NATURAL RESOURCE PARTNERS LP - 10-Q Quarterly Report

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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 SEPTEMBER 30, 2002

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 [ ] No [X]

At November 25, 2002, there were outstanding 11,353,658 Common Units and
11,353,658 Subordinated Units.

TABLE OF CONTENTS

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NATURAL RESOURCE PARTNERS L.P.
PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 2002
(UNAUDITED)
(IN THOUSANDS)

3

NATURAL RESOURCE PARTNERS L.P.
PRO FORMA BALANCE SHEET -- (CONTINUED)
AS OF SEPTEMBER 30, 2002
(UNAUDITED)
(IN THOUSANDS)

See accompanying notes to pro forma financial statements.
4

NATURAL RESOURCE PARTNERS L.P.
PRO FORMA STATEMENT OF REVENUES AND DIRECT COSTS AND EXPENSES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
(IN THOUSANDS)

See accompanying notes to pro forma financial statements.
5

NATURAL RESOURCE PARTNERS L.P.
PRO FORMA STATEMENT OF REVENUES AND DIRECT COSTS AND EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
(IN THOUSANDS)

See accompanying notes to pro forma financial statements.
6

NATURAL RESOURCE PARTNERS L.P.

NOTES TO PRO FORMA FINANCIAL STATEMENTS

BASIS OF PRESENTATION

Preceding are the unaudited pro forma financial statements of Natural
Resource Partners L.P., which is referred to throughout this Form 10-Q as
"Natural Resource Partners" or "NRP," as of September 30, 2002 and for the three
and nine months ended September 30, 2002. Natural Resource Partners is a newly
formed limited partnership, which consummated its initial public offering of
common units in October 2002. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Introduction." The pro forma
balance sheet assumes that the offering and related transactions (described in
the note below entitled "Offering and Transactions") occurred as of the balance
sheet date, and the pro forma statements of revenues and direct costs and
expenses assume that the offering and related transactions occurred as of the
beginning of the periods presented. NRP presents the transaction adjustments in
the notes to the unaudited pro forma financial statements. You should read the
unaudited pro forma financial statements and accompanying notes together with
the September 30, 2002 financial statements and related notes of the WPP Group
and the Arch Coal Contributed Properties included in this Form 10-Q.

NRP derived the pro forma balance sheet by adjusting the balance sheets of
Western Pocahontas Properties Limited Partnership ("Western Pocahontas"), Great
Northern Properties Limited Partnership ("Great Northern"), New Gauley Coal
Corporation ("New Gauley" and, together with Western Pocahontas and Great
Northern, the "WPP Group") and the Arch Coal, Inc. Contributed Properties ("Arch
Coal Contributed Properties"). NRP derived the pro forma statements of revenue
and direct costs and expenses by extracting the revenues and direct costs and
expenses from the statements of income of each of Western Pocahontas, Great
Northern and New Gauley included elsewhere in this Form 10-Q and adding them to
the Arch Coal Contributed Properties statements of revenues and direct costs and
expenses. As a result, the pro forma statements of revenues and direct costs and
expenses do not reflect general and administrative expenses and other income and
expense from the statements of income of the WPP Group included in this Form
10-Q. The pro forma statements of revenues and direct costs and expenses were
adjusted to exclude revenue and direct costs and expenses related to properties
not being contributed to NRP by the WPP Group. NRP based the pro forma
adjustments upon currently available information and certain estimates and
assumptions, and therefore the actual adjustments made to effect the
transactions may differ from the pro forma adjustments. However, management
believes that the assumptions provide a reasonable basis for presenting the
significant effects of the transactions and the pro forma adjustments give
appropriate effect to these assumptions and are properly applied in the pro
forma financial information.

NRP has no employees, and its operations are conducted by its general
partner and affiliates pursuant to contractual arrangements.

Western Pocahontas contributed nearly all of its coal royalty producing
properties to NRP in connection with its initial public offering, while
retaining surface and timber properties. Coal royalties accounted for
approximately 77% of Western Pocahontas' total revenues for the nine months
ended September 30, 2002. New Gauley contributed all of its coal royalty
producing properties. Great Northern contributed the coal royalty producing
properties related to two leases and retained two properties with either a
short-lived reserve life or insignificant royalty income as well as its surface
and non-producing coal properties. The properties contributed by the WPP Group
account for approximately 81% of WPP Group's total revenues for the nine months
ended September 30, 2002.

