PER LIMITED PARTNER UNIT:
Common ................................................. $ 0.34
Subordinated............................................. $ 0.34
WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING:
Common .................................................. 11,354
===========
Subordinated ........................................... 11,354
===========
The accompanying notes are an integral part of these financial statements.
4
NATURAL RESOURCE PARTNERS L. P.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 7,973
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion and amortization............................... 5,804
Change in operating assets and liabilities:
Accounts receivable...................................... 2,093
Other assets............................................. 163
Accounts payable and accrued liabilities................. (956)
Deferred revenue......................................... 421
Long-term incentive plan................................. 191
Property and franchise taxes payable..................... (320)
---------
Net cash provided by operating activities........... 15,369
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property..................................... (11,852)
---------
Net cash used in investing activities............... (11,852)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans......................................... 11,500
Distributions to partners................................... (9,811)
---------
Net cash provided by financing activities........... 1,689
--------
NET INCREASE IN CASH.......................................... 5,206
CASH AT BEGINNING OF PERIOD................................... 7,753
--------
CASH AT END OF PERIOD......................................... $ 12,959
========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 391
========
The accompanying notes are an integral part of these financial statements.
5
NATURAL RESOURCE PARTNERS L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 2003
are not necessarily indicative of the results that may be expected for future
periods.
The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date but does not include all the footnotes
required by generally accepted accounting principles for complete financial
statements.
For further information, refer to the consolidated financial statements and
footnotes for the period from commencement of operations (October 17, 2002)
through December 31, 2002 included in the Natural Resource Partners L.P. Form
10-K, as filed on March 28, 2003.
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 of the assets from
the predecessor companies.
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 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
6
requirements that provide a description of asset retirement obligations and a
reconciliation of changes in the components of those obligations. The operators
of mines on our leased property are responsible for asset retirement
obligations. Therefore, the 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 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 requires 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
activities that are initiated after December 31, 2002. The adoption of this
standard did not have a significant impact on the Partnership's financial
statements.
3. ACQUISITION
On February 27, 2003, the Partnership purchased, through a wholly owned
subsidiary, an overriding royalty interest from a subsidiary of Alpha Natural
Resources LLC for $11.85 million. The acquisition was funded primarily through
its existing credit facility with the remainder in cash.
4. PROPERTY AND EQUIPMENT
Property and equipment includes:
MARCH 31, DECEMBER 31,
2003 2002
---------- ----------
(UNAUDITED)
(IN THOUSANDS)
Land................................... $ 13,532 $ 13,532
Coal properties........................ 423,286 411,434
Other.................................. 8,465 8,464
---------- ----------
$ 445,283 $ 433,430
========== ==========
5. REVOLVING CREDIT FACILITY
At March 31, 2003, the Partnership had borrowed $69.0 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% on $57.5 million
of the aggregate borrowings and 2.59% on the remaining $11.5 million at March
31, 2003. 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. In April 2003, the Partnership
increased the revolving credit facility from $100 million to $175 million.
Please read Note 10. Subsequent Events.
7
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 $248,000 for the period ending March 31,
2003. 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 for the period ending March 31, 2003 to the Partnership. The total
expenses charged to the Partnership under this arrangement were $527,000 for the
period ending March 31, 2003. These costs are reflected in the general and
administrative expenses in the accompanying statements of income.
At March 31, 2003, the Partnership had accounts receivable from affiliates
of $114,000 due from Arch Coal, Inc., which represents its portion of cost
incurred in connection with the formation of the Partnership. The Partnership
also had accounts payable to affiliates of $221,000, which includes overhead
reimbursements to Quintana Minerals Corporation and Western Pocahontas
Properties of $131,000 and $90,000, respectively.
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 an
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 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 the Partnership 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 March 31, 2003. The Partnership is not
associated with any environmental contamination that may require remediation
costs. However, lessees do 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, until
October 17, 2005 against environmental and tax liabilities attributable to the
ownership and operation of the assets contributed to the Partnership prior to
the closing of the initial public offering. The environmental indemnity is
limited to a maximum of $10.0 million.
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:
8
THREE MONTHS ENDED
MARCH 31, 2003
REVENUES PERCENT
-------- -------
(IN THOUSANDS)
(UNAUDITED)
Lessee A..................... $2,780 15%
Lessee B..................... $2,007 11%
9. INCENTIVE PLANS
Prior to the Partnership's initial public offering, GP Natural Resource
Partners LLC 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, or a total of 340,610 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 and the compensation committee of the board of directors have 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 determines. 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 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
become exercisable over a period determined by the compensation committee. The
compensation committee may provide for an acceleration of vesting based upon 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 are 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.
GP Natural Resource Partners LLC 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 reimburses GP Natural Resource
Partners LLC for payments and costs incurred under the Compensation Plan.
At March 31, 2003, 85,003 restricted units and 196,518 unit options have
been granted under the Plan and 59,089 units remained available to be issued.
The Partnership accrued expenses to be reimbursed to GP Natural Resource
Partners LLC of $246,000 for the period ended March 31, 2003 related to these
plans.
