NATURAL RESOURCE PARTNERS LP - 10-K Annual Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 1-31465
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 Number)

610 JEFFERSON, SUITE 3600 77002
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)

(713) 751-7507
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE.

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 the
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ ] No [X]

The aggregate value of the Common Units held by non-affiliates of the
registrant (treating all executive officers and directors of the registrant and
holders of 10% or more of the Common Units outstanding, for this purpose, as if
they were affiliates of the registrant) was approximately $89,502,660 on
December 31, 2002(1) based on a price of $20.70 per unit, the closing price of
the Common Units as reported on the New York Stock Exchange on that date.

As of March 15, 2003, there were 11,353,658 Common Units outstanding and
11,353,658 Subordinated Units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE.
None.

(1)The registrant completed its initial public offering in October 2002.
Because the registrant has not yet completed a "second fiscal quarter" it is
stating the aggregate value of the Common Units as of December 31, 2002, the
last business day of its most recently completed fiscal quarter.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

TABLE OF CONTENTS

1

NATURAL RESOURCE PARTNERS L.P.

PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIES

Natural Resource Partners L.P. (the "Partnership" or "NRP") is a limited
partnership formed in April 2002 by the WPP Group and Arch Coal, Inc. ("Arch
Coal").

We engage principally in the business of owning and managing coal
properties in the three major coal-producing regions of the United States:
Appalachia, the Illinois Basin and the Western United States. As of December 31,
2002, we controlled approximately 1.23 billion tons of proven and probable coal
reserves in eight states. We do not operate any mines. 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. Our lessees
are generally required to make payments to us 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 WPP Group includes Western Pocahontas Properties Limited Partnership,
New Gauley Coal Corporation and Great Northern Properties Limited Partnership,
three privately held companies that are primarily engaged in owning and managing
mineral properties. Western Pocahontas Properties Limited Partnership was
established in connection with the acquisition of properties located in West
Virginia, Kentucky, Maryland, Indiana and Alabama from CSX Corporation in 1986.
As part of Western Pocahontas Properties Limited Partnership's acquisition of
the CSX properties, Western Pocahontas Properties Limited Partnership acquired
New Gauley Coal Corporation, which held additional properties in West Virginia.
Great Northern Properties Limited Partnership was established with the
acquisition in 1992 from Burlington Resources of properties primarily located in
Montana.

We completed our initial public offering of 2,598,750 common units at a
price of $20.00 per unit on October 17, 2002, from which we received net
proceeds of approximately $48.4 million. Simultaneously, Arch Coal sold
1,901,250 common units at the same price. We did not receive any proceeds from
the sale by Arch Coal of these units.

At the time of the our initial public offering, the WPP Group transferred
certain assets and liabilities to us in exchange for:

- 3,882,485 common units;

- 6,556,738 subordinated units;

- 25% of the incentive distribution rights;

- a 57.75% limited partner interest in NRP (GP) LP, the general partner of
the Partnership; and

- the assumption of $46.5 million of debt contributed by the WPP Group
which was paid from the proceeds of the initial public offering.

Simultaneously, Arch Coal transferred certain assets and liabilities to the
Partnership in exchange for:

- 4,796,920 common units (of which Arch Coal subsequently sold 1,901,250
units);

- 4,796,920 subordinated units;

- 10% of the incentive distribution rights; and

- a 42.25% limited partner interest in NRP (GP) LP, the general partner of
the Partnership.

Subsequently, we sold 75,503 common units at the initial public offering
price to Great Northern and New Gauley because the underwriters did not exercise
their over-allotment option.

Simultaneously with the initial public offering, we entered into a
$100,000,000 revolving credit facility arrangement with a group of banks led by
PNC Bank. As we are actively pursuing additional property acquisitions, we are
currently in discussions with a group of banks to increase our revolving credit
facility.

2

PARTNERSHIP STRUCTURE AND MANAGEMENT

Our operations are conducted through, and our operating assets are owned
by, our subsidiaries. We own our subsidiaries through an operating company, NRP
(Operating) LLC. At March 1, 2003, our partnership structure is as follows:

- NRP (GP) LP, our general partner, owns the 2% general partner interest in
us, as well as 65% of the incentive distribution rights, which entitle
the holder to receive a higher percentage of cash distributed in excess
of $0.5625 per unit in any quarter;

- the WPP Group owns 25% of the incentive distribution rights and Arch Coal
owns the remaining 10% of the incentive distribution rights;

- we own 100% of the membership interests in the operating company; and

- the operating company owns 100% of the membership interests in its
subsidiaries: NNG LLC, WPP LLC, GNP LLC, ACIN LLC, and CSTL LLC.

Our general partner has sole responsibility for conducting our business and
for managing our operations. Because our general partner is a limited
partnership, its general partner, GP Natural Resource Partners LLC, will conduct
its business and operations and the board of directors and officers of GP
Natural Resource Partners LLC makes decisions on our behalf. Arch Coal owns a
42.25% membership interest in and is entitled to nominate three directors,
including one independent director, of GP Natural Resource Partners LLC.
Robertson Coal Management LLC, a limited liability company wholly owned by
Corbin J. Robertson, Jr., owns a 57.75% membership interest in and is entitled
to nominate five directors, including two independent directors, of GP Natural
Resource Partners LLC. Corbin J. Robertson, Jr. controls each entity comprising
the WPP Group. Mr. Robertson owns the general partner of Western Pocahontas
Properties Limited Partnership, 85% of the general partner of Great Northern
Properties Limited Partnership and is the Chairman, Chief Executive Officer and
controlling stockholder of New Gauley Coal Corporation.

The senior executives and other officers who currently manage the WPP Group
assets also manage us. They are employees of Western Pocahontas Properties
Limited Partnership and Quintana Minerals Corporation, a company controlled by
Mr. Robertson, and they allocate varying percentages of their time to managing
our operations. Neither our general partner, GP Natural Resource Partners LLC,
nor their affiliates receive any management fee or other compensation in
connection with the management of our business but are entitled to be reimbursed
for all direct and indirect expenses incurred on our behalf.

The offices of Western Pocahontas Properties Limited Partnership are
located at P.O. Box 2827, 1035 Third Avenue, Suite 300, Huntington, West
Virginia 25727 and the telephone number is (304) 522-5757. Our principal
executive offices are located at 601 Jefferson Street, Suite 3600, Houston,
Texas 77002 and our phone number is (713) 751-7507.

