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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 JUNE 30, 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 August 13, 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 Sheets as of June 30, 2003 and December 31, 2002....................... 3
Consolidated Statements of Income For the Three and Six Months Ended June 30, 2003.......... 4
Consolidated Statements of Cash Flows Six Months Ended June 30, 2003........................ 5
Notes to Consolidated Financial Statements.................................................. 6
Western Pocahontas Properties Limited Partnership:
Statements of Income For the Three and Six Months Ended June 30, 2002....................... 11
Statement of Cash Flows For the Six Months Ended June 30, 2002.............................. 12
Notes to Financial Statements............................................................... 13
Great Northern Properties Limited Partnership:
Statements of Income For the Three and Six Months Ended June 30, 2002...................... 14
Statement of Cash Flows For the Six Months Ended June 30, 2002 ............................ 15
Notes to Financial Statements.............................................................. 16
New Gauley Coal Corporation:
Statements of Income For the Three and Six Months Ended June 30, 2002...................... 17
Statement of Cash Flows For the Six Months Ended June 30, 2002............................. 18
Notes to Financial Statements.............................................................. 19
Arch Coal Contributed Properties:
Statements of Revenues and Direct Costs and Expenses - Three and Six
Months Ended June 30, 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............................................................... 32
Arch Coal Contributed Properties.......................................................... 33
Related Party Transactions................................................................ 34
Liquidity and Capital Resources........................................................... 35
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....................................................... 40
SIGNATURES..................................................................................... 41
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURAL RESOURCE PARTNERS L. P.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................. $ 14,181 $ 7,753
Accounts receivable................................... 9,600 7,593
Accounts receivable - affiliate....................... -- 1,450
Other................................................. 186 511
----------- ------------
Total current assets............................... 23,967 17,307
Property and equipment, at cost.......................... 499,094 433,430
Less accumulated depletion and amortization........... (71,091) (59,243)
----------- ------------
Net property and equipment............................ 428,003 374,187
Loan financing costs, net................................ 3,405 1,225
Cash held in escrow...................................... 58,000 --
----------- ------------
Total assets....................................... $ 513,375 $ 392,719
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable.................................... $ 203 $ 735
Accounts payable - affiliate........................ 248 667
Current portion of long-term debt................... 9,350 --
Accrued incentive plan expenses - current portion... 300 --
Property and franchise taxes payable................ 1,640 1,731
Accrued interest.................................... 209 200
----------- ------------
Total current liabilities ......................... 11,950 3,333
Deferred revenue......................................... 13,035 13,252
Accrued incentive plan expenses.......................... 798 --
Long-term debt ......................................... 173,650 57,500
Partners' capital:
Common units (11,353,658 units outstanding) ....... 146,803 148,646
Subordinated units (11,353,658 units outstanding)... 161,478 163,322
General partners' interest.......................... 6,592 6,666
Other comprehensive loss............................ (931) --
----------- ------------
Total partners' capital............................ 313,942 318,634
----------- ------------
Total liabilities and partners' capital............ $ 513,375 $ 392,719
=========== ============
The accompanying notes are an integral part of these financial statements.
3
NATURAL RESOURCE PARTNERS L. P.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2003 JUNE 30, 2003
------------- -------------
Revenues:
Coal royalties...................................................... $ 19,188 $ 34,597
Property taxes...................................................... 1,301 2,189
Minimums recognized as revenue...................................... 455 1,259
Override royalties.................................................. 200 661
Other ............................................................. 695 1,203
---------- ----------
Total revenues................................................. 21,839 39,909
Operating costs and expenses:
Depletion and amortization.......................................... 6,369 12,173
General and administrative.......................................... 2,131 4,307
Taxes other than income ........................................... 1,421 2,581
Override payments................................................... -- 388
Coal royalty payments............................................... 161 311
----------- -----------
Total operating costs and expenses............................. 10,082 19,760
----------- -----------
Income from operations 11,757 20,149
Other income (expense)
Interest expense.................................................... (1,131) (1,597)
Interest income..................................................... 56 103
Loss from interest rate hedge....................................... (499) (499)
------------ -----------
Net income ........................................................... $ 10,183 $ 18,156
============ ===========
General partners' net income........................................ $ 204 $ 363
=========== ===========
Limited partners' net income........................................ $ 9,979 $ 17,793
=========== ===========
Basic and diluted net income per limited partner unit:
Common............................................................. $ .44 $ .78
=========== ===========
Subordinated ....................................................... $ .44 $ .78
=========== ===========
Weighted average number of units outstanding:
Common 11,354 11,354
=========== ===========
Subordinated........................................................ 11,354 11,354
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
NATURAL RESOURCE PARTNERS L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED
JUNE 30, 2003
-------------
Cash flows from operating activities:
Net income................................................................ $ 18,156
Adjustments to reconcile net income to net
cash provided by operating activities:
Depletion and amortization............................................. 12,173
Change in operating assets and liabilities:
Accounts receivable.................................................... (557)
Other assets........................................................... (2,180)
Accounts payable and accrued liabilities............................... (642)
Deferred revenue....................................................... (217)
Accrued incentive plan expenses........................................ 798
Property and franchise taxes payable................................... (91)
----------
Net cash provided by operating activities......................... 27,440
----------
Cash flows from investing activities:
Acquisition of property................................................... (65,664)
Cash held in escrow....................................................... (58,000)
----------
Net cash used in investing activities............................. (123,664)
----------
Cash flows from financing activities:
Proceeds from loans....................................................... 248,100
Repayment of loans........................................................ (122,600)
Distributions to partners................................................. (21,917)
Settlement of hedge included in other comprehensive loss.................. (931)
----------
Net cash provided by financing activities......................... 102,652
----------
Net increase in cash........................................................ 6,428
Cash at beginning of period................................................. 7,753
----------
Cash at end of period....................................................... $ 14,181
==========
Supplemental cash flow information:
Cash paid during the period for interest.................................. $ 1,416
==========
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 and six month periods ended June
30, 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 87-21 , "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. The Partnership
does not operate any mines. The Partnership leases coal reserves through its
wholly owned subsidiary, NRP (Operating) LLC, ("NRP Operating"), 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
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
6
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. ACQUISITIONS
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 $53.625 million in
cash. The Partnership has, in turn, leased these reserves to the subsidiaries of
Alpha Natural Resources, which will mine the coal and pay royalties to the
Partnership. The acquisition was effective as of April 1, 2003. Funding for this
acquisition was obtained from the Partnership's recently increased credit
facility. These reserves, which are primarily underground, are associated with
18 mines, 11 leases, and 8 operators in Virginia. The properties are adjacent to
the Partnership's VICC property acquired from El Paso Corporation last December,
which is operated by another subsidiary of Alpha Natural Resources, LLC.