9
10. SUBSEQUENT EVENTS
On April 7, 2003, the Partnership increased the borrowing capacity under
its credit facility to $175 million from $100 million. The term and tenor of the
revolving credit facility remain unchanged. The amended credit facility includes
increased commitments from the original bank syndicate, led by PNC Bank, as well
as commitments from three new banks.
On April 10, 2003, the Partnership acquired more than 290,000 mineral acres
containing over 300 million tons of coal reserves from two subsidiaries of Alpha
Natural Resources, LLC for an aggregate purchase price of $53.6 million in cash.
The revolving credit facility was used to fund this acquisition.
On April 21, 2003, the board of directors of GP Natural Resource Partners
LLC voted to increase the quarterly distribution from $0.5125 to $0.5225, an
increase of $0.01 per unit. The distribution is payable on May 15, 2003 for unit
holders of record as of May 1, 2003.
10
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
(UNAUDITED)
REVENUES:
Coal royalties....................................... $ 4,779
Timber royalties..................................... 623
Gain on sale of property............................. 61
Property taxes....................................... 587
Other................................................ 211
----------
Total revenues.................................... 6,261
EXPENSES:
General and administrative........................... 823
Taxes other than income.............................. 697
Depreciation, depletion and amortization............. 707
----------
Total expenses.................................... 2,227
----------
Income from operations............................... 4,034
Other income (expenses):
Interest expense................................... (1,322)
Interest income.................................... 35
Reversionary interest.............................. (561)
----------
Net income........................................... $ 2,186
==========
The accompanying notes are an integral part of these financial statements.
11
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 2,186
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization............................ 707
Gain on sale of property............................................ (61)
Change in operating assets and liabilities
Accounts receivable.............................................. (543)
Other assets..................................................... (47)
Accrued liabilities.............................................. (294)
Deferred revenues................................................ (199)
Reversionary interest payable.................................... (865)
-----------
Net cash provided by operating activities...................... 884
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of properties...................................... 61
Capital expenditures.................................................. (35,127)
-----------
Net cash used in investing activities.......................... (35,066)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from financing............................................... 45,000
Deferred financing costs.............................................. (1,174)
Repayment of notes payable............................................ (7,848)
Repayment of debt..................................................... (721)
Distributions to partners............................................. (500)
Cash placed in restricted accounts, net............................... (16)
Cash placed in escrow................................................. 1,000
----------
Net cash provided by financing activities...................... 35,741
NET INCREASE IN CASH AND CASH EQUIVALENTS............................... 1,559
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD................................................................ 4,415
----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................. $ 5,974
==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest.............................. $ 1,322
==========
The accompanying notes are an integral part of these financial statements.
12
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 2002
are not necessarily indicative of the results that may be expected for future
periods.
For further information, refer to the financial statements and footnotes of
Western Pocahontas Properties Limited Partnership for the period through October
16, 2002 included in the Natural Resource Partners L.P. Form 10-K, as filed on
March 28, 2003.
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.
In connection with the formation of Natural Resource Partners L.P. and its
initial public offering of limited partnership units, the Partnership
transferred certain coal royalty producing properties that were 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. and
retained a coal reserve property that is leased to a third party and is
experiencing permitting problems. Additionally, the Partnership retained
unleased coal reserve properties, surface land and timberlands.
2. 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 $103,000 for the quarter
ended March 31, 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. The fee for the period
ending March 31, 2002, was $62,500 and is included in other revenue in the
accompanying statement of income. The contract may be canceled upon 90 days
advance notice by GNP.
13
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
(UNAUDITED)
REVENUES:
Coal royalties...................................... $ 1,444
Lease and easement income........................... 139
Other............................................... 93
----------
Total revenues................................. 1,676
EXPENSES:
General and administrative.......................... 130
Taxes other than income............................. 5
Depletion and amortization.......................... 696
----------
Total expenses................................. 831
----------
Income from operations................................... 845
Other income (expenses):
Interest expense.................................... (562)
Interest income..................................... 39
----------
Net income............................................... $ 322
==========
The accompanying notes are an integral part of these financial statements.
14
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 322
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion and amortization.............................. 696
Deferred revenue........................................ (5)
Change in operating assets and
liabilities
Accounts receivable................................... 622
Other assets.......................................... (58)
Accounts payable and accrued interest................. (64)
-----------
Net cash provided by operating
activities....................................... 1,513
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash provided by investing
activities....................................... --
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt.......................................... (375)
Partners' distributions.................................... (661)
Cash placed in restricted accounts, net.................... (793)
-----------
Net cash used in financing
activities....................................... (1,829)
-----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS................................................ (316)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD................................................. 749
-----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD.................................................... $ 433
===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest................... $ 572
===========
The accompanying notes are an integral part of these financial statements.
15
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 2002
are not necessarily indicative of the results that may be expected for future
periods.
For further information, refer to the financial statements and footnotes of
Great Northern Properties Limited Partnership for the period through October 16,
2002 included in the Natural Resource Partners L.P. Form 10-K, as filed on March
28, 2003.
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.
In connection with the formation of Natural Resource Partners L.P. and its
initial public offering of limited partnership units, the Partnership
transferred certain coal royalty producing properties that were 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. and
retained unleased coal reserve properties and surface land.