Corbin J. Robertson, Jr. controls the general partners of Western
Pocahontas and Great Northern and is the controlling shareholder of New Gauley.
Mr. Robertson also controls NRP (GP) LP, the general partner of Natural Resource
Partners, and NRP (GP) LP's general partner, GP Natural Resource Partners LLC
(together with NRP (GP) LP, the "General Partner"). The WPP Group accounted for
a majority of the revenues and total net book value of the assets contributed to
Natural Resource Partners. Additionally, the senior executives and other
officers who currently manage Western Pocahontas continue to manage Natural
Resource Partners. As a result, (1) the WPP Group is considered to be the
accounting acquirer, (2) the assets
7

NATURAL RESOURCE PARTNERS L.P.

NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)

of the WPP Group were contributed at cost in accordance with EITF 87-21, "Change
of Accounting Basis in Master Limited Partnership Transactions" and (3) the
assets and liabilities of the Arch Coal Contributed Properties were recorded at
their fair value.

The Arch Coal Contributed Properties were indirectly wholly owned by Arch
Coal, Inc. and comprised only a small percentage of its coal properties. Coal
royalty revenues from the Arch Coal Contributed Properties were approximately
1.2% of Arch Coal, Inc.'s revenues for the nine months ended September 30, 2002.

The financial statements of the Arch Coal Contributed Properties reflect
the revenues and direct costs and expenses of the properties contributed to
Natural Resource Partners. These properties did not comprise a legal entity.
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 Arch Coal Contributed
Properties did not maintain stand-alone corporate treasury, legal, tax, human
resources, general and administrative and other similar corporate support
functions. Corporate general and administrative expenses were not previously
allocated in connection with the preparation of the financial statements of the
Arch Coal Contributed Properties included with this Form 10-Q because there was
not sufficient information to develop a reasonable cost allocation. Because the
separate and distinct accounts necessary to present individual balance sheets
and income statements of the Arch Coal Contributed Properties were not
maintained as of September 30, 2002 and for the nine months ended September 30,
2002, Statements of Revenues and Direct Costs and Expenses and Statements of
Assets Purchased and Liabilities Assumed have been prepared and included in this
Form 10-Q. The Statements of Revenues and Direct Costs and Expenses and
Statement of Assets Purchased and Liabilities Assumed are not intended to be a
complete presentation of financial position and results of operations of the
Arch Coal Contributed Properties and are not indicative of the financial
condition or results of operations of the Arch Coal Contributed Properties going
forward due to the changes in the business and the omission of operating
expenses.

All properties contributed by the WPP Group and the Arch Coal Contributed
Properties were contributed to Natural Resource Partners in exchange for common
and subordinated units and the general partner interest in Natural Resource
Partners and its assumption of debt upon the closing of its initial public
offering. A table of coal reserve quantities, assuming the reserves were
contributed to NRP on December 31, 2001, is summarized below (tons in
thousands):

The unaudited pro forma financial statements do not purport to present the
financial position or the results of operations of Natural Resource Partners had
its initial public offering actually been completed as of the dates indicated.
Moreover, the statements do not project the financial position or results of
operations of Natural Resource Partners for any future date or period but are
presented here to provide a more meaningful financial presentation of Natural
Resource Partners after the closing of the offering.

On October 18, 2002, the Board of Directors of the general partner's
general partner authorized the issuance of options to purchase 10,000 common
units to each director (other than the Chairman of the Board) as compensation at
an exercise price equal to $19.50, which was the closing price of the common
units of Natural Resource Partners on that date. The options will fully vest in
three years from the grant date, with one-third vesting after the end of each
year. The options expire in ten years.

8

NATURAL RESOURCE PARTNERS L.P.

NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)

OFFERING AND TRANSACTIONS

The pro forma financial statements reflect the closing of the following
transactions:

- The transfer of certain assets and liabilities by the WPP Group to
Natural Resource Partners in exchange for the issuance by Natural
Resource Partners to the WPP Group of 3,882,485 common units, 6,556,738
subordinated units and 25% of the incentive distribution rights of
Natural Resource Partners. The WPP Group also received a 57.75%
interest in the general partner of NRP. These incentive distribution
rights represent the right to receive an increasing percentage of
certain quarterly distributions of cash by Natural Resource Partners
after the minimum quarterly distribution and certain target levels have
been achieved.