On June 30, 2003, the Partnership entered into an agreement to acquire
approximately 78 million tons of proven coal reserves and an overriding royalty
interest on additional coal from subsidiaries of PinnOak Resources, LLC for $58
million. Simultaneous with the execution of the purchase and sale agreement, the
Partnership placed the $58 million purchase price into an escrow account to be
released at closing. The Partnership will lease the reserves back to other
subsidiaries of PinnOak Resources that will mine the reserves and pay royalties
to the Partnership. The overriding royalty interest will be paid to the
Partnership on third party coal mined and processed by PinnOak Resources through
its preparation plants on these properties, which is anticipated to be at least
36 million tons. The properties consist of coal reserves at two separate mine
complexes: the Pinnacle mine in Pineville, West Virginia and the Oak Grove mine
near Birmingham, Alabama. PinnOak Resources produces low volatile metallurgical
coal from these longwall mines and has onsite preparation plants.
4. PROPERTY AND EQUIPMENT
Property and equipment includes:
JUNE 30, DECEMBER 31,
2003 2002
------------ ------------
(UNAUDITED)
(IN THOUSANDS)
Land............................................................................. $ 13,532 $ 13,532
Coal properties.................................................................. 477,098 411,434
Other............................................................................ 8,464 8,464
------------ ------------
$ 499,094 $ 433,430
============ ============
5. REVOLVING CREDIT FACILITY
In connection with the Partnership's initial public offering, its wholly
owned operating subsidiary, NRP Operating, entered into a three-year, $100
million revolving credit facility. On April 4, 2003, NRP Operating increased the
borrowing capacity under the credit facility to $175 million. 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.
On June 19, 2003, simultaneous with NRP Operating's issuance of senior
notes, NRP Operating adopted a second amendment to its credit facility. This
amendment permitted NRP Operating to issue senior unsecured notes through a
private placement in an amount up to $175 million, with a portion of the
proceeds to be used to reduce the outstanding balance on the revolving credit
facility. This amendment also increased the leverage ratio from 2.75 to 1.00 to
3.50 to 1.00. At June 30, 2003, NRP Operating had $58.0 million
7
outstanding under this credit facility.
6. LONG TERM SENIOR NOTES
On June 19, 2003, NRP Operating closed a private placement of $125 million
of senior unsecured notes and committed to issue an additional $50 million of
senior notes on or prior to September 19, 2003 at the same interest rates. The
senior notes include:
- $50 million of 5.55% senior notes due 2023, with a 10-year average
life;
- $50 million of 4.91% senior notes due 2018, with a 7.5-year average
life; and
- $25 million of 5.55% senior notes due 2013
Proceeds from the private placement were used to repay borrowings under NRP
Operating's existing revolving credit facility and for expenses associated with
the transaction. In anticipation of the private placement on May 12, 2003, NRP
Operating entered into a treasury rate hedge with respect to $50 million of the
senior notes. In conjunction with the closing of the private placement, NRP
Operating paid $1.4 million to settle this treasury rate hedge. Of the $1.4
million paid for the settlement, approximately $0.9 million will be amortized
into expense over 20 years, and the balance of approximately $0.5 million has
been expensed currently and classified as other income (expense) in the income
statement.
7. RELATED PARTY TRANSACTIONS
Quintana Minerals Corporation, a company controlled by Corbin J. Robertson,
Jr., Chairman and CEO of the Partnership's 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 approximately $0.2 million and
approximately $0.5 million for the three and six months ended June 30, 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 June 30, 2003 to the Partnership. The total
expenses charged to the Partnership under this arrangement were approximately
$0.5 million and approximately $1.0 million for the three and six months ended
June 30, 2003. These costs are reflected in the general and administrative
expenses in the accompanying statements of income.
At June 30, 2003, the Partnership had accounts payable to affiliates of
approximately $0.2 million, which includes overhead reimbursements to Quintana
Minerals Corporation and Western Pocahontas Properties of approximately $0.1
million and $0.1 million, respectively.
8. COMMITMENTS AND CONTINGENCIES
LEGAL
The Partnership is involved, from time to time, in various legal proceedings
arising in the ordinary course of business. While the ultimate results of these
proceedings cannot be predicted with certainty, Partnership management believes
these claims will not have a material effect on the Partnership's financial
position, liquidity or operations.
Environmental Compliance
The operations conducted on 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
8
environmental charges imposed on it related to its properties for the period
ended June 30, 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.
9. MAJOR LESSEES
The Partnership depends on a few lessees for a significant portion of its
revenues. Revenues from major lessees that exceed ten percent of total revenues
are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2003
REVENUES PERCENT REVENUES PERCENT
-------- ------- -------- -------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
Lessee A................................................... $4,707 22% $6,813 17%
Lessee B................................................... $3,028 14% $5,441 14%
Lessee C................................................... $2,286 11% $4,290 11%
Lessee D................................................... $2,106 10% $4,248 11%
10. 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.
9
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 June 30, 2003, 87,429 restricted units and 200,157 unit options have
been granted under the Plan and 53,024 units remained available to be issued.
The Partnership accrued expenses to be reimbursed to GP Natural Resource
Partners LLC of $798,000 for the six months ended June 30, 2003 related to these
plans.
11. SUBSEQUENT EVENTS
On July 11, 2003, the Partnership completed its acquisition of approximately
78 million tons of proven coal reserves and an overriding royalty interest on
additional coal from subsidiaries of PinnOak Resources, LLC for $58 million. The
$58 million purchase price had been placed into an escrow account on June 30,
2003 in connection with the execution of the purchase and sale agreement. The
transaction was initially funded through the Partnership's existing credit
facility. On September 19, 2003, $50 million of the borrowings will be converted
to long-term debt in connection with the Partnership's commitment to issue
additional senior notes under the Note Purchase Agreement dated June 19, 2003.
10
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------
Revenues:
Coal royalties....................................... $ 5,534 $ 10,313
Timber royalties..................................... 995 1,618
Gain on sale of property............................. 24 85
Property taxes....................................... 51 638
Other................................................ 534 745
---------- ----------
Total revenues.................................. 7,138 13,399
Expenses:
General and administrative........................... 726 1,549
Taxes other than income.............................. 85 782
Depreciation, depletion and amortization............. 770 1,477
---------- ----------
Total expenses.................................. 1,581 3,808
---------- ----------
Income from operations.................................... 5,557 9,591
Other income (expenses):
Interest expense..................................... (1,607) (2,929)
Interest income...................................... 38 73
Reversionary interest................................ -- (561)
---------- -----------
Net income................................................ $ 3,988 $ 6,174
========== ==========
The accompanying notes are an integral part of these financial statements.