OUR RELATIONSHIP WITH THE WPP GROUP AND ARCH COAL

The WPP Group and Arch Coal have a significant interest in our partnership
through their combined ownership of a 78.6% limited partner interest and the 2%
general partner interest in our partnership. Both the WPP Group and Arch Coal
have a history of successfully completing and integrating acquisitions in the
coal industry. We expect to pursue acquisitions with the WPP Group and Arch
Coal, as well as with other companies. We may acquire coal reserve properties,
other mineral properties or producing coal properties, in which event we would
expect to work with a coal producing company that would acquire the mine assets
and lease the reserves from us.

RECENT ACQUISITION OF COAL PROPERTIES

On December 4, 2002, we acquired, through our subsidiary CSTL LLC, mineral
rights to approximately 120 million tons of coal reserves from subsidiaries of
El Paso Corporation for $57 million in cash. Approximately one-half of these
reserves are located in Kentucky, and the remainder are in Virginia and West
Virginia. Some of these reserves were leased to and mined by subsidiaries of El
Paso Corporation. On some of

3

the properties, El Paso retained an overriding royalty interest. This
acquisition consisted of approximately 177,000 acres of mineral property
(including approximately 25,000 surface acres). Other revenue from the property
will arise from timber harvests, surface leases and oil and gas royalty. We also
acquired an overriding royalty interest in coal in North Dakota.

Subsequent to our acquisition, El Paso sold the overriding royalty it
retained to a subsidiary of Alpha Natural Resources, LLC ("Alpha"). On February
26, 2003, we acquired the override from Alpha for $11.9 million. We utilized our
revolving credit facility to finance both acquisitions.

MAJOR COAL PROPERTIES

The following is a summary of our major coal producing properties that were
contributed to NRP on October 17, 2002. Each of these properties produced more
than 1.0 million tons for the entire year during 2002. We have included in this
list two properties on which we acquired the reserves on December 4, 2002 and
leased the reserves back to either Coastal Coal Company, LLC or Coastal Coal --
WV, LLC.

APPALACHIA

Evans-Laviers. The Evans-Laviers property is located in Breathitt, Floyd,
Knott and Magoffin Counties, Kentucky. In 2002, 3.41 million tons were produced
from our property. We lease the property to CONSOL of Kentucky Inc., a
subsidiary of publicly held CONSOL Energy Inc., which operates an underground
mine and contracts the operations of other mines to third-party operators.
Additionally, a sublessee operates a surface and highwall mine on the property.
The underground mine is on our property as well as adjacent property. The coal
produced from this property is trucked to the Big Sandy River for barge
transport or is transported by truck or beltline to preparation plants located
on-site and on adjacent property. Coal is shipped from the preparation plants on
the CSX railroad to customers such as DuPont, Virginia Electric Power, Southern
Company, American Electric Power and Electric Fuels.

Lynch. The Lynch property is located in Harlan and Letcher Counties,
Kentucky. In 2002, 2.97 million tons were produced from our property. We
primarily lease the property to Resource Development, L.L.C., an independent
coal producer. Production comes from underground mines and a surface mine.
Production from the mines is transported by truck to a preparation plant on the
property and is shipped primarily on the CSX railroad to utility customers such
as Georgia Power and Orlando Utilities.

Eunice. The Eunice property is located in Raleigh and Boone Counties, West
Virginia. In 2002, 2.55 million tons were produced from our property. We lease
the property to Boone East Development Co., a subsidiary of publicly held Massey
Energy Company. Boone East Development, through affiliates, conducts two
operations on the property, including a surface operation and an underground
(longwall) mine. These operations extend onto adjacent reserves and will also
extend onto a portion of our nearby Y&O property. Production from this operation
is generally transported by beltline and processed at two preparation plants
located off the property. The preparation plants ship both metallurgical and
steam coal on the CSX railroad to customers such as American Electric Power,
CINergy, Louisville Gas & Electric, Virginia Electric Power, AK Steel and U.S.
Steel.

Lone Mountain. The Lone Mountain property is located in Harlan County,
Kentucky. In 2002, 2.53 million tons were produced from our property. We lease
the property to Ark Land Company, a subsidiary of publicly held Arch Coal, Inc.
Production comes from underground mines. Production from the mines is
transported primarily by beltline to a preparation plant on adjacent property
and shipped on the Norfolk Southern or CSX railroads to utility customers such
as Georgia Power and the Tennessee Valley Authority.

VICC. The VICC property is located in Wise, Dickenson and Russell
Counties, Virginia. In 2002, 2.5 million tons were produced from this property.
We purchased this property in December 2002 from a subsidiary of El Paso
Corporation and leased it to Coastal Coal Company, LLC, which had been operating
this mine complex prior to the acquisition. Production comes from several
underground mines. Coal is shipped on the Norfolk Southern railroad to utilities
such as Southern Company, TVA and VEPCO. Subsequent to the end of 2002, this
lease was acquired by Alpha Natural Resources or certain of its affiliates.

4

Kingwood. The Kingwood property is located in Preston County, West
Virginia. In 2002, 2.45 million tons were produced from this property. We
purchased this property in December 2002 from a subsidiary of El Paso
Corporation and leased it to Coastal Coal -- WV, LLC, which had been operating
this underground mine prior to the acquisition. Coal is shipped on the CSX
railroad to utilities such as Mirant, Allegheny Power and VEPCO. Subsequent to
the end of 2002, this lease was acquired by Alpha Natural Resources or certain
of affiliates.

Pardee. The Pardee property is located in Letcher County, Kentucky and
Wise County, Virginia. In 2002, 1.5 million tons were produced from our
property. We lease the property to Ark Land. Production comes from underground
mines and a surface mine. Production from the mines is transported by truck or
beltline to a preparation plant on the property and is shipped primarily on the
Norfolk Southern railroad to utility customers such as Georgia Power and the
Tennessee Valley Authority.

Campbell's Creek. The Campbell's Creek property is located in Kanawha
County, West Virginia. In 2002, 1.09 million tons were produced from our
property. The property is leased to Ark Land. Production comes from an
underground mine and is transported by truck to an on-site preparation plant.
After preparation, the coal is trucked to various loading points for shipment by
barge, or directly to customers such as Dayton Power & Light, Ohio Edison,
Kentucky Utilities and Union Carbide.

ILLINOIS BASIN

Hocking-Wolford/Cummings. The Hocking-Wolford property and the Cummings
property are both located in Sullivan County, Indiana. In 2002, 1.07 million
tons were produced from our property. Both properties are under common lease to
Black Beauty Coal Company, an affiliate of Peabody Energy. Production is
currently from a surface mine, and a dragline is being moved onto the property.
Coal is shipped by truck and railroad to customers such as Public Service of
Indiana and Indianapolis Power and Light.