2. 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, of
which $62,500 is reflected in general and administrative expenses in the
statements of income for the three months ended March 31, 2002. The contract may
be canceled upon 90 days advance notice to the Partnership.
16
NEW GAULEY COAL CORPORATION
STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
(UNAUDITED)
REVENUES:
Coal royalties............................... $ 528
EXPENSES:
General and administrative................... 19
Taxes other than income...................... 12
Depletion and amortization................... 32
---------
Total expenses.......................... 63
---------
Income from operations............................ 465
Other income (expenses):
Interest expense............................. (32)
Interest income.............................. 8
Reversionary interest........................ (34)
---------
Net income........................................ $ 407
=========
The accompanying notes are an integral part of these financial statements.
17
NEW GAULEY COAL CORPORATION
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 407
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion and amortization................................. 32
Decrease in deferred revenues.............................. (142)
Change in operating assets and liabilities
Accounts receivable...................................... (22)
Other assets............................................. (8)
Accrued liabilities...................................... 39
-----------
Net cash provided by operating
activities.......................................... 306
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in investing activities................. --
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt............................................. (24)
-----------
Net cash used in financing activities................. (24)
-----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS................................................... 282
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD........................................................ 399
-----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................... $ 681
===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest...................... $ 32
===========
The accompanying notes are an integral part of these financial statements.
18
NEW GAULEY COAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 2002
are not necessarily indicative of the results that may be expected for future
periods.
For further information, refer to the financial statements and footnotes of
New Gauley Coal Corporation for the period through October 16, 2002 included in
the Natural Resource Partners L.P. Form 10-K, as filed on March 28, 2003.
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.
In connection with the formation of Natural Resource Partners L.P. and its
initial public offering of limited partnership units, the Company transferred
certain coal royalty producing properties that were 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
long-term debt to Natural Resource Partners L.P. and retained unleased coal
reserve properties and surface land.
19
ARCH COAL CONTRIBUTED PROPERTIES
STATEMENT OF REVENUES AND DIRECT COSTS AND EXPENSES
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
(UNAUDITED)
REVENUES
Coal royalties................................. $ 4,351
Other royalties................................ 448
Property taxes................................. 269
---------
Total revenues............................ 5,068
---------
DIRECT COSTS AND EXPENSES
Depletion...................................... 1,469
Property taxes................................. 269
Other expense.................................. 197
---------
Total expenses............................ 1,935
---------
Excess of revenue over direct costs and expenses.... $ 3,133
=========
The accompanying notes are an integral part of these financial statements.
20
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 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 statement because there was not sufficient information to develop a
reasonable cost allocation.
The accompanying Statement of Revenues and Direct Costs and Expenses is not
intended to be a complete presentation of the results of operations of the
Contributed Properties. The accompanying statement has been prepared to comply
with the requirements of the Securities and Exchange Commission for inclusion in
the quarterly report on Form 10-Q of NRP. For further information, refer to the
financial statements and footnotes of Arch Coal Contributed Properties for the
period through October 16, 2002 included in Natural Resource Partners L.P. Form
10-K, as filed on March 28, 2003.
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 were currently
under lease to coal mine operators to Natural Resource Partners L.P. on October
17, 2002 at fair market value.
2. 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 three months ended March 31, 2002 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 $2.4 million for the three months ended
March 31, 2002.
21
ITEM 2. 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 and the financial
statements and footnotes included in the Natural Resource Partners L.P. Form
10-K, as filed on March 28, 2003. 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
(collectively, the "WPP Group") 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 March 31, 2003, our reserves were located on 48 separate
properties and were subject to 97 leases with 40 lessees. For the three months
ended March 31, 2003, approximately 55% of the coal produced from our properties
came from underground mines and 45% came from surface mines. As of March 31,
2003, 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 three months ended March
31, 2003, our lessees produced 9.8 million tons of coal from the properties
contributed to us and our total revenue was $18.1 million, including coal
royalty revenues and minimums totaling $16.2 million.
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. 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 was colder than normal in many parts of the United States. 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 10% to 15%. However, 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.
22
During the first quarter of 2003, approximately 17% 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 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.
Depletion. We deplete coal properties on a unit-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.
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
23
obligations. The operators of mines on our leased property are responsible for
asset retirement obligations. Therefore, the 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 requires 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.
24
RESULTS OF OPERATIONS
NATURAL RESOURCE PARTNERS L.P.
THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS, EXCEPT PER TON DATA)
(UNAUDITED)
REVENUES:
Coal royalties........................................ $ 15,409
Property taxes........................................
888
Minimums recognized as revenue........................
804
Override royalties....................................
461
Other.................................................
508
Total revenues........................................
18,070
EXPENSES:
Depletion and amortization............................ 5,804
General and administrative............................ 2,176
Taxes other than income............................... 1,160
Override payments.....................................
388
Coal royalty payments.................................
150
Total expenses........................................ 9,678
---------
Income from operations.................................. 8,392
Other income (expense):
Interest expense...................................... (466)
Interest income.......................................