- The transfer of certain assets and liabilities by Arch Coal to Natural
Resource Partners in exchange for the issuance by Natural Resource
Partners to Arch Coal of 4,796,920 common units, 4,796,920 subordinated
units and 10% of the incentive distribution rights. Arch Coal also
received 42.25% interest in the general partner of NRP.

- The public offering by Natural Resource Partners of 2,598,750 common
units at the initial offering price of $20.00 per common unit,
resulting in gross proceeds to Natural Resource Partners of $52.0
million, and the public offering by Arch Coal of 1,901,250 common
units. Natural Resource Partners did not receive any proceeds from the
sale of the common units by Arch Coal.

- The sale by Natural Resource Partners of 75,503 common units at the
initial public offering price of $20.00 per common unit to Great
Northern and New Gauley because the underwriters did not exercise their
over-allotment option.

- The repayment of $46.5 million of debt contributed by the WPP Group
with proceeds from the offering.

- The contribution of $1.0 million by Arch Coal to Natural Resource
Partners, representing Arch Coal's share of the deferred financing
costs and initial working capital.

- The contribution of $0.9 million by the WPP Group to Natural Resource
Partners, which represents funds required to pay transaction costs in
excess of proceeds from the offering after the repayment of $46.5
million of debt contributed by the WPP Group, and the funding of
initial working capital.

PRO FORMA ADJUSTMENTS TO BALANCE SHEET

(a) Represents the working capital of the WPP Group and the Arch Coal
Contributed Properties that was not contributed to Natural Resource
Partners.

(b) Represents the property, plant and equipment and related accumulated
depletion, depreciation and amortization of the WPP Group that was not
contributed to Natural Resource Partners. The property retained is as
follows (in thousands):

9

NATURAL RESOURCE PARTNERS L.P.

NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)

(c) Represents deferred financing costs, a note receivable and deferred
revenues of the WPP Group that were not contributed to Natural Resource
Partners. The deferred revenues not contributed relate to a coal
property that was not contributed to Natural Resource Partners.

(d) Represents debt that was not contributed to Natural Resource Partners
by the WPP Group. The total debt not contributed to Natural Resource
Partners is as follows (in thousands):

Western Pocahontas................................. $54,234
Great Northern..................................... 37,078
New Gauley......................................... --
-------
Total............................................ $91,312
=======

(e) Reflects gross proceeds to Natural Resource Partners of $53.5 million
from the issuance and sale of 2,674,253 common units at the initial
offering price of $20.00 per share, of which 2,598,750 common units
were sold to the public and, because the underwriters did not exercise
their over-allotment option, 75,503 units were sold to Great Northern
and New Gauley.

(f) Reflects payment of fees of $760,400 for the new credit facility,
underwriting discount of approximately $3,573,000 and legal and other
professional fees and expenses of approximately $2,912,000 associated
with the offering and $577,500 for working capital purposes. Also
reflects a $979,000 cash contribution by Arch Coal to provide $422,500
of working capital and $556,000 for fees for the new revolving credit
facility that will be capitalized and amortized. Also reflects an
$869,000 cash contribution by the WPP Group to Natural Resource
Partners to pay certain transaction costs in excess of those covered by
proceeds from the offering after the repayment of debt contributed by
the WPP Group and to fund working capital.

(g) Represents the repayment of $46.5 million of debt assumed from the WPP
Group from proceeds of the offering.

(h) Represents the pro rata allocation of the net assets contributed by the
WPP Group and Arch Coal of $149.8 million.

(i) Reflects the acquisition of the net assets of Arch Coal in exchange for
common and subordinated units and the general partner interest in
Natural Resource Partners. The purchase price related to the Arch Coal
Contributed Properties is calculated as follows:

10

NATURAL RESOURCE PARTNERS L.P.

NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)

Under the purchase method of accounting, the purchase price was allocated
to the Arch Coal assets based on the fair value determination indicated
above. The total purchase price in excess of the historical cost of Arch
Coal's assets was calculated as follows:

Total purchase price for Arch Coal Contributed
Properties........................................... $196,771
Less: Historical net book value of Arch Coal
Contributed Properties............................... 74,814
--------
Total purchase price in excess of historical cost
of Arch Coal Contributed Properties.................. $121,957
========
Allocation to cash................................. 423
Allocation to deferred financing costs............. 566
Allocation to mineral reserves..................... 120,978
--------
Allocation of purchase price in excess of
historical cost...................................... $121,957
========

The allocation of the purchase price of the Arch Coal Contributed
Properties based on their relative fair values resulted in an increase to
property and equipment of $120,978,000 to reflect these assets at their
estimated fair values. This allocation is based upon the consummation of
the offering and related transactions.