NORTHERN POWDER RIVER BASIN

Big Sky. The Big Sky property is located adjacent to and to the south of
the Western Energy property in Rosebud County, Montana. In 2002, 1.73 million
tons were produced from our property. The property is leased to Big Sky Coal
Company, a subsidiary of publicly held Peabody Energy. Big Sky Coal Company
produces coal by surface (dragline) mining. Coal is shipped on the Burlington
Northern Santa Fe railroad to utilities such as Minnesota Power and Northern
States Power.

Western Energy. The Western Energy property is located in Rosebud and
Treasure Counties, Montana. In 2002, 3.75 million tons were produced from our
property. Western Energy Company, a subsidiary of publicly-held Westmoreland
Coal Company, has two coal leases on the property with nearly identical
provisions. Western Energy produces coal by surface (dragline) mining, and the
coal is transported by either truck or beltline to the four-unit 2,200-megawatt
Colstrip generation station located at the mine mouth. A small amount of coal is
transported by truck or the Burlington Northern Santa Fe railroad to other
customers.

COAL ROYALTY BUSINESS

Coal royalty businesses are principally engaged in the business of owning
and managing coal reserves. As an owner of coal reserves, royalty businesses
typically are not responsible for operating mines, but instead enter into
long-term leases with third-party coal mine operators granting them the right to
mine coal reserves on the owner's property in exchange for a royalty payment. A
standard lease has a 5 to 10 year base term, with the lessee having an option to
extend the lease for additional terms. Leases often include the right to
renegotiate rents and royalties for the extended term.

Coal royalty revenues are affected by changes in coal prices, lessees'
supply contracts and, to a lesser extent, fluctuations in the spot market prices
for coal. The prevailing price for coal depends on a number of factors,
including the supply-demand relationship, the price and availability of
alternative fuels, overall economic conditions and governmental regulations. In
addition to their royalty obligation, lessees are often subject to
pre-established minimum monthly, quarterly or annual payments. These minimum
rentals reflect

5

amounts owners are entitled to receive even if no mining activity occurred
during the period. Minimum rentals are often credited against future production
royalties that are earned when coal production commences.

Because royalty businesses do not operate any mines, they do not bear
ordinary operating costs and have limited direct exposure to environmental,
permitting and labor risks. As operators, the lessees are subject to
environmental laws, permitting requirements and other regulations adopted by
various governmental authorities. In addition, the lessees bear the labor risks,
including health care legacy costs, black lung benefits and workmen's
compensation costs, associated with operating the mines. Royalty businesses
typically pay property taxes and then are reimbursed by the lessee for the taxes
on the leased property, pursuant to the terms of the lease.

Our business is not seasonal, although at times severe winter weather can
cause a short-term decrease in coal production by our lessees, due to the
weather's negative impact on production.

We have three lessees who provided more than 10% of our revenue in 2002:
Arch Coal, Massey Energy and Peabody Coal. Each of these companies has several
different mines on our properties. While the loss of any one of these lessees
would have a material adverse effect on us, we do not believe that the loss of
any single mine would have a material adverse effect on us.

COAL RESERVES AND PRODUCTION

The following table sets forth 2002 and 2001 coal royalty revenues from the
properties that were contributed to NRP on October 17, 2002. These coal
royalties represent production from the properties, for the years ending
December 31, 2002 and 2001, respectively. Coal royalty revenue was generated
from the properties in each of the following areas: Appalachia, Illinois Basin
and Northern Powder River Basin.

COAL ROYALTY REVENUES FROM CONTRIBUTED PROPERTIES

The following table sets forth production data and reserve information for
the contributed properties in each of the following areas: Appalachia, Illinois
Basin and Northern Powder River Basin.

PRODUCTION AND RESERVES

6

- ---------------

(1) Of the 1.23 billion tons of reserves, we control approximately 20.2 million
tons in Southern West Virginia under paid-up leases for which we have paid
royalties sufficient to allow us to mine all of the coal reserves
attributable to the properties without further payment.

We classify low sulfur coal as coal with a sulfur content of less than
1.0%, medium sulfur coal as coal with a sulfur content between 1.0% and 1.5% and
high sulfur coal as coal with a sulfur content of greater than 1.5%. Compliance
coal is that portion of low sulfur coal that, when burned, emits less than 1.2
pounds of sulfur dioxide per million Btu. As of December 31, 2002, approximately
25% of our reserves were compliance coal which met the standards for Phase II of
the Clean Air Act. Unless otherwise indicated, we present the quality of the
coal throughout this Form 10-K on an as-received basis, which assumes 6%
moisture for Appalachian reserves, 12% moisture for Illinois Basin reserves and
25% moisture for Northern Powder River Basin reserves. We own both steam and
metallurgical coal reserves in Central and Southern Appalachia, and we own steam
coal reserves in Northern Appalachia, the Illinois Basin and the Northern Powder
River Basin. In 2002, approximately 16.2% of the coal production from our
properties was metallurgical coal.

The following table sets forth our estimate of the sulfur content, the
typical quality of our coal reserves and the type of coal in each area as of
December 31, 2002.

SULFUR CONTENT, TYPICAL QUALITY AND TYPE OF COAL

- ---------------

(1) Compliance coal meets the sulfur dioxide emission standards imposed by Phase
II of the Clean Air Act without blending with other coals or using sulfur
dioxide reduction technologies. Compliance coal is a subset of low sulfur
coal and is, therefore, also reported within the amounts for low sulfur
coal.

(2) For purposes of this table, we have defined metallurgical coal reserves as
reserves located in those seams that historically have been of sufficient
quality and characteristics to be able to be used in the steel making
process. Some of the reserves in the metallurgical category can also be used
as steam coal.

We prepare our reserve estimate from geologic data assembled and analyzed
by our staff of geologists and engineers. The geologic data is taken from
thousands of drill holes, adjacent mine workings, outcrop prospect openings and
other sources, including from third parties. These estimates also take into
account legal, technical and economic limitations that may keep coal from being
mined. Reserve estimates will change from time to time due to mining activities,
analysis of new engineering and geologic data, acquisition or divestment of
reserve holdings, modification of mining plans or mining methods, and other
factors. As of December 31, 2002 our reserves were estimated internally by our
geologists and engineers.