47
Net income.............................................. $ 7,973
=========
OTHER DATA:
Coal royalties
Appalachia............................................ $ 12,713
Illinois Basin........................................ 865
Northern Powder River Basin........................... 1,831
---------
Total $ 15,409
Production
Appalachia............................................ 7,496
Illinois Basin........................................ 721
Northern Powder River Basin........................... 1,601
---------
Total 9,818
=========
Average gross royalty per ton
Appalachia............................................ $ 1.70
Illinois Basin........................................ 1.20
Northern Powder River Basin........................... 1.14
Total $ 1.57
=========
THREE MONTHS ENDED MARCH 31, 2003
Revenues. For the three month period ending March 31, 2003, coal royalty
revenues were $15.4 million on 9.8 million tons of coal produced. Approximately
76.3% of the coal production came from the Appalachian region, 16.3% from the
Northern Powder River Basin and 7.4% from the Illinois Basin. The results
include two months of coal royalty revenues generated from NRP's acquisition of
an overriding royalty interest from Alpha Natural Resources in February.
Expenses. For the three month period ending March 31, 2003, total expenses
were $9.7 million, which includes depletion and amortization of $5.8 million, or
60%, general and administrative expense of $2.2 million, or 23%, and taxes other
than income of $1.2 million, or 12%. General and administrative expenses consist
of compensation expense of $1.0 million, including $0.2 million for the expected
reimbursement of the general partner for compensation awards granted by the
board of directors in February and $0.3 million
25
to establish a reserve for a potential bad debt expense due to a bankruptcy
petition filed by one of our lessees. NRP does not anticipate any further
allowances will be required due to the bankruptcy filing. Also contributing to
general and administrative expense were charges relating to the year-end audit,
tax returns and annual report expense. Taxes other than income include property
taxes of $0.9 million and state franchise taxes of $0.3 million.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2002
The following table sets forth coal royalty revenues, production, and
average gross royalty per ton from our properties for the three months ending
March 31, 2003 and 2002, respectively. The coal royalty revenues and production
for 2002 are from properties that were contributed to us on October 17, 2002.
Coal royalty revenues were generated from the properties in each of the
following areas: Appalachia, Illinois Basin and Northern Powder River Basin.
OPERATING STATISTICS
(IN THOUSANDS, EXCEPT PER TON DATA)
(UNAUDITED)
THREE THREE
MONTHS MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2003 2002
----------- ----------
COAL ROYALTIES
Appalachia........................................... $ 12,713 $ 8,823
Illinois Basin....................................... 865 578
Northern Powder River Basin.......................... 1,831 1,365
---------- ---------
Total ......................................... $ 15,409 $ 10,766
========== ==========
PRODUCTION
Appalachia........................................... 7,496 5,018
Illinois Basin....................................... 721 464
Northern Powder River Basin.......................... 1,601 1,268
---------- ----------
Total .......................................... 9,818 6,750
========== ==========
AVERAGE GROSS ROYALTY PER TON
Appalachia........................................... $ 1.70 $ 1.76
Illinois Basin....................................... 1.20 1.25
Northern Powder River Basin.......................... 1.14 1.08
---------- ----------
Total ................................... $ 1.57 1.59
========== ==========
Coal royalty revenues for the three months ended March 31, 2003 were $15.4
million compared to $10.8 million for the three months ended March 31, 2002, an
increase of $4.6 million, or 42.6%. Production increased by 3.1 million tons, or
46.3%, from 6.7 million tons to 9.8 million tons. The increases in production
and coal royalties were primarily due to:
Appalachia. Production from the properties we acquired from El Paso in
December 2002 resulted in production of 1.8 million tons and coal royalty
revenues of $2.6 million. Production from our West Fork property increased from
106,000 tons to 561,000 tons, and coal royalty revenues increased from $234,000
to $1.2 million because a longwall mine moved onto the property from adjacent
property. On our Dorothy-Sarita property, production increased from 149,000 tons
to 368,000 tons and royalty revenues increased from $298,000 to $753,000 due to
the resumption of mining at a temporarily idled mine. On our Davis Lumber
property, production increased from zero tons to 181,000 tons, and coal royalty
revenues increased from $6,000 to $247,000 due to the resumption of mining at a
temporarily idled mine. These increases were partially offset by lower
production on our Eunice property, where production decreased from 743,000 tons
to 658,000 tons and coal royalty revenues decreased from $1.4 million to $1.1
million due to a higher proportion of the production tonnage being surface mined
coal, which is at a lower royalty rate.
Illinois Basin. On our Cummings/Hocking Wolford property, production
increased from 182,000 tons to 395,000 tons, and coal royalty revenues increased
from $182,000 to $417,000 due to a higher proportion of production being on our
property instead of adjacent property.
Northern Powder River. Production from our Western Energy property increased
from 803,000 tons to 1.2 million tons, and coal royalty revenues increased from
$933,000 to $1.5 million. This increase was due to a higher proportion of the
production coming
26
from our property instead of adjacent property, which is typical of the
variations in production resulting from the checkerboard pattern ownership of
this mine.