The excess purchase price is allocated to the WPP Group and Arch Coal
on a pro rata basis.

(j) Represents the elimination of accumulated depletion associated with the
acquisition of the Arch Coal Contributed Properties.

(k) If at any time the General Partner and its affiliates own more than 80%
of the outstanding common units, the General Partner has the right, but
not the obligation, to purchase all of the common units at a price not
less than their then market price. As of the closing of the initial
public offering, the General Partner and its affiliates owned 60.4% of
the outstanding common units. If NRP does not issue any equity
securities prior to the expiration of the subordination period, the
General Partner and its affiliates will own 80.2% of NRP's outstanding
common units upon the conversion of subordinated units into common
units at the end of the subordination period and will be able to
exercise this call right.

PRO FORMA ADJUSTMENTS TO REVENUES AND DIRECT COSTS AND EXPENSES

(l) Represents coal royalties, timber royalties, gain on sale of property,
lease and easement income and other revenue related to properties not
contributed to Natural Resource Partners by the WPP Group.

(m) Represents property tax revenue and expenses and depletion directly
related to properties not contributed to Natural Resource Partners by
the WPP Group.

(n) Represents the incremental depletion associated with the assets
contributed by Arch Coal being recorded at fair value by Natural
Resource Partners.

(o) Pro forma as adjusted excess of revenues over direct costs and expenses
does not include the historical general and administrative expenses
related to the WPP Group and Arch Coal since these are not direct costs
and expenses.

RECENT FEDERAL DISTRICT COURT RULINGS

(p) On May 8, 2002, the United Stated District Court for the Southern
District of West Virginia issued an order in Kentuckians for the
Commonwealth v. Rivenburgh enjoining the Huntington, West Virginia
office of the U.S. Army Corps of Engineers from issuing permits under
Section 404 of the Clean Water Act for the construction of valley fills
for the disposal of overburden from mountaintop

11

NATURAL RESOURCE PARTNERS L.P.

NOTES TO PRO FORMA FINANCIAL STATEMENTS (CONTINUED)

mining operations solely for the purpose of waste disposal. In
connection with this case, the plaintiffs also filed a motion to revoke
an existing permit. The court did not rule on this motion because it
did not have sufficient factual information. On June 17, 2002, the
court denied a motion from the U.S. Army Corps of Engineers requesting
a stay of the initial order and indicated that it would consider a
properly filed motion to revoke the existing permit. The Corps filed an
appeal on July 3, 2002. Oral argument in the Fourth Circuit Court of
Appeals is scheduled for December 4, 2002.

NRP is unable to predict the ultimate outcome of this decision or the
impact this decision may have on itslessees' operations and, therefore,
its results of operations. The ruling could be upheld or reversed on
appeal, settled by the parties or overturned by legislation, and this
process could take several years to complete. If the decision is
ultimately upheld in whole or in part on appeal, NRP cannot predict how
it would be interpreted or implemented by the applicable governmental
agencies or courts. Future litigation could result from ambiguities in
the current order or ambiguities contained in future orders or
decisions. In addition, although this ruling applies only to the
Huntington, West Virginia office of the U.S. Army Corps of Engineers,
future litigation, including appellate review of this case, could
ultimately broaden its applicability to other offices of the U.S. Army
Corps of Engineers, including offices that have issued and may issue in
the future permits to NRP's lessees for mining on its properties. NRP
is also uncertain as to whether this ruling would impact only its
lessees' future permits, or whether it would also apply to renewals of
permits or to existing permits.

As a result of the uncertain disposition and effect on NRP's lessees'
operations from this ruling, NRP is unable to quantify or estimate the
effect on its results of operations from this ruling. However, NRP's
properties that are subject to the Huntington district generated $17.6
million, or 50%, of its pro forma coal royalty revenues for the nine
months ended September 30, 2002 and $18.6 million, or 44%, of its pro
forma coal royalty revenues for the year ended December 31, 2001. In
addition, the properties contained 396 million tons, or 34%, of its
proven and probable coal reserves as of December 31, 2001 and
constituted $116 million, or 34%, of its pro forma net property and
equipment as of September 30, 2002.