COMPETITION

Numerous producers in the coal industry make the industry intensely
competitive. Our lessees compete with coal producers in various regions of the
United States for domestic sales. The industry has undergone significant
consolidation since 1976. The top ten producers have increased their share of
total domestic coal production from 38% in 1976 to 63% in 2001. This
consolidation has led to a number of our lessees' parent companies having
significantly larger financial and operating resources than their competitors.
Our lessees compete with both large and small producers nationwide on the basis
of coal price at the mine, coal quality, transportation cost from the mine to
the customer and the reliability of supply. Continued demand for our coal

7

and the prices that our lessees obtain are also affected by demand for
electricity and steel, as well as environmental and government regulations,
technological developments and the availability and price of alternative fuel
supplies, including nuclear, natural gas, oil and hydroelectric power.

REGULATION

The coal mining industry is subject to regulation by federal, state and
local authorities on matters such as:

- the discharge of materials into the environment;

- employee health and safety;

- mine permits and other licensing requirements;

- reclamation and restoration of mining properties after mining is
completed;

- management of materials generated by mining operations;

- surface subsidence from underground mining;

- water pollution;

- legislatively mandated benefits for some current and retired coal miners;

- air quality standards;

- protection of wetlands;

- endangered plant and wildlife protection;

- limitations on land use;

- storage of petroleum products and substances that are regarded as
hazardous under applicable laws; and

- management of electrical equipment containing polychlorinated biphenyls,
or PCBs.

In addition, the electricity generation industry, which is the most
significant end-user of coal, is subject to extensive regulation regarding the
environmental impact of its power generation activities, which could affect
demand for our lessees' coal. New legislation or regulations may be adopted or
enforcement of existing laws could become more stringent, either of which may
have a significant impact on the mining operations of our lessees or their
customers' ability to use coal. Potential regulation may require our lessees or
their customers to change operations significantly or incur substantial costs.

Our lessees are obligated to conduct mining operations in compliance with
all applicable federal, state and local laws and regulations. However, because
of extensive and comprehensive regulatory requirements, violations during mining
operations are not unusual in the industry and, notwithstanding compliance
efforts, we do not believe violations by our lessees can be eliminated
completely. We do not currently expect that future compliance will have a
material adverse effect on us, our unitholders or our minimum quarterly
distributions.

While it is not possible to quantify the expenditures incurred by our
lessees to maintain compliance with all applicable federal and state laws, those
costs have been and are expected to continue to be significant. Our lessees post
performance bonds pursuant to federal and state mining laws and regulations for
the estimated costs of reclamation and mine closing, including the cost of
treating mine water discharge when necessary. Compliance with these laws
substantially increases the cost of coal mining for all domestic coal producers.

SPECIFIC REGULATORY AND LITIGATION MATTERS

West Virginia Mountaintop Mining/Valley Fill Litigation. Bragg v. Robertson
was filed in federal court by the West Virginia Highlands Conservancy and
several citizens in July 1998 against the West Virginia Department of
Environmental Protection and the U.S. Army Corp of Engineers. Bragg generally
targeted

8

mountaintop mining operations utilizing valley fills for mine overburden
disposal. The plaintiffs in this case alleged that the procedures used by the
West Virginia Department of Environmental Protection and the U.S. Army Corps of
Engineers for issuing permits for valley fills used in mountaintop removal
violated SMCRA, the Clean Water Act and the National Environmental Policy Act.

In its ruling on the SMCRA claims, the district court enjoined the West
Virginia Department of Environmental Protection from issuing mining permits for
the construction of valley fills over both intermittent and perennial stream
segments. The Fourth Circuit Court of Appeals vacated the district court's
injunction in April 2001, ruling that the Eleventh Amendment to the U.S.
Constitution barred suit against the state in federal court for alleged
violations of state mining law. The plaintiffs appealed the Fourth Circuit's
decision to the U.S. Supreme Court. In January 2002, the U.S. Supreme Court
refused to hear the appeal. Because virtually all mining operations in West
Virginia, including those of our lessees, utilize valley fills, all or a portion
of our lessees' mining operations could have been affected by the permanent
injunction. The plaintiffs could file a new lawsuit in state court challenging
the West Virginia Department of Environmental Protection's practice of
permitting valley fills. If a state court were to enjoin the construction of
valley fills, our lessees might not be able to continue mining those reserves in
West Virginia that are only accessible through mining techniques that use valley
fills, unless such a decision were overturned or if a legislative or other
solution were not achieved. The issuance of an injunction by a state court could
have a material adverse effect on our lessees and on our acquisition and use of
future reserves that require valley fills.

Before Bragg was filed, the federal defendants had previously reached a
settlement with the plaintiffs in December 1998 regarding the Clean Water Act
and the National Environmental Policy Act claims. Under the agreement, the U.S.
Army Corps of Engineers, in cooperation with other agencies, must prepare a
programmatic environmental impact statement regarding the effects of valley
fills on the environment. This environmental impact statement was to have been
completed by January 2001. At this time, however, the environmental impact
statement has not been completed, and it is uncertain when it will be completed.
Until the environmental impact statement is completed, an individual Clean Water
Act Section 404 dredge and fill permit is required prior to the construction of
any valley fill greater than 250 acres in size.

On May 8, 2002, the United States 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
mining operations solely for the purpose of waste disposal. These valleys
typically contain streams that, under the Clean Water Act, are considered
navigable waters of the United States. The court held that the filling of these
waters solely for waste disposal is a violation of the Clean Water Act. The
effect of this injunction would have been to make mountaintop mining
uneconomical in those areas subject to the injunction. We would be materially
affected by this injunction because a substantial number of mountaintop mining
valley fill permits required to be obtained by our lessees are issued by the
Huntington, West Virginia office of the U.S. Army Corps of Engineers.

On December 4, 2002, the Fourth Circuit Court of Appeals heard oral
arguments in the Corps of Engineers' appeal from the District Court's decision
in Kentuckians and issued a 2-1 opinion on January 29, 2003, which vacated the
injunction issued by the District Court. The Court of Appeals also reversed the
District Court's interpretation of the meaning of "fill material" as used in
Section 404 to mean "material deposited for some beneficial primary purpose, not
waste material discharged solely to dispose of waste" and remanded the case to
the District Court for further proceedings. Based on this ruling, the Corps of
Engineers appears to have the authority under Section 404 of the Clean Water Act
to issue permits, and our lessees can apply for these permits and expect to
receive them so long as they comply with all the requirements of the
application.

The Fourth Circuit ruling is subject to further appellate review by either
the Fourth Circuit itself or the Supreme Court. Because additional appellate
review is entirely discretionary, we are unable to predict whether such review
will be allowed.