11
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED
JUNE 30, 2002
-------------
Cash flows from operating activities:
Net income............................................................ $ 6,174
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, depletion and amortization............................ 1,477
Gain on sale of property............................................ (85)
Change in operating assets and liabilities
Accounts receivable.............................................. (1,534)
Other assets..................................................... 8
Accrued liabilities.............................................. 96
Deferred revenues................................................ 621
Reversionary interest payable.................................... (865)
----------
Net cash provided by operating activities...................... 5,892
Cash flows from investing activities:
Proceeds from sale of properties...................................... 86
Capital expenditures.................................................. (35,123)
----------
Net cash used in investing activities.......................... (35,037)
Cash flows from financing activities:
Proceeds from financing............................................... 45,000
Deferred financing costs.............................................. (1,289)
Repayment of notes payable............................................ (7,848)
Repayment of debt..................................................... (1,456)
Distributions to partners............................................. (3,500)
Cash placed in restricted accounts, net............................... (31)
Cash placed in escrow................................................. 1,000
----------
Net cash provided by financing activities...................... 31,876
Net increase in cash and cash equivalents............................... 2,731
Cash and cash equivalents at beginning of period........................ 4,415
---------
Cash and cash equivalents at end of period.............................. $ 7,146
==========
Supplemental cash flow information:
Cash paid during the period for interest.............................. $ 2,929
==========
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 and six month periods ended June
30, 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 $81,000 and $191,000 for
the three and six month periods ended June 30, 2002, respectively. 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 fees for the three
and six month periods ended June 30, 2002, were $62,500 and $125,000,
respectively, and are 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
STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------
Revenues:
Coal royalties...................................... $ 1,998 $ 3,442
Lease and easement income........................... 95 234
Other............................................... 131 224
---------- ----------
Total revenues................................. 2,224 3,900
Expenses:
General and administrative.......................... 143 273
Taxes other than income............................. 39 44
Depletion and amortization.......................... 507 1,203
---------- ----------
Total expenses................................. 689 1,520
---------- ----------
Income from operations................................... 1,535 2,380
Other income (expenses):
Interest expense.................................... (579) (1,141)
Interest income..................................... 26 65
---------- ----------
Net income............................................... $ 982 $ 1,304
========== ==========
The accompanying notes are an integral part of these financial statements.
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED
JUNE 30, 2002
-------------
Cash flows from operating activities:
Net income......................................................... $ 1,304
Adjustments to reconcile net income to net cash provided by
operating activities:
Depletion and amortization...................................... 1,203
Deferred revenue................................................ 290
Change in operating assets and liabilities
Accounts receivable........................................... (45)
Other assets.................................................. 7
Accounts payable and accrued interest......................... (58)
-----------
Net cash provided by operating activities.................. 2,701
-----------
Cash flows from investing activities:
Net cash provided by investing activities.................. --
-----------
Cash flows from financing activities:
Repayment of debt.................................................. (750)
Partners' distributions............................................ (661)
Cash placed in restricted accounts, net............................ (1,062)
-----------
Net cash used in financing activities...................... (2,473)
-----------
Net increase in cash and cash equivalents............................ 228
Cash and cash equivalents at beginning of period..................... 749
-----------
Cash and cash equivalents at end of period........................... $ 977
===========
Supplemental cash flow information:
Cash paid during the period for interest........................... $ 1,126
===========
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 June 30, 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 and $125,000 are reflected in general and administrative expenses
in the statements of income for the three and six month periods ended June 30,
2002, respectively. The contract may be canceled upon 90 days advance notice to
the Partnership.
16
NEW GAULEY COAL CORPORATION
STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------
Revenues:
Coal royalties............................................ $ 410 $ 938
Other..................................................... 52 52
----------- -----------
Total revenues....................................... 462 990
Expenses:
General and administrative................................ 40 59
Taxes other than income................................... (1) 11
Depletion and amortization................................ 47 79
----------- -----------
Total expenses....................................... 86 149
----------- -----------
Income from operations......................................... 376 841
Other income (expenses):
Interest expense.......................................... (32) (64)
Interest income........................................... 7 15
Reversionary interest..................................... -- (34)
----------- -----------
Net income..................................................... $ 351 $ 758
=========== ===========
The accompanying notes are an integral part of these financial statements.
17
NEW GAULEY COAL CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED
JUNE 30, 2002
-------------
Cash flows from operating activities:
Net income.................................................... $ 758
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion and amortization................................. 79
Decrease in deferred revenues.............................. (278)
Change in operating assets and liabilities
Accounts receivable...................................... 4
Other assets............................................. (23)
Accrued liabilities...................................... (65)
-----------
Net cash provided by operating
activities.......................................... 475
-----------
Cash flows from investing activities:
Net cash used in investing activities................. --
-----------
Cash flows from financing activities:
Repayment of debt............................................. (49)
Dividends..................................................... (400)
-----------
Net cash used in financing activities................. (449)
-----------
Net increase in cash and cash equivalents....................... 26
Cash and cash equivalents at beginning of period................ 399
-----------
Cash and cash equivalents at end of period...................... $ 425
===========
Supplemental cash flow information:
Cash paid during the period for interest...................... $ 64
===========
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 June 30, 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
STATEMENTS OF REVENUES AND DIRECT COSTS AND EXPENSES
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------
Revenues
Coal royalties................................. $ 4,529 $ 8,880
Other royalties................................ 477 925
Property taxes................................. 269 538
--------- ---------
Total revenues............................ 5,275 10,343
--------- ---------
Direct Costs and Expenses
Depletion...................................... 1,500 2,969
Property taxes................................. 269 538
Other expense.................................. 214 411
--------- ---------
Total expenses............................ 1,983 3,918
--------- ---------
Excess of revenue over direct costs and expenses.... $ 3,292 $ 6,425
========= =========
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 and six months ended June 30, 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 and $4.8 million for the
three and six months ended June 30, 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. 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 June 30, 2003, our reserves were located on 49 separate
properties and were subject to 107 leases with 46 lessees. For the six months
ended June 30, 2003, approximately 57% of the coal produced from our properties
came from underground mines and 43% came from surface mines. As of June 30,
2003, approximately 62% 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 at least 20% 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 six months ended June 30,
2003, our lessees produced 21.2 million tons of coal from our properties and our
coal royalty revenues, including minimum royalties, totaled $35.9 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.
The majority of our coal is produced by nine 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. Coal prices are based on supply and
demand, specific coal characteristics, economics of alternative fuel, and
overall domestic and international economic conditions.
During the first half of 2003, approximately 20% of our coal royalty
revenues were from metallurgical coal. Prices of metallurgical coal have
remained relatively stable in the past two years. Metallurgical coal, because of
its unique chemical characteristics, is usually priced higher than steam coal.
Metallurgical coal 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." Property tax expenses are higher than property tax
revenue because certain properties are unleased and, therefore, no
reimbursements are received.
22
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.
ACQUISITIONS
Alpha Acquisition. On April 10, 2003, we 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 $53.625 million
in cash. We have, in turn, leased these reserves to the subsidiaries of Alpha
Natural Resources, which will mine the coal and pay royalties to us. The
acquisition was effective as of April 1, 2003. Funding for this acquisition was
obtained from our recently increased credit facility. These reserves, which are
primarily underground, are associated with 18 mines, 11 leases, and 8 operators
in Virginia. The properties are adjacent to our VICC property acquired from El
Paso Corporation last December, which is operated by another subsidiary of Alpha
Natural Resources, LLC.