27
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
(UNAUDITED)
REVENUES:
Coal royalties....................................... $ 4,779
Timber royalties..................................... 623
Gain on sale of property............................. 61
Property taxes....................................... 587
Other................................................ 211
----------
Total revenues.................................. 6,261
EXPENSES:
General and administrative........................... 823
Taxes other than income.............................. 697
Depreciation, depletion and amortization............. 707
----------
Total expenses.................................. 2,227
----------
Income from operations.................................... 4,034
Other income (expenses):
Interest expense..................................... (1,322)
Interest income...................................... 35
Reversionary interest................................ (561)
-----------
Net income................................................ $ 2,186
==========
PRODUCTION................................................ 2,677
AVERAGE GROSS ROYALTY PER TON............................. $ 1.79
THREE MONTHS ENDED MARCH 31, 2002
Revenues. Total revenues for the three months ended March 31, 2002 were
$6.3 million, of which coal royalty revenues were $4.8 million, or 76%. Coal
production during the period was 2.7 million tons, with an average gross royalty
rate per ton of $1.79. The following properties were the major contributors to
revenue:
Appalachia. Production from our Eunice property was 743,000 tons, which
generated coal royalty revenues of $1.4 million. Production from our
Evans-Laviers property was 859,000 tons, which generated coal royalty revenues
of $1.1 million. Seventeen other properties contributed 893,000 tons generating
$1.9 million in revenue.
Timber revenues for the three months ended March 31, 2002 were $0.6 million.
Other revenues were $0.9 million, including $0.6 million in property tax
revenues for amounts reimbursed to our lessees. Property and franchise taxes
account for the remaining $697,000.
Expenses. Aggregate expenses for the three months ended March 31, 2002 were
$2.2 million, including $823,000 of general and administrative expenses and
$707,000 of expenses related to depletion and amortization.
Other Income (Expense). Interest expense was $1.3 million for three months
ended March 31, 2002.
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. For the three months ended March 31, 2002, Western
Pocahontas incurred $0.6 million of expenses related to the reversionary
interest.
28
Net Income. Net income was $2.2 million for the three months ended
March 31, 2002.
29
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
(UNAUDITED)
REVENUES:
Coal royalties...................................... $ 1,444
Lease and easement income........................... 139
Other............................................... 93
----------
Total revenues................................. 1,676
EXPENSES:
General and administrative.......................... 130
Taxes other than income............................. 5
Depletion and amortization.......................... 696
----------
Total expenses................................. 831
----------
Income from operations................................... 845
Other income (expenses):
Interest expense.................................... (562)
Interest income..................................... 39
----------
Net income............................................... $ 322
==========
PRODUCTION............................................... 1,870
AVERAGE GROSS ROYALTY PER TON............................ $ 0.77
THREE MONTHS ENDED MARCH 31, 2002
Revenues. Total revenues for the three months ended March 31, 2002 were $1.7
million, of which coal royalty revenues were $1.4 million, or 86%. Coal
production for the period was 1.9 million tons, with average gross royalty rate
per ton of $0.77. Coal production and coal royalty revenues were attributed to
the following:
Northern Powder River. Production from our Western Energy property was
929,000 tons, which generated coal royalty revenues of $933,000. Production from
our Big Sky property was 431,000 tons, which generated coal royalty revenues of
$431,000.
Expenses totaled $0.8 million of which includes $0.1 million of general and
administrative expenses that primarily consist of $62,500 of fees paid to WPP
under their management agreement and $0.7 million of depletion and amortization.
Other Income (Expense). Interest expense was $0.6 million for the three
months ended March 31, 2002.
Net Income. Net income was $0.3 million for the three months ended
March 31, 2002.
30
NEW GAULEY COAL CORPORATION
STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
(UNAUDITED)
REVENUES:
Coal royalties............................................ $ 528
EXPENSES:
General and administrative................................ 19
Taxes other than income................................... 12
Depletion and amortization................................ 32
---------
Total expenses....................................... 63
---------
Income from operations......................................... 465
Other income (expenses):
Interest expense.......................................... (32)
Interest income........................................... 8
Reversionary interest..................................... (34)
---------
Net income..................................................... $ 407
=========
PRODUCTION.................................................... 178
AVERAGE GROSS ROYALTY PER TON................................. $ 2.97
THREE MONTHS ENDED MARCH 31, 2002
Revenues. Coal royalty revenues for the three months ended March 31, 2002
were $0.5 million on production of 0.4 million tons. New Gauley has producing
properties on two leases. The Alabama property produced 78,000 tons, generating
coal royalty revenues of $264,000. Production from our West Virginia property
was 100,000 tons, which generated coal royalty revenues of $250,000.
Expenses. Aggregate expenses for the three months ended March 31, 2002, were
$63,000 of which $32,000, or 50%, was from depletion and amortization, while
$12,000, or 19% was for property taxes.
Net Income. Net income was $407,000 for the three months ended
March 31, 2002.