9

Surface Mining Control And Reclamation Act. SMCRA establishes operational,
reclamation and closure standards for all aspects of surface mining as well as
many aspects of deep mining. SMCRA requires that comprehensive environmental
protection and reclamation standards be met during the course of and upon
completion of mining activities. In conjunction with mining the property, our
lessees are contractually obligated under the terms of their leases to comply
with all laws, including SMCRA and similar state and local laws.

SMCRA also requires our lessees to submit a bond or otherwise financially
secure the performance of their reclamation obligations. The earliest a
reclamation bond can be completely released is five years after reclamation is
complete. In addition, the Abandoned Mine Lands Act, which is part of SMCRA,
imposes a tax on all current mining operations, the proceeds of which are used
to restore mines closed before 1977. Since our lessees are responsible for these
obligations and any related liabilities, we do not accrue the estimated costs of
reclamation or mine closing, and we do not pay the tax described above.

Under SMCRA, responsibility for unabated violations, unpaid civil penalties
and unpaid reclamation fees of independent mine lessees and other third parties
could potentially be imputed to other companies that are deemed to have "owned"
or "controlled" the mine operator. Sanctions against the "owner" or "controller"
are quite severe and can include civil penalties, reclamation fees and
reclamation costs. We are not aware of any currently pending or asserted claims
against us asserting that we "own" or "control" our lessees. We believe our
lessees are generally in compliance with all operational, reclamation and
closure requirements under their SMCRA permits.

On March 29, 2002, the U.S. District Court for the District of Columbia
issued a ruling that could restrict underground mining activities conducted in
the vicinity of public roads or occupied dwellings, or within a variety of
federally protected lands or national forests. Citizens Coal Council v. Norton
was filed in February 2000 to challenge regulations issued by the Department of
Interior that provide, among other things, that subsidence and underground
activities that may lead to subsidence are not surface mining activities within
the meaning of SMCRA. SMCRA generally contains restrictions and certain
prohibitions on the locations where surface mining activities can be conducted.
The District Court entered summary judgment upon the plaintiff's claims that the
Secretary of the Interior's determination violated SMCRA. By order dated April
9, 2002, the court remanded the regulations to the Secretary of the Interior for
reconsideration.

None of the deep mining activities undertaken on our properties are within
federally protected lands or national forests where SMCRA restricts surface
mining, even though several are within proximity to occupied dwellings. However,
this case poses a potential restriction on underground mining within 100 feet of
a public road. If these SMCRA restrictions ultimately apply to underground
mining, considerable uncertainty would exist about the nature and extent of
these restrictions.

The significance of this decision for the coal mining industry remains
unclear because this ruling is subject to appellate review. The Department of
Interior and the National Mining Association, a trade group that intervened in
this action, have appealed the ruling and sought a stay of the order pending
appeal to the District of Columbia Circuit Court of Appeals, and the stay was
granted. Oral argument before the District of Columbia Circuit is scheduled for
April 7, 2003. If the District Court's decision is not overturned or if some
legislative solution is not enacted, this ruling could have a material adverse
effect on all coal mine operations that utilize underground mining techniques,
including those of our lessees. While it still may be possible to obtain permits
for underground mining operations in these areas, the time and expense of that
permitting process are likely to increase significantly.

West Virginia Cumulative Hydrologic Impact Analysis Litigation. In a
lawsuit unrelated to Bragg, two environmental groups sued the West Virginia
Department of Environmental Protection in January 2000, and later added the U.S.
Secretary of the Interior in federal court, alleging various violations of the
Clean Water Act and SMCRA. The U.S. Office of Surface Mining is a division
within the Department of Interior. Ohio Valley Environmental Coalition, Inc. v.
Castle specifically alleges that the West Virginia Department of Environmental
Protection has violated its non-discretionary duty to require all surface and
underground mining permit applications to include certain stream flow and water
quality data and an analysis of the probable hydrologic consequences of the
proposed mine, and that the West Virginia Department of

10

Environmental Protection failed to conduct SMCRA-required cumulative hydrologic
impact analysis prior to issuing mining permits. The lawsuit also alleges that
the Office of Surface Mining has a non-discretionary duty to apply the federal
SMCRA law in West Virginia due to the deficiencies in the state program. In
March 2001, the district court denied the plaintiff's motion for a preliminary
injunction on its claims against the West Virginia Department of Environmental
Protection. In September 2001, the district court denied a motion to dismiss
filed by defendant Michael Callaghan, Secretary of the West Virginia Department
of Environmental Protection. Callaghan filed an interlocutory appeal of this
decision in October 2001. The Fourth Circuit Court of Appeals dismissed this
appeal in part and has denied a motion filed by the plaintiffs to dismiss the
remaining claims. During the pendency of this appeal, on August 30, 2002, the
district court dismissed some of the plaintiffs' claims.

If the plaintiffs are eventually successful in this lawsuit, the West
Virginia Department of Environmental Protection will have to modify its
procedures and requirements for the content and review of mining permit
applications, or the federal government will be ordered to assume control over
mining permits in West Virginia. Any of these changes is likely to increase the
cost of preparing applications and the time required for their review and may
entail additional operating expenditures and, possibly, restrictions on
operating that could reduce our coal royalty revenues.

Green Valley Coal Company, one of our lessees and a subsidiary of Massey
Energy Company, intervened as a defendant in this lawsuit because a permit
issued to Green Valley is alleged to have been improperly issued, and because
several pending Green Valley permit applications are also alleged to be
deficient.

West Virginia Antidegradation Policy. In January 2002, a number of
environmental groups and individuals filed suit in the U.S. District Court for
the Southern District of West Virginia to challenge the EPA's approval of West
Virginia's antidegradation implementation policy. Under the federal Clean Water
Act, state regulatory authorities must conduct an antidegradation review before
approving permits for the discharge of pollutants to waters that have been
designated as high quality by the state. Antidegradation review involves public
and intergovernmental scrutiny of permits and requires permittees to demonstrate
that the proposed activities are justified in order to accommodate significant
economic or social development in the area where the waters are located. The
plaintiffs in Ohio Valley Environmental Coalition v. Whitman challenge
provisions in West Virginia's antidegradation implementation policy that exempt
current holders of National Pollutant Discharge Elimination System (NPDES)
permits and Section 404 permits, among other parties, from the
antidegradation-review process. Our lessees are current NPDES or Section 404
permit holders that are exempt from antidegradation review under these
provisions. Revoking this exemption and subjecting our lessees to the
antidegradation review process could delay the issuance or reissuance of Clean
Water Act permits to our lessees or cause these permits to be denied. If the
plaintiffs are successful and our lessees discharge into waters that have been
designated as high-quality by the state, the costs, time and difficulty
associated with obtaining and complying with Clean Water Act permits for surface
mining of operations could increase, which could in turn increase the costs of
coal production, potentially reducing our royalty revenues.