PinnOak Acquisition. On June 30, 2003, we entered into an agreement to
acquire approximately 78 million tons of proven coal reserves and an overriding
royalty interest on additional coal from subsidiaries of PinnOak Resources, LLC
for $58 million. Simultaneous with the execution of the purchase and sale
agreement, we placed the $58 million purchase price into an escrow account to be
released at closing. We will lease the reserves back to other subsidiaries of
PinnOak Resources that will mine the reserves and pay royalties to us. The
overriding royalty interest will be paid to us on third party coal mined and
processed by PinnOak Resources through its preparation plants on these
properties, which is anticipated to be at least 36 million tons. The properties
consist of coal reserves at two separate mine complexes: the Pinnacle mine in
Pineville, West Virginia and the Oak Grove mine near Birmingham, Alabama.
PinnOak Resources produces low volatile metallurgical coal from these longwall
mines and has onsite preparation plants. Over 85% of the current production is
under contract for use primarily by the steel industry both domestically and
abroad, including approximately 35% contracted to United States Steel
Corporation and a similar amount slated for export.
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 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.
23
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 SIX MONTHS
ENDED ENDED
JUNE 30, 2003 JUNE 30, 2003
------------- ------------
(IN THOUSANDS, EXCEPT PER TON DATA)
(UNAUDITED)
Revenues:
Coal royalties........................................ $ 19,188 $ 34,597
Property taxes........................................ 1,301 2,189
Minimums recognized as revenue........................ 455 1,259
Override royalties.................................... 200 661
Other................................................. 695 1,203
------------- -------------
Total revenues........................................ 21,839 39,909
Expenses:
Depletion and amortization............................ 6,369 12,173
General and administrative............................ 2,131 4,307
Taxes other than income............................... 1,421 2,581
Override payments..................................... -- 388
Coal royalty payments................................. 161 311
------------- -------------
Total expenses........................................ 10,082 19,760
------------- -------------
Income from operations.................................. 11,757 20,149
Other income (expense):
Interest expense...................................... (1,131) (1,597)
Interest income....................................... 56 103
Loss from interest rate hedge......................... (499) (499)
------------- -------------
Net income.............................................. $ 10,183 $ 18,156
============= =============
Other Data:
Coal royalties
Appalachia............................................ $ 16,886 $ 29,599
Illinois Basin........................................ 970 1,835
Northern Powder River Basin........................... 1,332 3,163
------------- -------------
Total ............................................. $ 19,188 $ 34,597
============= =============
Production
Appalachia............................................ 9,464 16,960
Illinois Basin........................................ 829 1,550
Northern Powder River Basin........................... 1,083 2,684
------------- -------------
Total ............................................. $ 11,376 $ 21,194
============= =============
Average gross royalty per ton
Appalachia............................................ $ 1.78 $ 1.75
Illinois Basin........................................ 1.17 1.18
Northern Powder River Basin........................... $ 1.23 $ 1.18
------------- -------------
Total $ 1.69 $ 1.63
============= =============
THREE MONTHS ENDED JUNE 30, 2003
Revenues. For the three month period ending June 30, 2003, coal royalty
revenues were $19.2 million on 11.4 million tons of coal produced. Approximately
83% of the coal tonnage produced came from the Appalachian region, 10% from the
Northern Powder River Basin and 7% from the Illinois Basin. The results include
coal royalty revenues generated from our acquisition of over 300 million tons of
coal reserves acquired from Alpha Natural Resources in April.
Expenses. For the three month period ending June 30, 2003, total expenses
were $10.1 million, including depletion and amortization of $6.4 million, or
63%, general and administrative expense of $2.1 million, or 21%, and taxes other
than income of $1.4 million, or 14%. General and administrative expenses consist
of compensation expense of $1.4 million, including $0.7 million for the expected
reimbursement of the general partner for compensation awards granted by the
board of directors in February. Also
25
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 $1.2 million and state franchise taxes of $0.2
million.
SIX MONTHS ENDED JUNE 30, 2003
Revenues. For the six months ended June 30, 2003, coal royalty revenues were
$34.6 million on 21.2 million tons of coal produced. Approximately 80% of the
coal tonnage produced came from the Appalachian region, 13% from the Northern
Powder River Basin and 7% from the Illinois Basin. The results include coal
royalty revenues generated from our acquisition of over 300 million tons of coal
reserves acquired from Alpha Natural Resources in April.
Expenses. For the six months ended June 30, 2003, total expenses were $19.8
million, including depletion and amortization of $12.2 million, or 62%, general
and administrative expense of $4.3 million, or 22%, and taxes other than income
of $2.6 million, or 13%. General and administrative expenses consist of
compensation expense of $2.4 million, including $0.8 million for the expected
reimbursement of the general partner for compensation awards granted by the
board of directors in February.
THREE AND SIX MONTH COMPARISON OF OPERATING STATISTICS
The following table sets forth coal royalty revenues, production, and
average gross royalty per ton from our properties for the three and six months
ending June 30, 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 MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
Coal Royalties
Appalachia........................................... $ 16,886 $ 9,703 $ 29,599 $ 18,526
Illinois Basin....................................... 970 706 1,835 1,284
Northern Powder River Basin.......................... 1,332 1,294 3,163 2,659
----------- --------- ---------- ---------
Total .......................................... $ 19,188 $ 11,703 $ 34,597 $ 22,469
=========== ========= ========== =========
Production
Appalachia........................................... 9,464 5,317 16,960 10,335
Illinois Basin....................................... 829 554 1,550 1,018
Northern Powder River Basin.......................... 1,083 1,114 2,684 2,382
----------- --------- ---------- ---------
Total .......................................... 11,376 6,985 21,194 13,735
=========== ========= ========== =========
Average gross royalty per ton
Appalachia........................................... $ 1.78 $ 1.82 $ 1.75 $ 1.79
Illinois Basin....................................... 1.17 1.27 1.18 1.26
Northern Powder River Basin.......................... 1.23 1.16 1.18 1.12
----------- --------- ---------- ---------
Total .......................................... $ 1.69 $ 1.68 $ 1.63 $ 1.64
=========== ========= ========== =========
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2002
Coal royalty revenues for the three months ended June 30, 2003 were $19.2
million compared to $11.7 million for the three months ended June 30, 2002, an
increase of $7.5 million, or 64%. Production increased by 4.4 million tons, or
63%, from 7.0 million tons to 11.4 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 and Alpha Natural Resources in February and April 2003 resulted in
production of 3.5 million tons and coal royalty revenues of $5.7 million.