31
ARCH COAL CONTRIBUTED PROPERTIES
STATEMENT OF REVENUES AND DIRECT COSTS AND EXPENSES
THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
(UNAUDITED)
REVENUES
Coal royalties................................. $ 4,351
Other royalties................................ 448
Property taxes................................. 269
---------
Total revenues............................ 5,068
---------
EXPENSES
Depletion...................................... 1,469
Property taxes................................. 269
Other expense.................................. 197
---------
Total expenses............................ 1,935
---------
Excess of revenue over direct costs and expenses.... $ 3,133
=========
PRODUCTION.......................................... 2,627
AVERAGE GROSS ROYALTY PER TON....................... $ 1.66
THREE MONTHS ENDED MARCH 31, 2002
Revenues. Revenues for the three months ended March 31, 2002 were $5.1
million, of which coal royalty revenues were $4.4 million, or 86%, on production
of 2.6 million tons.
Appalachia. Production from our Lone Mountain property was 668,000 tons,
which generated coal royalty revenues of $1.3 million. Production from our Lynch
property was 765,000 tons, which generated coal royalty revenues of $1.1
million. Production from our Pardee property was 293,000 tons, which generated
coal royalty revenues of $521,000. Production from our Campbells Creek property
was 274,000 tons, which generated coal royalty revenues of $438,000.
Direct costs and expenses. Direct costs and expenses for the three months
ended March 31, 2002 were $1.9 million, consisting of depletion of $1.5 million,
property taxes of $269,000 and other expense of $197,000.
RELATED PARTY TRANSACTIONS
PARTNERSHIP AGREEMENT
Our general partner does 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 are reimbursed for expenses incurred on our behalf. All direct
general and administrative expenses are 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 are also
reimbursed. Cost reimbursements due our general partner may be substantial and
will reduce our cash available for distribution to unitholders. For the three
months ended March 31, 2003, we have incurred expenses totaling $712,000 for
services performed by Western Pocahontas Properties Limited Partnership and
Quintana Minerals Corporation, affiliates of our general partner.
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 Ark Land the right to mine our coal on the
following properties:
o Lone Mountain located in Kentucky, which contains 47.1 million tons of
proven and probable reserves as of December 31, 2002;
32
o Pardee located in Kentucky and Virginia, which contains 20.4 million tons
of proven and probable reserves as of December 31, 2002;
o Boone/Lincoln located in West Virginia, which contains 18.5 million tons
of proven and probable reserves as of December 31, 2002; and
o 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 for the three months ended
March 31, 2003 were $2.4 million, representing 15.6% of our total coal royalty
revenues. If no production had taken place during the three months ended March
31, 2003, minimum royalties of $1.5 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) the
mining of all mineable and merchantable coal. 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:
o Ark Land has the ability to sublease the leased property without our
prior approval, although it remains responsible for sublessee
performance;
o 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;
o royalties for coal sold to any affiliates may be based on a gross selling
price below the market value of the coal;
o the indemnities provided by Ark Land to us do not survive the termination
of the leases;
o we only have a limited ability to terminate the leases;
o Ark Land has royalty-free wheelage rights on the leased properties; and
o 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.
On November 20, 2002 we amended the Pardee lease to include in that lease a
requirement that Ark Land pay us a non-recoupable quarterly rental payment equal
to quarterly minimums under a previous agreement that was simultaneously
terminated.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS AND CAPITAL EXPENDITURES
We satisfied our working capital requirements other than property
acquisitions with cash generated from operations. Funds for property
acquisitions were obtained through borrowings.
33
We believe that cash generated from operations and our borrowing capacity
under our revolving credit facility will be sufficient to meet our working
capital requirements and anticipated capital expenditures, other than for
acquisitions, for the next several years. We are actively pursuing additional
property acquisitions; accordingly, in April of 2003, we increased our revolving
credit facility from $100 million to $175 million to provide for additional
acquisitions. We intend to fund any acquisitions with borrowings under our
revolving credit facility and proceeds from the issuance of common units and
debt. A minimal portion of our capital expenditures will be maintenance capital
expenditures. 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, other than for acquisitions, have
historically been minimal.
Net cash provided by operations during the three months ended March 31, 2003
was $15.4 million, substantially all of which was from coal royalty revenues.
Net cash used in investing activities during the three months ended March
31, 2003 was $11.9 million for the acquisition of the Alpha Natural Resources
overriding royalty interest acquired in February 2003. This acquisition was
funded primarily from our revolving credit facility with the balance paid in
cash.
Cash provided by financing activities for the three months ended March 31,
2003 was $1.7 million. This was primarily attributable to the borrowings under
our revolving credit facility used to finance the acquisition discussed above.
This borrowing was offset by a distribution to partners of $9.8 million made on
February 14, 2003 at a rate of $0.4234 per unit, which was pro-rated for the two
and one-half month period from the commencement of operations on October 17
through December 31, 2002. No borrowings were required to fund the distribution.
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. On April 4, 2003, we increased the borrowing capacity under our credit
facility to $175 million. Other terms of the credit facility remain unchanged.
The amended credit facility includes increased commitments from the original
bank syndicate, led by PNC Bank, as well as commitments from three new banks.
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 are
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:
o the higher of the federal funds rate plus 0.50% or the prime rate as
announced by the agent bank; or
o 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:
o incur indebtedness;
34
o grant liens;
o engage in mergers and acquisitions or change the nature of our business;
o amend our organizational documents or the omnibus agreement;
o make loans and investments;
o sell assets; or
o enter into transactions with affiliates.