Massey Energy Show Cause Order. In January 2002, the West Virginia
Department of Environmental Protection entered an order finding a pattern of
violations relating to water quality by Marfork Coal Company, a subsidiary of
Massey Energy, and suspending its permit for operations adjacent to the
Dorothy-Sarita property for 14 days. Marfork Coal filed an appeal and obtained a
stay of enforcement of this order. The Surface Mining Board heard the appeal and
reduced the suspension to nine days. Marfork Coal has appealed this decision to
the circuit court, which held a hearing on November 22, 2002. On December 23,
2002, the Circuit Court reversed the order of the West Virginia Department of
Environmental Protection. The court found that the show cause hearing was not
conducted in an impartial manner and caused a violation of Marfork Coal's due
process rights. The matter was remanded to the West Virginia Department of
Environmental Protection for an impartial hearing. If this show cause order had
been upheld, the permits issued to Massey Energy and its subsidiaries could be
suspended or revoked and production could be decreased at the mines on the
Dorothy-Sarita property and at the longwall mine operated by Performance Coal at
the Eunice property, reducing our coal royalty revenues on that property.

11

Mine Health and Safety Laws. Stringent safety and health standards have
been imposed on the coal mining industry by federal legislation since the
adoption of the Mine Health and Safety Act of 1969. The Mine Health and Safety
Act of 1969 resulted in increased operating costs and reduced productivity. The
Mine Safety and Health Act of 1977, which significantly expanded the enforcement
of health and safety standards of the Mine Health and Safety Act of 1969,
imposes comprehensive safety and health standards on all mining operations. In
addition, as part of the Mine Health and Safety Acts of 1969 and 1977, the Black
Lung Act requires payments of benefits by all businesses conducting current
mining operations to coal miners with black lung and to some survivors of miners
who die from this disease. Because the regulatory requirements imposed by mine
worker health and safety laws are comprehensive and ongoing in nature,
non-compliance cannot be eliminated completely. We believe our lessees have made
all payments under the Black Lung Act and are generally in compliance with all
applicable mine health and safety laws.

Clean Air Act. The federal Clean Air Act and similar state and local laws,
which regulate emissions into the air, affect coal mining and processing
operations primarily through permitting and emissions control requirements. The
Clean Air Act also indirectly affects coal mining operations by extensively
regulating the emissions from coal-fired industrial boilers and power plants,
which are the largest end-users of our coal. These regulations can take a
variety of forms, as explained below.

The Clean Air Act imposes obligations on the Environmental Protection
Agency, or EPA, and the states to implement regulatory programs that will lead
to the attainment and maintenance of EPA-promulgated ambient air quality
standards, including standards for sulfur dioxide, particulate matter, nitrogen
oxides and ozone. Owners of coal-fired power plants and industrial boilers have
been required to expend considerable resources to comply with these ambient air
standards. Significant additional emissions control expenditures will be needed
in order to meet the current national ambient air standards.

Numerous legal and regulatory actions have been initiated over the years
under the Clean Air Act, the outcome of which could adversely affect coal mining
and coal-fired power plants. In February 2003, legislation was introduced in
Congress outlining the Bush administration's Clear Skies Initiative, which calls
for dramatic decreases in sulfur emissions from power plants. If lower emissions
standards are enacted under the act, it could result in a decrease in coal
demand.

In summary, the effect that a variety of Clean Air Act regulations and
legal actions could have on the coal industry and thus our business cannot be
predicted with certainty. We cannot assure you that future regulatory provisions
will not materially adversely affect our business, financial condition or
results of operations. Additionally, we have no ability to control, or specific
knowledge regarding, the environmental and other regulatory compliance of
purchasers of coal mined from our properties.

Clean Water Act. Section 301 of the Clean Water Act prohibits the
discharge of a pollutant from a point source into navigable waters except in
accordance with a permit issued under either Section 402 or Section 404 of the
Clean Water Act. Navigable waters are broadly defined to include streams, even
those that are not navigable in fact, and may include wetlands.

All mining operations in Appalachia generate excess material that must be
placed in fills in adjacent valleys and hollows. Likewise, coal refuse disposal
areas and coal processing slurry impoundments are located in valleys and
hollows. Almost all of these areas contain intermittent or perennial streams,
which are considered navigable waters. An operator must secure a Clean Water Act
permit before filling such streams. For approximately the past twenty-five
years, operators have secured Section 404 fill permits to authorize the filling
of navigable waters with material from various forms of coal mining. Operators
have also obtained permits under Section 404 for the construction of slurry
impoundments although the use of these impoundments, including discharges from
them, requires permits under Section 402. Our leases require our lessees to
obtain all necessary permits required under the Clean Water Act. To our
knowledge, our lessees have obtained all permits required under the Clean Water
Act and equivalent state laws.

Mining Permits and Approvals. Numerous governmental permits or approvals
are required for mining operations. We do not hold any mining permits. Under our
leases, our lessees are responsible for obtaining and maintaining all permits.
In connection with obtaining these permits and approvals, our lessees may be
required

12

to prepare and present to federal, state or local authorities data pertaining to
the effect or impact that any proposed production of coal may have upon the
environment. The requirements imposed by any of these authorities may be costly
and time consuming and may delay commencement or continuation of mining
operations. Regulations also provide that a mining permit can be refused or
revoked if an officer, director or a shareholder with a 10% or greater interest
in the entity is affiliated with another entity that has outstanding permit
violations. Thus, past or ongoing violations of federal and state mining laws
could provide a basis to revoke existing permits and to deny the issuance of
additional permits.

In order to obtain mining permits and approvals from state regulatory
authorities, mine operators, including our lessees, must submit a reclamation
plan for restoring the mined property to its prior condition, productive use or
other permitted condition upon the completion of mining operations. Typically
our lessees submit the necessary permit applications between 12 and 18 months
before they plan to begin mining a new area. In our experience, permits
generally are approved within 12 months after a completed application is
submitted. In the past, our lessees have generally obtained their mining permits
without significant delay. Our lessees have obtained or applied for permits to
mine a majority of the reserves that are currently planned to be mined by our
lessees over the next five years. Our lessees are in the planning phase for
obtaining permits for the remaining reserves planned to be mined over the next
five years. We cannot assure you, however, that they will not experience
difficulty in obtaining mining permits in the future.