Production from our West Fork property increased from 612,000 tons to 730,000
tons, and coal royalty revenues increased from $1.4 to $1.6 million because a
longwall mine moved onto the property from adjacent property. On our
Dorothy-Sarita property, production increased from 248,000 tons to 466,000 tons
and royalty revenues increased from $493,000 to $899,000 due to the resumption
of mining at a
26
temporarily idled mine. On our Boone Lincoln property, production increased from
25,000 tons to 197,000 tons, and royalty revenue increased from $52,000 to
$366,000 due to the restarting of a previously idle mine and an increase in the
proportion of surface mined tonnage on our property, which yields a higher per
ton royalty than underground mining. On our Davis Lumber property, production
increased from zero to 188,000 tons and coal royalty revenues increased from $0
to $284,000 in coal royalties.
Illinois Basin. On our Cummings/Hocking Wolford property, production
increased from 241,000 tons to 465,000 tons, and coal royalty revenues increased
from $244,000 to $476,000 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 645,000 tons to 901,000 tons, and coal royalty revenues increased from
$860,000 to $1.2 million. This increase was due to a higher proportion of the
production coming from our property instead of adjacent property, which is
typical of the variations in production resulting from the checkerboard
ownership of this mine. This was offset by lower production at our Big Sky
property from 468,000 tons to 183,000 tons and royalty revenue decreased from
$434,000 to $169,000. This was due to a higher proportion of tonnage being mined
from adjacent property.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 2002
Coal royalty revenues for the six months ended June 30, 2003 were $34.6
million compared to $22.5 million for the six months ended June 30, 2002, an
increase of $12.1 million, or 54%. Production increased by 7.5 million tons, or
55%, from 13.7 million tons to 21.2 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 and Alpha Natural Resources in February and April 2003 resulted in
production of 5.4 million tons and coal royalty revenues of $8.3 million.
Production from our West Fork property increased from 718,000 tons to 1.3
million tons, and coal royalty revenues increased from $2.6 million to $2.9
million because a longwall mine moved onto our property from adjacent property.
On our Dorothy-Sarita property, production increased from 396,000 tons to
833,000 tons and coal royalty revenues increased from $798,000 to $1.7 million
due to the resumption of mining at a temporarily idled mine. On our Davis Lumber
property, production increased from zero tons to 370,000 tons, and coal royalty
revenues increased from $0 to $501,000 due to the resumption of mining at a
temporarily idled mine. On our Kingston property, production increased from
475,000 tons to 709,000 tons and coal royalty revenues increased from $777,000
to $1.2 million due to a new mine, which started in early 2002, reaching full
production.
Illinois Basin. On our Cummings/Hocking Wolford property, production
increased from 426,000 tons to 860,000 tons, and coal royalty revenues increased
from $423,000 to $893,000 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 1.4 million tons to 2.1 million tons, and coal royalty revenues increased
from $1.8 million to $2.6 million. This increase was due to a higher proportion
of the production coming from our property instead of adjacent property, which
is typical of the variations in production resulting from the checkerboard
ownership of this mine. This was partially offset by a decrease in production at
our Big Sky property where production decreased from 933,000 tons to 567,000
tons, and coal royalty revenues decreased from $866,000 to $525,000. This
decrease was due to a higher proportion of the production coming from adjacent
property, which is typical of the variations in production resulting from the
checkerboard ownership of this mine.
27
WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------
(IN THOUSANDS, EXCEPT
PER TON DATA)
(UNAUDITED)
Revenues:
Coal royalties....................................... $ 5,534 $ 10,313
Timber royalties..................................... 995 1,618
Gain on sale of property............................. 24 85
Property taxes....................................... 51 638
Other................................................ 534 745
---------- ----------
Total revenues.................................. 7,138 13,399
Expenses:
General and administrative........................... 726 1,549
Taxes other than income.............................. 85 782
Depreciation, depletion and amortization............. 770 1,477
---------- ----------
Total expenses.................................. 1,581 3,808
---------- ----------
Income from operations.................................... 5,557 9,591
Other income (expenses):
Interest expense..................................... (1,607) (2,929)
Interest income...................................... 38 73
Reversionary interest................................ -- (561)
---------- ----------
Net income................................................ $ 3,988 $ 6,174
========== ==========
Production................................................ 3,047 5,724
Average gross royalty per ton............................. $ 1.82 $ 1.80
THREE MONTHS ENDED JUNE 30, 2002
Revenues. Total revenues for the three months ended June 30, 2002 were $7.1
million, of which coal royalty revenues were $5.5 million, or 77%. Coal
production during the period was 3.0 million tons, with an average gross royalty
rate per ton of $1.82. The following properties were the major contributors to
revenue:
Appalachia. Production from our West Fork property was 612,000 tons, which
generated coal royalty revenues of $1.4 million. Production from our
Evans-Laviers property was 731,000 tons, which generated coal royalty revenues
of $1.0 million. Production from our Eunice property was 570,000 tons, which
generated coal royalty revenues of $1.0 million. Seventeen other properties
contributed 1.1 million tons generating $2.2 million in revenue.
Timber revenues for the three months ended June 30, 2002 were $1.0 million.
Other revenues were $0.5 million, including $0.2 for wheelage income and $0.2
for oil and gas related income.
Expenses. Aggregate expenses for the three months ended June 30, 2002 were
$1.6 million, including $726,000 of general and administrative expenses and
$770,000 of expenses related to depletion and amortization.
Other Income (Expense). Interest expense was $1.6 million for three months
ended June 30, 2002.
Net Income. Net income was $4.0 million for the three months ended June 30,
2002.
SIX MONTHS ENDED JUNE 30, 2002
Revenues. Total revenues for the six months ended June 30, 2002 were $13.4
million, of which coal royalty revenues were $10.3 million, or 77%. Coal
production during the period was 5.7 million tons, with an average gross royalty
rate per ton of $1.80. The following properties were the major contributors to
revenue:
28
Appalachia. Production from our Eunice property was 1.3 million tons, which
generated coal royalty revenues of $2.4 million. Production from our
Evans-Laviers property was 1.6 million tons, which generated coal royalty
revenues of $2.1 million. Production from our West Fork property was 718,000
tons, which generated coal royalty revenues of $1.6 million. Seventeen other
properties contributed 2.1 million tons generating $4.2 million in revenue.
Timber revenues for the six months ended June 30, 2002 were $1.6 million.
Other revenues were $1.5 million, including $0.6 million in property tax
revenues for amounts reimbursed by our lessees. Other income was $0.7 million,
of which $0.3 million was from wheelage income, $0.2 million was attributable to
lease and easement income and another $0.1 was from management fees charged to
Great Northern Properties Limited Partnership for the six months ended June 30,
2002.
Expenses. Aggregate expenses for the six months ended June 30, 2002 were
$3.8 million, including $1.5 million of general and administrative expenses and
$1.5 million of expenses related to depletion and amortization.
Other Income (Expense). Interest expense was $2.9 million for six months
ended June 30, 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 December 2001 and the remainder
of the interest in March 2002. For the six months ended June 30, 2002, Western
Pocahontas incurred $0.6 million of expenses related to the reversionary
interest.
Net Income. Net income was $6.2 million for the six months ended June 30,
2002.