The credit agreement also contains covenants requiring us to maintain:
o 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
o 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:
o failure to pay any principal, interest, fees or other amount when due;
o 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;
o bankruptcy or insolvency events;
o termination of existence;
o failure to comply with the loan documents, subject to certain grace
periods;
o any representation, warranty or document provided is determined to have
been materially untrue when made or provided;
o 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
o any of the following changes in control:
o we cease to own all of the member interests of the operating company;
o our general partner ceases to own directly all of our general partner
interests; or
o 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 February 26, 2003, we borrowed $11.5 million under our revolving credit
facility for the acquisition of the overriding royalty interest from Alpha
Natural Resources for $11.852 million. At the March 31, 2003 we had $69 million
outstanding on our revolving credit facility with $57.5 million bearing interest
at 2.72% and $11.5 million bearing interest at 2.59%. We incurred $466,000 of
interest expense in first quarter, consisting of $418,000 of interest and
$48,000 of credit facility fees. Cash payments for interest totaled $391,000 on
March 4, 2003.
35
CONTRACTUAL OBLIGATIONS
The following table reflects our long-term non-cancelable contractual
obligations as of March 31, 2003 (in millions):
PAYMENTS DUE BY PERIOD
--------------------------------------------------
CONTRACTUAL OBLIGATIONS 2003 2004 2005 2006 2007 THEREAFTER
- ----------------------- ---- ---- ---- ---- ---- ----------
Long-term debt (including current maturities) $ -- $ -- $ 69.0 $ -- $ -- $ --
====== ====== ====== ====== ====== ==========
ITEM 3. 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 March 31, 2003, the Partnership had
outstanding $69.0 million in variable interest rate debt. If LIBOR rates were to
increase by 100 basis points, annual interest expense would increase by
$690,000, assuming the same principal amount remained outstanding over the next
twelve months.
INFLATION
Inflation in the United States has been relatively low in recent years and
did not have a material impact on operations for the quarter ended March 31,
2003.
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. 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-Q 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.
36
These forward-looking statements are made based upon management's current
plans, expectations, estimates, assumptions and beliefs concerning future events
affecting us and therefore involve a number of risks and uncertainties. We
caution that forward-looking statements are not guarantees and that actual
results could differ materially from those expressed or implied in the
forward-looking statements.
You should not put undue reliance on any forward-looking statements. Please
read "Risks Related to Our Business" below for important factors that could
cause our actual results of operations or our actual financial condition to
differ.
RISKS RELATED TO OUR BUSINESS
o 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.
o A substantial or extended decline in coal prices could reduce our coal
royalty revenues and the value of our coal reserves.
o Our lessees' coal mining operations are subject to operating risks that
could result in lower coal royalty revenues to us.
o 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.
o 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.
o If our lessees do not manage their operations well, their production
volumes and our coal royalty revenues could decrease.
o Due to our lack of asset diversification, adverse developments in the
coal industry could reduce our coal royalty revenues.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o Fluctuations in transportation costs and the availability or reliability
of transportation could reduce the production of coal mined from our
properties.
o Our reserve estimates depend on many assumptions that may be inaccurate,
which could materially adversely affect the quantities and value of our
reserves.
o Our lessees' work forces could become increasingly unionized in the
future.
o We may be exposed to changes in interest rates because our current
borrowings under our revolving credit facility may be
37
subject to variable interest rates based upon LIBOR.
ITEM 4. CONTROLS AND PROCEDURES
NRP carried out an evaluation of the effectiveness of the design and
operation of its 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 NRP management, including the Chief Executive Officer
and Chief Financial Officer of the general partner of the general partner of
NRP. 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, summarizing and reporting of
information and in accumulating and communicating of information to management
as appropriate to allow for timely decisions with regard to required disclosure.
In addition, there have been no significant changes in NRP's 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.
38
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are in the ordinary course of business a party to various legal
proceedings. We do not believe the outcome of these proceedings, individually or
in the aggregate, will have a material adverse effect on our financial
condition, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit
Number Description
- ------- -----------------------------------------------------------------
3.1 -- Certificate of Limited Partnership of Natural Resource Partners
L.P. (incorporated by reference to Exhibit 3.1 of the
Registration Statement on Form S-1 filed April 19, 2002, File No.
333-86582)
3.2 -- First Amended and Restated Agreement of Limited Partnership of
Natural Resource Partners L.P., dated as of October 17, 2002
(incorporated by reference to Exhibit 3.2 to the Annual Report on
Form 10-K for the year ended December 31, 2002, File No.