As a consequence of potential future legislation and administrative
regulations that may emphasize the protection of the environment, the activities
of mine operators, including our lessees, may be more closely regulated.
Legislation and regulations, as well as future interpretations of existing laws,
may also require substantial increases in equipment expenditures and operating
costs, as well as delays, interruptions or the termination of operations. We
cannot predict the possible effect of such regulatory changes.

Under some circumstances, substantial fines and penalties, including
revocation or suspension of mining permits, may be imposed under the laws
described above. Monetary sanctions and, in severe circumstances, criminal
sanctions may be imposed for failure to comply with these laws.

Framework Convention on Global Climate Change. The United States and more
than 160 other nations are signatories to the 1992 Framework Convention on
Global Climate Change, commonly known as the Kyoto Protocol, that is intended to
limit or capture emissions of greenhouse gases such as carbon dioxide and
methane. The U.S. Senate has neither ratified the treaty commitments, which
would mandate a reduction in U.S. greenhouse gas emissions, nor enacted any law
specifically controlling greenhouse gas emissions, and the Bush Administration
has withdrawn support for this treaty. Nonetheless, future regulation of
greenhouse gases could occur either pursuant to future U.S. treaty obligations
or pursuant to statutory or regulatory changes under the Clean Air Act. Efforts
to control greenhouse gas emissions could result in reduced demand for coal if
electric power generators switch to lower carbon sources of fuel. These
restrictions or uncertainties could have a material adverse effect on our
business.

Comprehensive Environmental Response, Compensation and Liability
Act. CERCLA and similar state laws affect coal mining operations by, among
other things, imposing cleanup requirements for threatened or actual releases of
hazardous substances that may endanger public health or welfare or the
environment. Under CERCLA and similar state laws, joint and several liability
may be imposed on waste generators, site owners and lessees and others
regardless of fault or the legality of the original disposal activity. Although
the EPA excludes most wastes generated by coal mining and processing operations
from the hazardous waste laws, such wastes can, in certain circumstances,
constitute hazardous substances for the purposes of CERCLA. In addition, the
disposal, release or spilling of some products used by coal companies in
operations, such as chemicals, could implicate the liability provisions of the
statute. Thus, coal mines on lands that we currently own or have previously
owned, and sites to which our lessees sent waste materials, may be subject to
liability under CERCLA and similar state laws. In particular, we may be liable
under CERCLA or similar state laws for the cleanup of hazardous substance
contamination at sites where we own surface rights. We cannot assure you that we
or our lessees will not become involved in future proceedings, litigation or
investigations or that these liabilities will not be material.

13

Endangered Species. The federal Endangered Species Act and counterpart
state legislation protects species threatened with possible extinction.
Protection of endangered species may have the effect of prohibiting or delaying
our lessees from obtaining mining permits and may include restrictions on timber
harvesting, road building and other mining or silvicultural activities in areas
containing the affected species. A number of species indigenous to our
properties are protected under the Endangered Species Act. Based on the species
that have been identified to date and the current application of applicable laws
and regulations, however, we do not believe there are any species protected
under the Endangered Species Act that would materially and adversely affect our
lessees' ability to mine coal from our properties in accordance with current
mining plans. There can be no assurance, however, that additional species on our
properties will not receive protected status under the Endangered Species Act or
that currently protected species will not be discovered within our properties.

Other Environmental Laws Affecting Our Lessees. Our lessees are required
to comply with numerous other federal, state and local environmental laws in
addition to those previously discussed. These additional laws include the
Resource Conservation and Recovery Act, the Safe Drinking Water Act, the Toxic
Substance Control Act and the Emergency Planning and Community Right-to-Know
Act. We believe that our lessees are in substantial compliance with all
applicable environmental laws.

TITLE TO PROPERTY

Of the 1.23 billion tons of proven and probable coal reserves to which we
had rights as of December 31, 2002, we owned approximately 1.21 billion tons, or
98.4% of the reserves, in fee. We lease approximately 20.2 million tons, or 1.6%
of our reserves, from unaffiliated third parties. We believe that we have
satisfactory title to all of our mineral properties, but we have not had a
qualified title company confirm this belief. Although title to these properties
is subject to encumbrances in certain cases, such as customary easements,
rights-of-way, interests generally retained in connection with the acquisition
of real property, licenses, prior reservations, leases, liens, restrictions and
other encumbrances, we believe that none of these burdens will materially
detract from the value of our properties or from our interest in them or will
materially interfere with their use in the operations of our business.

For most of our properties, the surface, oil and gas and mineral or coal
estates are owned by different entities. Some of those entities are our
affiliates. State law and regulations in most of the states where we do business
require the oil and gas owner to coordinate the location of wells so as to
minimize the impact on the intervening coal seams. We do not anticipate that the
existence of the severed estates will materially impede coal development on our
properties.

EMPLOYEES AND LABOR RELATIONS

We do not have any employees. To carry out our operations, affiliates of
our general partner employ approximately 24 employees who directly support our
operations. None of these employees are subject to a collective bargaining
agreement. Some of the employees of our lessees and sublessees are subject to
collective bargaining agreements.

SEGMENT INFORMATION

Pursuant to SFAS No. 132, "Disclosure About Segments of an Enterprise and
Related Information," we are not required to disclose separate segment
information because the materiality of timber and oil and gas did not meet the
test for segment disclosure.

AVAILABLE INFORMATION

The Partnership's internet address is www.nrplp.com. We make available free
of charge on or through our internet website our annual report on Form 10-K,
quarterly reports on Form 10-Q and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and

14

Exchange Commission. Included on our website is our "Code of Business Conduct
and Ethics" adopted by our Board of Directors.

ITEM 3. LEGAL PROCEEDINGS

Although we may, from time to time, be involved in litigation and claims
arising out of our operations in the normal course of business, we are not
currently a party to any material legal proceedings. In addition, we are not
aware of any legal or governmental proceedings against us, or contemplated to be
brought against us, under the various environmental protection statutes to which
we are subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON UNITS AND RELATED UNITHOLDER MATTERS

Our common units are listed and traded on the New York Stock Exchange under
the symbol "NRP." As of March 1, 2003, there were an estimated 4,700 beneficial
owners of our common units, and four holders of subordinated units.

The following table sets forth the high and low sales prices per common
unit, as reported on the New York Stock Exchange, from October 11, 2002 (the day
our common units began trading) to December 31, 2002 and the quarterly cash
distribution paid per common unit and subordinated unit.

- ---------------

* The prorated cash distribution relates to the period from October 17, 2002,
the closing date of our initial public offering, to December 31, 2002. This
distribution was declared on January 21, 2003 and paid on February 14, 2003.