Although it is possible that the ruling may result in a material
adverse effect upon NRP's results of operations or financial condition,
the financial information presented above is not intended to indicate
the potential impact of Kentuckians decision for the reasons discussed
above.

12

WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP

BALANCE SHEETS
(IN THOUSANDS)

See accompanying notes to financial statements.
13

WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP

STATEMENTS OF INCOME
(IN THOUSANDS)

See accompanying notes to financial statements
14

WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOW
(IN THOUSANDS)

See accompanying notes to financial statements
15

WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited condensed financial statements of Western
Pocahontas Properties Limited Partnership ("Western Pocahontas") 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 nine month periods ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2002.

The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

Western Pocahontas, 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 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.

Western Pocahontas enters into leases with various third-party operators
for the right to mine coal reserves and harvest timber on Western Pocahontas'
land in exchange for royalty payments. Generally, the coal lessees make payments
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 based on predetermined rates per board foot
harvested.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NEW ACCOUNTING STANDARDS

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates
pooling-of-interests accounting and requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. With regard
to intangible assets, SFAS No. 141 states that intangible assets acquired in a
business combination subsequent to June 30, 2001 should be recognized separately
if the benefit of the intangible asset is obtained through contractual rights or
if the intangible asset can be sold, transferred, licensed, rented to or
exchanged, without regard to the acquirer's intent. The adoption of SFAS No. 141
did not have a material impact on the 2001 financial statements. SFAS No. 142
discontinues goodwill amortization; rather, goodwill will be subject to at least
an annual fair-value based impairment test. The adoption of SFAS No. 142 on
January 1, 2002 did not have a material impact on Western Pocahontas' financial
statements.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligation." 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 requires
disclosure that provides a description of asset retirement obligations and a
reconciliation of changes in the components of those obligations. Western
Pocahontas is evaluating the future financial effects of adopting SFAS No. 143
and expects to adopt the standard effective January 1, 2003.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the
Results of Operations --

16

WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Reporting the Effects of the Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
objectives of SFAS No. 144 are to establish one accounting model for long-lived
assets to be disposed of by sale and to resolve implementation issues related to
SFAS No. 121. The adoption of SFAS No. 144 on January 1, 2002 did not have a
material impact on Western Pocahontas' financial position or results of
operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." Among other things, SFAS No. 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under SFAS
No. 4. The provisions of this Statement related to the rescission of SFAS No. 4
shall be applied in fiscal years beginning after May 15, 2002. Western
Pocahontas does not expect the adoption of SFAS No. 145 on January 1, 2003 to
have a material impact on its financial position or results of operations.

3. REVERSIONARY INTEREST

The previous owner of the Western Pocahontas' coal and timber properties
(CSX Corporation and certain of its affiliates, "CSX") retained a reversionary
interest in those properties whereby it receives either a 25% or 28% interest in
the properties and the net revenues from the properties after July 1, 2001, and
in the net proceeds from any sale of property occurring prior to July 1, 2001.

In December 2001, Western Pocahontas purchased from CSX its reversionary
interest in Western Pocahontas' Kentucky properties for $2.0 million in cash and
a note payable of $7.9 million (see note 5). The Partnership allocated $8.8
million to coal and timber properties and $1.1 million to a reduction in the
reversionary interest payable for the six months ended December 31, 2001.

In March 2002, Western Pocahontas purchased from CSX its reversionary
interest in the remaining assets subject to the reversionary interest. Western
Pocahontas allocated $35 million to coal and timber properties and $1.4 million
to a reduction in the reversionary interest payable for the nine months ended
September 30, 2002. The purchase was financed with a $45.0 million loan and a
portion of the proceeds were used to retire the $7.9 million note that Western
Pocahontas issued in December 2001 as part of the consideration for the purchase
of the reversionary interest in Kentucky (see note 4).

4. LONG-TERM DEBT

Long-term debt consisted of the following:

The notes are collateralized by a mortgage on Western Pocahontas'
properties, a security interest in accounts receivable, other assets, the
partnership interests in Western Pocahontas and the common stock of WPC. Western
Pocahontas is required to maintain an aggregate minimum balance of $3.0 million
in cash and cash equivalents, which is pledged to its lenders. Western
Pocahontas is allowed to make cash distribution to
17

WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

its partners, provided that no event of default exists and the aggregate cash
balance is not reduced below $4.0 million ($6.0 million beginning in March 2002)
by any distribution.