29
GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------
(IN THOUSANDS, EXCEPT
PER TON DATA)
(UNAUDITED)
Revenues:
Coal royalties...................................... $ 1,998 $ 3,442
Lease and easement income........................... 95 234
Other............................................... 131 224
---------- ----------
Total revenues................................. 2,224 3,900
Expenses:
General and administrative.......................... 143 273
Taxes other than income............................. 39 44
Depletion and amortization.......................... 507 1,203
---------- ----------
Total expenses................................. 689 1,520
---------- ----------
Income from operations................................... 1,535 2,380
Other income (expenses):
Interest expense.................................... (579) (1,141)
Interest income..................................... 26 65
---------- ----------
Net income............................................... $ 982 $ 1,304
========== ==========
Production............................................... 1,720 3,590
Average gross royalty per ton............................ $ 1.16 $ .96
THREE MONTHS ENDED JUNE 30, 2002
Revenues. Total revenues for the three months ended June 30, 2002 were $2.2
million, of which coal royalty revenues were $2.0 million, or 91%. Coal
production for the period was 1.7 million tons, with average gross royalty rate
per ton of $1.16. Coal royalty revenues were attributed to the following:
Northern Powder River. Production from our Western Energy property was
646,000 tons, which generated coal royalty revenues of $860,000. Production from
our Big Sky property was 468,000 tons, which generated coal royalty revenues of
$434,000.
Expenses totaled $0.7 million of which includes $0.1 million of general and
administrative expenses that primarily consist of $62,500 of fees paid to
Western Pocahontas Properties under a management agreement and $0.5 million of
depletion and amortization.
Other Income (Expense). Interest expense was $0.6 million for the three
months ended June 30, 2002.
Net Income. Net income was $1.0 million for the three months ended June 30,
2002.
SIX MONTHS ENDED JUNE 30, 2002
Revenues. Total revenues for the six months ended June 30, 2002 were $3.9
million, of which coal royalty revenues were $3.4 million or 88%. Coal
production for six months ended June 30, 2002 was 3.6 million tons, with average
gross royalty rate per ton of $0.96. Coal royalty revenues were attributed to
the following:
Northern Powder River. Production from our Western Energy property was 1.4
million tons, which generated coal royalty revenues of $1.8 million. Production
from our Big Sky property was 933,000 tons, which generated coal royalty
revenues of $866,000.
30
Expenses totaled $1.5 million, which includes $0.3 million of general and
administrative expenses that primarily consist of $125,000 of fees paid to
Western Pocahontas Properties under a management agreement and $1.2 million of
depletion and amortization.
Other Income (Expense). Interest expense was $1.1 million for the six months
ended June 30, 2002.
Net Income. Net income was $1.3 million for the six months ended June 30,
2002.
31
NEW GAULEY COAL CORPORATION
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------
(IN THOUSANDS, EXCEPT
PER TON DATA)
(UNAUDITED)
Revenues:
Coal royalties...................................... $ 410 $ 938
Other............................................... 52 52
---------- ----------
462 990
Expenses:
General and administrative.......................... 40 59
Taxes other than income............................. (1) 11
Depletion and amortization.......................... 47 79
---------- ----------
Total expenses................................. 86 149
---------- ----------
Income from operations................................... 376 841
Other income (expenses):
Interest expense.................................... (32) (64)
Interest income..................................... 7 15
Reversionary interest............................... -- (34)
---------- ----------
Net income............................................... $ 351 $ 758
========== ==========
Production............................................... 133 311
Average gross royalty per ton............................ $ 3.08 $ 3.02
THREE MONTHS ENDED JUNE 30, 2002
Revenues. Total revenue for the three months ended June 30, 2003 was
$462,000, of which coal royalty revenues were $410,000, or 87%, on production of
133,000 tons. New Gauley has producing properties on two leases. The Alabama
property produced 77,000 tons, generating coal royalty revenues of $265,000.
Production from our West Virginia property was 57,000 tons, which generated coal
royalty revenues of $145,000.
Expenses. Aggregate expenses for the three months ended June 30, 2002, were
$86,000 of which $47,000, or 55%, was from depletion and amortization.
Net Income. Net income was $351,000 for the three months ended June 30,
2002.
SIX MONTHS ENDED JUNE 30, 2002
Revenues. Total revenue for the six months ended June 30, 2003 was $990,000,
of which coal royalty revenues were $938,000, or 95%, on production of 311,000
million tons. New Gauley has producing properties on two leases. The Alabama
property produced 154,000 tons, generating coal royalty revenues of $529,000.
Production from our West Virginia property was 157,000 tons, which generated
coal royalty revenues of $394,000.
Expenses. Aggregate expenses for the six months ended June 30, 2002, were
$149,000 of which $79,000, or 53%, was from depletion and amortization.
Net Income. Net income was $758,000 for the six months ended June 30, 2002.
32
ARCH COAL CONTRIBUTED PROPERTIES
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2002 JUNE 30, 2002
------------- -------------
(IN THOUSANDS, EXCEPT
PER TON DATA)
(UNAUDITED)
Revenues
Coal royalties................................. $ 4,529 $ 8,880
Other royalties................................ 477 925
Property taxes................................. 269 538
----------- -----------
Total revenues............................ 5,275 10,343
----------- -----------
Expenses
Depletion...................................... 1,500 2,969
Property taxes................................. 269 538
Other expense.................................. 214 411
----------- -----------
Total expenses............................ 1,983 3,918
----------- -----------
Excess of revenue over direct costs and expenses.... $ 3,292 $ 6,425
=========== ===========
Production.......................................... 2,690 5,317
Average gross royalty per ton....................... $ 1.68 $ 1.67
THREE MONTHS ENDED JUNE 30, 2002
Revenues. Revenues for the three months ended June 30, 2002 were $5.3
million, of which coal royalty revenues were $4.5 million, or 85%, on production
of 2.7 million tons.
Appalachia. Production from our Lone Mountain property was 648,000 tons,
which generated coal royalty revenues of $1.2 million. Production from our Lynch
property was 782,000 tons, which generated coal royalty revenues of $1.2
million. Production from our Pardee property was 352,000 tons, which generated
coal royalty revenues of $632,000. Production from our Campbells Creek property
was 272,000 tons, which generated coal royalty revenues of $493,000.
Direct costs and expenses. Direct costs and expenses for the three months
ended June 30, 2002 were $2.0 million, consisting of depletion of $1.5 million,
property taxes of $269,000 and other expense of $214,000.
SIX MONTHS ENDED JUNE 30, 2002
Revenues. Revenues for the six months ended June 30, 2002 were $10.3
million, of which coal royalty revenues were $8.9 million, or 86%, on production
of 5.3 million tons.
Appalachia. Production from our Lone Mountain property was 1.3 million tons,
which generated coal royalty revenues of $2.5 million. Production from our Lynch
property was 1.5 million tons, which generated coal royalty revenues of $2.3
million. Production from our Pardee property was 645,000 tons, which generated
coal royalty revenues of $1.2 million. Production from our Campbells Creek
property was 546,000 tons, which generated coal royalty revenues of $932,000.