001-31465)
3.3 -- Certificate of Formation of NRP (Operating) LLC (incorporated by
reference to Exhibit 3.3 of the Registration Statement on Form
S-1 filed April 19, 2002, File No. 333-86582)
3.4 -- Amended and Restated Limited Liability Company Agreement of NRP
(Operating) LLC, dated as of October 17, 2002 (incorporated by
reference to Exhibit 3.4 to the Annual Report on Form 10-K for
the year ended December 31, 2002, File No. 001-31465)
3.5 -- Certificate of Limited Partnership of NRP (GP) LP (incorporated
by reference to Exhibit 3.5 of the Registration Statement on Form
S-1 filed April 19, 2002, File No. 333-86582)
3.6 -- First Amended and Restated Agreement of Limited Partnership of
NRP (GP) LP,dated as of October 17, 2002 (incorporated by
reference to Exhibit 3.6 to the Annual Report on Form 10-K for
the year ended December 31, 2002, File No. 001-31465)
3.7 -- Certificate of Formation of GP Natural Resource Partners LLC
(incorporated by reference to Exhibit 3.1 of the Registration
Statement on Form S-1 filed April 19, 2002, File No. 333-086582)
3.8 -- Second Amended and Restated Limited Liability Company of GP
Natural Resource Partners LLC, dated as of October 17, 2002
(incorporated by reference to Exhibit 3.8 to the Annual Report on
Form 10-K for the year ended December 31, 2002, File No.
001-31465)
99.1* -- Certification of Chief Executive Officer pursuant to 18 U.S.C.
section 1350
99.2* -- Certification of Chief Financial Officer pursuant to 18 U.S.C.
section 1350
*Filed herewith
B. Reports on Form 8-K
A current report on Form 8-K/A was filed on January 9, 2003 in
connection with our acquisition of coal reserves from Coastal Coal
Company, a subsidiary of El Paso Corporation.
A current report on Form 8-K was filed on January 23, 2003 in connection
with the declaration of our first quarter distribution and the
appointment of Robert T. Blakely to our board of directors.
A current report on Form 8-K was furnished on February 14, 2003 in
connection with disclosure of fourth quarter earnings and our outlook
for 2003.
A current report on Form 8-K was filed on February 27, 2003 in
connection with our acquisition of an overriding royalty interest from
Alpha Natural Resources.
39
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
Date: May 15, 2003
By: /s/ CORBIN J. ROBERTSON, JR.
--------------------------------------
Corbin J. Robertson, Jr.,
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2003
By: /s/ DWIGHT L. DUNLAP
--------------------------------------
Dwight L. Dunlap,
Chief Financial Officer and
Treasurer (Principal Financial Officer)
Date: May 15, 2003
By: /s/ KENNETH HUDSON
--------------------------------------
Kenneth Hudson
Controller
(Principal Accounting Officer)
40
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Dwight L. Dunlap, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Natural Resource
Partners L.P.
2) Based on my knowledge, this quarterly 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 quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly 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
quarterly 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: May 15, 2003
41
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Corbin J. Robertson, Jr., certify that:
1) I have reviewed this quarterly report on Form 10-Q of Natural Resource
Partners L.P.
2) Based on my knowledge, this quarterly 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 quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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
quarterly 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 quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly 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
quarterly 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, JR.
------------------------------------
Corbin J. Robertson, Jr.
Chief Executive Officer and
Chairman of the Board
Date: May 15, 2003
42
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------------------------------------------------------------
3.1 -- Certificate of Limited Partnership of Natural Resource Partners
L.P. (incorporated by reference to Exhibit 3.1 of the
Registration Statement on Form S-1 filed April 19, 2002, File No.
333-86582)
3.2 -- First Amended and Restated Agreement of Limited Partnership of
Natural Resource Partners L.P., dated as of October 17, 2002
(incorporated by reference to Exhibit 3.2 to the Annual Report on
Form 10-K for the year ended December 31, 2002, File No.
001-31465)
3.3 -- Certificate of Formation of NRP (Operating) LLC (incorporated by
reference to Exhibit 3.3 of the Registration Statement on Form
S-1 filed April 19, 2002, File No. 333-86582)
3.4 -- Amended and Restated Limited Liability Company Agreement of NRP
(Operating) LLC, dated as of October 17, 2002 (incorporated by
reference to Exhibit 3.4 to the Annual Report on Form 10-K for
the year ended December 31, 2002, File No. 001-31465)
3.5 -- Certificate of Limited Partnership of NRP (GP) LP (incorporated
by reference to Exhibit 3.5 of the Registration Statement on Form
S-1 filed April 19, 2002, File No. 333-86582)
3.6 -- First Amended and Restated Agreement of Limited Partnership of
NRP (GP) LP,dated as of October 17, 2002 (incorporated by
reference to Exhibit 3.6 to the Annual Report on Form 10-K for
the year ended December 31, 2002, File No. 001-31465)
3.7 -- Certificate of Formation of GP Natural Resource Partners LLC
(incorporated by reference to Exhibit 3.1 of the Registration
Statement on Form S-1 filed April 19, 2002, File No. 333-086582)
3.8 -- Second Amended and Restated Limited Liability Company of GP
Natural Resource Partners LLC, dated as of October 17, 2002
(incorporated by reference to Exhibit 3.8 to the Annual Report on
Form 10-K for the year ended December 31, 2002, File No.
001-31465)
99.1* -- Certification of Chief Executive Officer pursuant to 18 U.S.C.
section 1350
99.2* -- Certification of Chief Financial Officer pursuant to 18 U.S.C.
section 1350