Western Pocahontas is required to contribute cash or cash equivalents to a
debt service account when it receives coal or timber royalties greater than a
predetermined amount or when it sells certain properties. Pursuant to these
provisions, Western Pocahontas contributed $2.4 million to the debt service
account for the year ending December 31, 2001, and $45,000 for the nine months
ended September 30, 2002.

On December 10, 2001, Western Pocahontas issued a $7.9 million non-interest
bearing note payable to CSX in conjunction with the purchase of CSX's
reversionary interest in properties located in Kentucky (see note 3). The note
was due and paid off in March 2002. A discount of $152,000 was imputed for the
period ended December 31, 2001 (see note 3).

5. RELATED PARTY TRANSACTIONS

Quintana Minerals Corporation, a company controlled by Corbin J. Robertson,
Jr., provided certain administrative services to Western Pocahontas and charged
it for direct costs related to the administrative services. The total expenses
charged to Western Pocahontas under this arrangement were $290,000 and $202,000
for the nine month periods ended September 30, 2002 and 2001, respectively.
These costs are reflected in the general and administrative expenses in the
accompanying statements of income.

Western Pocahontas has a management contract to provide certain management,
engineering and accounting services to Great Northern. The contract provides for
a $250,000 annual fee, and Great Northern paid a $187,500 fee in each of the
nine months ended September 30, 2002 and 2001, which is intended to reimburse
Western Pocahontas for its expenses. This fee is presented as other revenue in
the accompanying statement of income. The contract may be canceled upon 90 days
advance notice by Great Northern.

6. COMMITMENTS AND CONTINGENCIES

LEGAL

Western Pocahontas 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, management
believes these claims will not have a material effect on Western Pocahontas'
financial position, liquidity or operations.

ENVIRONMENTAL COMPLIANCE

The operations conducted on Western Pocahontas properties by its lessees
are subject to environmental laws and regulations adopted by various
governmental authorities in the jurisdictions in which these operations are
conducted. As owner of surface interests in some properties, Western Pocahontas
may be liable for certain environmental conditions occurring at the surface
properties. The terms of substantially all of Western Pocahontas' 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 Western
Pocahontas against, among other things, environmental liabilities. Some of these
indemnifications survive the termination of the lease. Employees of Western
Pocahontas regularly visit the mines to ensure compliance with lease terms, but
the duty to comply with all regulations rests with the lessees. Management
believes that Western Pocahontas' 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. Western Pocahontas neither has incurred, nor
is aware of, any material environmental charges imposed on it related to its
properties for the nine months ended September 30, 2002. Western Pocahontas is
not associated with any environmental contamination that may require

18

WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

remediation costs. However, lessees do, from time to time, conduct reclamation
work on the properties under lease to them. Because Western Pocahontas 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
Western Pocahontas' 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, Western Pocahontas could be held
liable for these costs.

GUARANTEES

Western Pocahontas guaranteed a $2.0 million note payable of New Gauley, an
entity that was formerly wholly owned by Western Pocahontas. At September 30,
2002, the outstanding balance on the note was approximately $1.6 million. As a
result of the initial public offering of Natural Resource Partners, New Gauley
retired the note (see note 8).

7. SEGMENT INFORMATION

Segment information has been provided in accordance with SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." Western
Pocahontas' reportable segments are as follows:

Coal Royalty. The coal royalty segment is engaged in managing Western
Pocahontas' coal properties.

Timber Royalty. The timber royalty segment is engaged in the selling of
standing timber on Western Pocahontas' properties.

The following is a summary of certain financial information relating to the
Partnership's segments:

19

WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. SUBSEQUENT EVENT

On October 17, 2002, in connection with Natural Resource Partners'
completion of its initial public offering of limited partnership units, Western
Pocahontas transferred to NRP at historical cost certain coal royalty producing
properties that are currently under lease to coal mine operators in exchange for
common and subordinated units in NRP and a limited partnership interest in the
general partner of NRP. Western Pocahontas also transferred a portion of its
deferred revenue and $36 million of its long-term debt to NRP. The Partnership
retained a coal reserve property that is leased to a third party that is
experiencing permitting problems, as well as unleased coal reserve properties,
surface and timberlands. In connection with the initial public offering New
Gauley Coal Corporation retired the note payable that was guaranteed by the
Partnership.