Direct costs and expenses. Direct costs and expenses for the six months
ended June 30, 2002 were $3.9 million, consisting of depletion of $3.0 million,
property taxes of $538,000 and other expense of $411,000.
33
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 six
months ended June 30, 2003, we have incurred expenses totaling $1.5 million 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:
- Lone Mountain located in Kentucky, which contains 47.1 million tons of
proven and probable reserves as of December 31, 2002;
- Pardee located in Kentucky and Virginia, which contains 20.4 million tons
of proven and probable reserves as of December 31, 2002;
- Boone/Lincoln located in West Virginia, which contains 18.5 million tons
of proven and probable reserves as of December 31, 2002; and
- Campbell's Creek located in West Virginia, which contains 9.8 million
tons of proven and probable reserves as of December 31, 2002.
Coal royalty revenues payable under these leases for the three months and
six months ended June 30, 2003 were $2.9 and $5.3 million, respectively,
representing 15.1% and 15.3% of our total coal royalty revenues. If no
production had taken place during the six months ended June 30, 2003, minimum
royalties of $3.0 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:
- Ark Land has the ability to sublease the leased property without our
prior approval, although it remains responsible for sublessee
performance;
- minimum royalty payments from Ark Land continue to be payable during the
initial lease term even if all mineable and merchantable coal has been
mined from the property;
- royalties for coal sold to any affiliates may be based on a gross selling
price below the market value of the coal;
- the indemnities provided by Ark Land to us do not survive the termination
of the leases;
- we only have a limited ability to terminate the leases;
34
- Ark Land has royalty-free wheelage rights on the leased properties; and
- the leases do not impose a legal duty to diligently mine the maximum
amount of coal possible from the leased property.
We believe that the production and minimum royalty rates contained in the
Ark Land leases are consistent with current market royalty rates.
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.
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, fund planned
acquisitions and 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 six months ended June 30, 2003
was $27.4 million, substantially all of which was from coal royalty revenues.
Net cash used in investing activities during the six months ended June 30,
2003 was $123.7 million in connection with the acquisition of the overriding
interest in February for $11.9 million and the acquisition of 290,000 mineral
acres from two subsidiaries of Alpha Natural Resources, LLC for $53.8 million.
These acquisitions were funded primarily from our revolving credit facility,
with the balance paid in cash. In addition, we placed $58 million of our
borrowings from our revolving credit facility in a cash escrow account pending
the closing of the PinnOak acquisition.
Cash provided by financing activities for the six months ended June 30, 2003
was $102.7 million. During the first six months we received proceeds from
additional borrowings of $248.1 million, which includes $123.1 million under our
revolving credit facility and $125.0 million from the issuance of our senior
unsecured debt. These borrowings were partially offset by repayments of debt on
our revolving credit facility of $122.6 million. We paid $0.9 million to settle
an interest rate hedge entered into in connection with issuance of our senior
notes. For the six months ended June 30, 2003, we also made cash distributions
of $21.9 million to our partners.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Credit Facility and Senior Notes. Our debt currently consists of:
- a $175 million revolving credit facility that matures in October 2005 and
under which $58 million was outstanding at June 30, 2003;
- $50 million of 5.55% senior notes due 2023, with a 10-year average life;
- $50 million of 4.91% senior notes due 2018, with a 7.5-year average life;
and
- $25 million of 5.55% senior notes due 2013.
35
On April 4, 2003, we increased the borrowing capacity under our credit
facility to $175 million, and the other terms of the credit facility remained
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.
On June 19, 2003 and simultaneous with NRP Operating's issuance of senior
notes, we adopted a second amendment to the credit facility. This amendment
permitted NRP Operating to issue unsecured notes through a private placement in
an amount up to $175 million, with a portion of the proceeds to be used to
reduce the outstanding balance on the revolving credit facility. Among other
items, this amendment increased the maximum leverage ratio from 2.75 to 1.00 to
3.50 to 1.0. Indebtedness under the revolving credit facility bears interest, at
our option, at either:
- the higher of the federal funds rate plus an applicable margin ranging
from 0.25% to 0.75% or the prime rate as announced by the agent bank; or
- a rate equal to LIBOR plus an applicable margin ranging from 1.25% to
2.25%.
At June 30, 2003, we had $58 million outstanding under the revolving credit
facility bearing interest at a prime rate of 4.00%. The interest rate was
converted to a LIBOR rate of 2.61% on July 7, 2003. We incur a commitment fee on
the unused portion of the revolving credit facility at a rate of 0.50% per
annum.
We incurred interest expense of $1.1 million and $1.6 million for the three
and six-month periods ended June 30, 2003, respectively. Interest expense for
the three and six-month periods ended June 30, 2003 included credit facility
fees of $87,000 and $135,000, respectively.
The following table reflects our long-term non-cancelable contractual
obligations as of June 30, 2003 (in millions):
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------
CONTRACTUAL OBLIGATIONS 2003 2004 2005 2006 2007 THEREAFTER
----------------------- ---- ---- ---- ---- ---- ----------
Long-term debt (including current maturities) $ -- $ 9.35 $ 67.35 $ 9.35 $ 9.35 $ 137.6
==== ======= ======= ====== ====== ==========
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. In anticipation of the private placement on May
12, 2003, we entered into a treasury rate hedge with respect to $50 million of
the senior notes. In conjunction with the issuance of the senior notes, we paid
$1.4
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million to settle this treasury rate hedge. Of the $1.4 million paid for the
settlement, approximately $0.9 million will be amortized into expense over 20
years and the balance of $0.4 million, will be expensed currently and classified
as other income (expense) in the income statement. At June 30, 2003, we had
outstanding approximately $0.5 million in variable interest rate debt. If LIBOR
rates were to increase by 100 basis points, annual interest expense would
increase by $580,000, 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 six months ended June 30,
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.
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
- We may not have sufficient cash from operations to pay the minimum
quarterly distribution following establishment of cash reserves and
payment of fees and expenses, including payments to our general partner.
- A substantial or extended decline in coal prices could reduce our coal
royalty revenues and the value of our coal reserves.
- Our lessees' coal mining operations are subject to operating risks that
could result in lower coal royalty revenues to us.
- We depend on a limited number of primary operators for a significant
portion of our coal royalty revenues, and the loss of or reduction in
production from any of our operators could reduce our coal royalty
revenues.
- We may not be able to terminate our leases if any of our lessees declare
bankruptcy, and we may experience delays and be unable to replace lessees
that do not make royalty payments.
- If our lessees do not manage their operations well, their production
volumes and our coal royalty revenues could decrease.
- Due to our lack of asset diversification, adverse developments in the
coal industry could reduce our coal royalty revenues.
- Any decrease in the demand for metallurgical coal could result in lower
coal production by our lessees, which would thereby
37
reduce our coal royalty revenues.