9. PRIOR PERIOD ADJUSTMENT

In order to correct an error in depletion expense for the three months
ended June 30, 2002 due to a depletion rate for one lease being erroneously
applied to several leases, depletion expense for the three months ended June 30,
2002 has been adjusted. The adjusted quarterly income statements as of June 30,
2002 and March 31, 2002 are as follows:

20

WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

21

GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP

BALANCE SHEETS
(IN THOUSANDS)

See accompanying notes to financial statements
22

GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP

STATEMENTS OF INCOME
(IN THOUSANDS)

See accompanying notes to financial statements
23

GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOW
(IN THOUSANDS)

See accompanying notes to financial statements
24

GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited condensed financial statements of Great Northern
Properties Limited Partnership ("Great Northern") 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 nine month periods ended September
30, 2002 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2002.

The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements

Great Northern, 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
Great Northern are allocated 1% to the general partner and 99% to the limited
partners.

Great Northern enters into leases with various coal mine operators for the
right to mine coal reserves on Great Northern's land in exchange for royalty
payments. Generally, the lessees make payments to Great Northern 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 payments.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NEW ACCOUNTING STANDARDS

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates
pooling-of-interests accounting and requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. With regard
to intangible assets, SFAS No. 141 states that intangible assets acquired in a
business combination subsequent to June 30, 2001 should be recognized separately
if the benefit of the intangible asset is obtained through contractual rights or
if the intangible asset can be sold, transferred, licensed, rented to or
exchanged, without regard to the acquirer's intent. The adoption of SFAS No. 141
did not have a material impact on the 2001 financial statements. SFAS No. 142
discontinues goodwill amortization; rather, goodwill will be subject to at least
an annual fair-value based impairment test. The adoption of SFAS No. 142 on
January 1, 2002 did not have a material impact on the Partnership's financial
statements.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligation." 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 requires
disclosure that provides a description of asset retirement obligations and a
reconciliation of changes in the components of those obligations. Management is
evaluating the future financial effects of adopting SFAS No. 143 and expects to
adopt the standard effective January 1, 2003.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the
Results of Operations --

25

GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Reporting the Effects of the Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
objectives of SFAS No. 144 are to establish one accounting model for long-lived
assets to be disposed of by sale and to resolve implementation issues related to
SFAS No. 121. The adoption of SFAS No. 144 on January 1, 2002 did not have a
material impact on Great Northern's financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." Among other things, SFAS No. 145 will require gains and losses on
extinguishments of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under SFAS
No. 4. The provisions of this Statement related to the rescission of SFAS No. 4
shall be applied in fiscal years beginning after May 15, 2002. Management does
not expect the adoption of SFAS No. 145 on January 1, 2003 to have a material
impact on Great Northern's financial position or results of operations.

3. NONPARTICIPATING ROYALTY INTEREST

The previous owner of Great Northern's coal properties, Meridian Minerals
Company ("Meridian"), a subsidiary of Burlington Resources, Inc., retained a
nonparticipating royalty interest in certain properties that were not leased at
the time of acquisition at a royalty rate ranging from 2% to 5%. Such properties
are presently not leased. In the event any of the properties subject to the
nonparticipating royalty interest are sold to a third party, Meridian will
receive a certain percentage of the selling price.

4. LONG-TERM DEBT

Long-term debt consisted of the following:

The notes are collateralized by a mortgage on Great Northern's properties,
a security interest in accounts receivable, other assets, the partnership
interests in Great Northern and the debt service account established by Great
Northern. The debt service account is funded quarterly with 100% of Great
Northern's cash flows, defined as all cash revenue received by Great Northern,
net of any operating expenses and management fees and up to a maximum of 20% of
positive operating income to be used to pay the portion of the partners' income
tax liabilities attributable to Great Northern, less $250,000 in cash to be
retained for general operating purposes.

The debt reserve account will be used to collateralize the notes until the
balance of the account reaches a minimum of $10.0 million, after which the
amount in excess of $10.0 million may be applied directly to the outstanding
balance of the notes. Great Northern contributed $1.9 million and $2.3 million
to the debt service account for the nine-month periods ended September 30, 2001
and 2002, respectively (see note 7).

5. RELATED PARTY TRANSACTIONS

Great Northern has a management contract to receive management, engineering
and accounting services from Western Pocahontas. The contract provides for an
annual fee of $250,000 of which $187,500 is for the
26

GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

nine month period ended September 30, 2002. Such amounts are reflected in
general and administrative expenses in the accompanying statements of income.
The contract may be canceled upon 90 days advance notice to the Partnership.

6. COMMITMENTS AND CONTINGENCIES

LEGAL

Great Northern 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, management believes these claims
will not have a material effect on Great Northern's financial position,
liquidity or operations.

ENVIRONMENTAL COMPLIANCE

The operations conducted on Great Northern properties by its lessees are
subject to environmental laws and regulations adopted by various governmental
authorities in the jurisdictions in which these operations are conducted. As
owner of surface interests in some properties, Great Northern may be liable for
certain environmental conditions occurring at the surface properties. The terms
of substantially all of Great Northern'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 Great Northern against, among other
things, environmental liabilities. Some of these indemnifications survive the
termination of the lease. Great Northern causes 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 Great Northern'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. Great Northern neither has
incurred, nor is aware of, any material environmental charges imposed on it
related to its properties for the nine months ended September 30, 2002. Great
Northern is not associated with any environmental contamination that may require
remediation costs. However, lessees do, from time to time, conduct reclamation
work on the properties under lease to them. Because Great Northern 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 lessee
is 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, Great Northern could be held liable for these costs.

7. SUBSEQUENT EVENT

On October 17, 2002 in connection with Natural Resource Partners'
completion of its initial public offering of limited partnership units, Great
Northern transferred to NRP at historical cost certain coal royalty producing
properties that are currently under lease to coal mine operators in exchange for
common and subordinated units of NRP and a limited partnership interest in the
general partner of NRP. Great Northern also transferred a portion of its
deferred revenue and $8.9 million of its long-term debt to NRP. Great Northern
retained unleased coal reserve properties and surface land. Because the
underwriters of the initial public offering of NRP units did not exercise their
option to purchase additional units of NRP, Great Northern purchased 66,353
common units on November 18, 2002 for $1.3 million.

Simultaneously with NRP's initial public offering of units, Great Northern
restructured its remaining long-term debt. In connection with the restructuring,
Great Northern used approximately $10.5 million of funds in its debt reserve
account to pay down debt and executed two new promissory notes for $14.9 million

27

GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

per note. The notes are payable to a bank and to the majority owner of the
general partner of the Partnership. The terms of the notes are as follows:

28

NEW GAULEY COAL CORPORATION

BALANCE SHEETS
(IN THOUSANDS)

See accompanying notes to financial statements
29

NEW GAULEY COAL CORPORATION

STATEMENTS OF INCOME
(IN THOUSANDS)

See accompanying notes to financial statements
30

NEW GAULEY COAL CORPORATION

STATEMENTS OF CASH FLOW
(IN THOUSANDS)

See accompanying notes to financial statements
31

NEW GAULEY COAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND ORGANIZATION

The accompanying unaudited condensed financial statements of New Gauley
Coal Corporation ("New Gauley") 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 nine month periods ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2002.

The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements

New Gauley, a West Virginia subchapter S corporation, was incorporated in
1918 to own and manage land and mineral rights. New Gauley owns property located
in Alabama and West Virginia.

New Gauley enters into leases with various coal mine operators for the
right to mine coal reserves on New Gauley's land in exchange for royalty
payments. Generally, the lessees make payments to New Gauley based on the
greater of a percentage of the gross sales price or a fixed price per ton of
coal they sell, subject to minimum annual or quarterly payments.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NEW ACCOUNTING STANDARDS

In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 eliminates
pooling-of-interests accounting and requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. With regard
to intangible assets, SFAS No. 141 states that intangible assets acquired in a
business combination subsequent to June 30, 2001 should be recognized separately
if the benefit of the intangible asset is obtained through contractual rights or
if the intangible asset can be sold, transferred, licensed, rented to or
exchanged, without regard to the acquirer's intent. The adoption of SFAS No. 141
did not have a material impact on New Gauley's 2001 financial statements. SFAS
No. 142 discontinues goodwill amortization; rather, goodwill will be subject to
at least an annual fair-value based impairment test. The adoption of SFAS No.
142 on January 1, 2002 did not have a material impact on New Gauley's financial
statements.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligation." 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 requires
disclosure that provides a description of asset retirement obligations and a
reconciliation of changes in the components of those obligations. Management is
evaluating the future financial effects of adopting SFAS No. 143 and expects to
adopt the standard effective January 1, 2003.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of the Disposal of a Segment of a
Business, and Extraordinary, Unusual and