- We may not be able to expand and our business will be adversely affected
if we are unable to replace or increase our reserves or obtain other
mineral reserves through acquisitions.
- Any change in fuel consumption patterns by electric power generators
resulting in a decrease in the use of coal could result in lower coal
production by our lessees, which would reduce our coal royalty revenues.
- Current conditions in the coal industry may make it difficult for our
lessees to extend existing contracts or enter into supply contracts with
terms of one year or more, which could adversely affect the stability and
profitability of their operations and adversely affect our coal royalty
revenues.
- Competition within the coal industry may adversely affect the ability of
our lessees to sell coal, and excess production capacity in the industry
could put downward pressure on coal prices.
- Lessees could satisfy obligations to their customers with coal from
properties other than ours, depriving us of the ability to receive
amounts in excess of minimum royalty payments.
- Fluctuations in transportation costs and the availability or reliability
of transportation could reduce the production of coal mined from our
properties.
- Our reserve estimates depend on many assumptions that may be inaccurate,
which could materially adversely affect the quantities and value of our
reserves.
- Our lessees' work forces could become increasingly unionized in the
future.
- We may be exposed to changes in interest rates because our current
borrowings under our revolving credit facility may be subject to variable
interest rates based upon LIBOR.
- Our lessees are subject to environmental compliance and bonding
requirements, and if they do not comply or are unable to obtain bonds,
they may not be allowed to mine coal and our royalty revenue could
decrease.
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 Rules 13a-15
and 15d-15 of the Securities Exchange Act) as of the end of the period covered
by 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.
No changes were made to NRP's internal control over financial reporting
during the last fiscal quarter that materially affected, or are reasonably
likely to materially affect, NRP's internal control over financial reporting.
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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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit Number Description
-------------- ------------
4.1 Note Purchase Agreement dated as of June 19, 2003
among NRP (Operating) LLC and the Purchasers
signatory thereto (incorporated by reference to
Exhibit 4.1 to the Current Report on Form 8-K filed
June 23, 2003).
4.2 Form of Series A Note (incorporated by reference to
Exhibit 4.2 to the Current Report on Form 8-K filed
June 23, 2003).
4.3 Form of Series B Note (incorporated by reference to
Exhibit 4.3 to the Current Report on Form 8-K filed
June 23, 2003).
4.4 Form of Series C Note (incorporated by reference to
Exhibit 4.4 to the Current Report on Form 8-K filed
June 23, 2003).
4.5 Subsidiary Guarantee of Senior Notes of NRP
(Operating) LLC, dated June 19, 2003 (incorporated by
reference to Exhibit 4.5 to the Current Report on
Form 8-K filed June 23, 2003).
10.1* Amendment No. 1 to Credit Agreement, dated as of
April 4, 2003 by and among NRP (Operating) LLC, PNC
National Bank, as Administrative Agent, Bank of
Montreal and BNP Paribas, as documentation agents,
Branch Banking and Trust Company, as Syndication
Agent, and the lenders party thereto.
10.2* Amendment No. 2 to Credit Agreement, dated as of June
19, 2003 by and among NRP (Operating) LLC, PNC
National Bank, as Administrative Agent, Bank of
Montreal and BNP Paribas, as documentation agents,
Branch Banking and Trust Company, as Syndication
Agent, and the lenders party thereto.
10.3* Purchase and Sale Agreement, dated April 9, 2003,
between Alpha Land and Reserves, LLC and CSTL LLC.
10.4 Purchase and Sale Agreement, dated June 30, 2003,
by and among PinnOak Resources, LLC, Pinnacle Land
Company, LLC, Oak Grove Land Company, LLC and WPP LLC
(incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed July 14, 2003).
31.1* Certification of Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley.
31.2* Certification of Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley.
32.1** Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350.
32.2** Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350.
*Filed herewith
** Furnished herewith
B. Reports on Form 8-K
A current report on Form 8-K was filed on April 7, 2003 in connection
with the amendment to our revolving credit facility.
A current report on Form 8-K was filed on April 10, 2003 in connection
with our acquisition of coal reserves from Alpha Natural Resources.
A current report on Form 8-K was furnished on May 8, 2003 in connection
with disclosure of first quarter earnings and our outlook for 2003.
40
A current report on Form 8-K was furnished on May 9, 2003 in connection
with a presentation made by management to the West Virginia Coal Mining
Institute and the West Virginia Coal Association.
A current report on Form 8-K was filed on June 23, 2003 in connection
with our issuance of senior notes.
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: August 13, 2003
By: /s/ CORBIN J. ROBERTSON, JR.
--------------------------------------
Corbin J. Robertson, Jr.,
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 2003
By: /s/ DWIGHT L. DUNLAP
--------------------------------------
Dwight L. Dunlap,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
Date: August 13, 2003
By: /s/ KENNETH HUDSON
--------------------------------------
Kenneth Hudson
Controller
(Principal Accounting Officer)
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INDEX TO EXHIBITS
Exhibit Number Description
-------------- ------------
4.1 Note Purchase Agreement dated as of June 19, 2003
among NRP (Operating) LLC and the Purchasers
signatory thereto (incorporated by reference to
Exhibit 4.1 to the Current Report on Form 8-K filed
June 23, 2003).
4.2 Form of Series A Note (incorporated by reference to
Exhibit 4.2 to the Current Report on Form 8-K filed
June 23, 2003).
4.3 Form of Series B Note (incorporated by reference to
Exhibit 4.3 to the Current Report on Form 8-K filed
June 23, 2003).
4.4 Form of Series C Note (incorporated by reference to
Exhibit 4.4 to the Current Report on Form 8-K filed
June 23, 2003).
4.5 Subsidiary Guarantee of Senior Notes of NRP
(Operating) LLC, dated June 19, 2003 (incorporated by
reference to Exhibit 4.5 to the Current Report on
Form 8-K filed June 23, 2003).
10.1* Amendment No. 1 to Credit Agreement, dated as of
April 4, 2003 by and among NRP (Operating) LLC, PNC
National Bank, as Administrative Agent, Bank of
Montreal and BNP Paribas, as documentation agents,
Branch Banking and Trust Company, as Syndication
Agent, and the lenders party thereto.
10.2* Amendment No. 2 to Credit Agreement, dated as of June
19, 2003 by and among NRP (Operating) LLC, PNC
National Bank, as Administrative Agent, Bank of
Montreal and BNP Paribas, as documentation agents,
Branch Banking and Trust Company, as Syndication
Agent, and the lenders party thereto.
10.3* Purchase and Sale Agreement, dated April 9, 2003,
between Alpha Land and Reserves, LLC and CSTL LLC.
10.4 Purchase and Sale Agreement, dated June 30, 2003,
by and among PinnOak Resources, LLC, Pinnacle Land
Company, LLC, Oak Grove Land Company, LLC and WPP LLC
(incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed July 14, 2003).
31.1* Certification of Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley.
31.2* Certification of Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley.
32.1** Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350.
32.2** Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350.
*Filed herewith
** Furnished herewith