In addition to common units, we have also issued subordinated units for
which there is no established public trading market. The subordinated units were
issued as part of our initial public offering in October 2002 and receive a
quarterly distribution only after sufficient funds have been paid to the common
units, as described below. All of the subordinated units are held by affiliates
of our general partner.

During the subordination period, the holders of our common units are
entitled to receive a minimum quarterly distribution of $0.5125 per unit ($2.05
annualized) prior to any distribution of available cash to holders of our
subordinated units. The subordination period is defined generally as the period
that will end on the first day of any quarter beginning after September 30, 2007
if (1) we have distributed at least the minimum quarterly distribution on all
outstanding units in each of the immediately preceding three consecutive,
non-overlapping four-quarter periods and (2) our adjusted operating surplus, as
defined in our partnership agreement, during such periods equals or exceeds the
amount that would have been sufficient to enable us to distribute the minimum
quarterly distribution on all outstanding units on a fully diluted basis and the
related distribution on the 2% general partner interest during those periods. In
addition, 25% of the subordinated units may convert to common units on a
one-for-one basis after September 30, 2005, and 25% of the subordinated units
may convert to common units on a one-for-one basis after September 30. 2006, if
we meet the tests set forth in our partnership agreement. If the subordination
period ends, the rights of the holders of subordinated units will no longer be
subordinated to the rights of the holders of common units, the subordinated
units may be converted into common units and the common units will no longer be
entitled to arrearages.

15

Our general partner, the WPP Group and Arch Coal are entitled to incentive
distributions if the amount we distribute with respect to any quarter exceeds
specified target levels shown below:

PERCENTAGE ALLOCATIONS OF AVAILABLE CASH FROM OPERATING SURPLUS

We must distribute all of our cash on hand at the end of each quarter, less
reserves established by our general partner. We refer to this cash as "available
cash" as that term is defined in our partnership agreement. The amount of
available cash may be greater than or less than the minimum quarterly
distribution. We currently pay quarterly cash distributions of $0.5125 per unit.
In general, we intend to increase our cash distributions in the future assuming
we are able to increase our "available cash" from our operations and through
acquisitions, provided there is no adverse change in our operations, economic
conditions and other factors. However, we cannot guarantee that future
distributions will continue at such levels.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED HISTORICAL FINANCIAL DATA

The following tables show selected historical financial data for Natural
Resource Partners L.P. and our predecessors (Western Pocahontas Properties
Limited Partnership, Great Northern Properties Limited Partnership, New Gauley
Coal Corporation and the Arch Coal Contributed Properties, collectively known as
predecessors), in each case for the periods and as of the dates indicated. We
derived the selected historical financial data for Natural Resource Partners
L.P. as of December 31, 2002 and for the period from commencement of operations
(October 17, 2002) through December 31, 2002 from the audited financial
statements of Natural Resource Partners L.P. We derived the selected historical
financial data for the WPP Group as of and for the years ended December 31,
1998, 1999, 2000, 2001 and for the period from January 1 through October 16,
2002 from the audited financial statements of the WPP Group, and we derived the
selected historical financial data for the Arch Coal Contributed Properties as
of and for the years ended December 31, 1999, 2000, 2001 and for the period from
January 1 through October 16, 2002 from the audited financial statements of the
Arch Coal Contributed Properties. We derived the selected historical financial
data for the Arch Coal Contributed Properties as of and for the years ended
December 31, 1998 from the accounting records of Arch Coal.

We derived the information in the following tables from, and the
information should be read together with and is qualified in its entirety by
reference to, the historical financial statements and the accompanying notes
included in Item 8, "Financial Statements and Supplementary Data." The tables
should be read together with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations." While substantially all of the
producing coal-related assets and operations of the WPP Group were contributed
to us, some assets and liabilities were retained by the WPP Group.

16

NATURAL RESOURCE PARTNERS L.P.

- ---------------

(1) No financial data is presented for these periods because Natural Resource
Partners L.P. was not formed until April 9, 2002 and did not commence
operations until October 17, 2002.

17

WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP

- ---------------

(1) Up to the date of contribution of assets to Natural Resource Partners L.P.

18

GREAT NORTHERN PROPERTIES LIMITED PARTNERSHIP

- ---------------

(1) Up to the date of contribution of assets to Natural Resource Partners L.P.

19

NEW GAULEY COAL CORPORATION

- ---------------

(1) Up to the date of contribution of assets to Natural Resource Partners L.P.

20

ARCH COAL CONTRIBUTED PROPERTIES

- ---------------

(1) Up to the date of contribution of assets to Natural Resource Partners L.P.

21

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion of the financial condition and results of
operations should be read in conjunction with the historical financial
statements and notes thereto included elsewhere in this filing. For more
detailed information regarding the basis of presentation for the following
financial information, see the notes to the historical financial statements.

After the Introduction, there is a separate section for each of Natural
Resource Partners L.P., Western Pocahontas Properties Limited Partnership, Great
Northern Properties Limited Partnership, New Gauley Coal Corporation and the
Arch Coal Contributed Properties. The Arch Coal Contributed Properties include
the properties contributed to us by Ark Land Company, a subsidiary of Arch Coal,
Inc.

INTRODUCTION

Natural Resource Partners L.P. is a master limited partnership formed by
the WPP Group and Arch Coal, Inc. We engage principally in the business of
owning and managing coal properties in the three major coal-producing regions of
the United States: Appalachia, the Illinois basin and the Western United States.
As of December 31, 2002, we controlled approximately 1.23 billion tons of proven
and probable coal reserves in eight states. We completed our initial public
offering in October 2002.

We lease coal reserves to experienced mine operators under long-term leases
that grant the operators the right to mine our coal reserves in exchange for
royalty payments. As of December 31, 2002, our reserves were located on 48
separate properties and were subject to 97 leases with 40 lessees. For the year
ended December 31, 2002, approximately 55% of the coal produced from the
properties contributed to us came from underground mines, and 45% came from
surface mines. As of December 31, 2002, approximately 64% of our reserves were
low sulfur coal. Included in our low sulfur reserves is compliance coal, which
meets the standards imposed by the Clean Air Act and constitutes approximately
25% of our reserves. Coal produced from our properties is burned in electric
power plants located east of the Mississippi River and in Montana and Minnesota.
In the year ended December 31, 2002, our lessees produced 30.5 million tons of
coal from the properties contributed to us and our total revenue was $56.6
million, including coal royalty revenues and minimums totaling $50.5 million.
Approximately 16% of our lessees' 2002 coal production was metallurgical coal,
which the lessees sold to steel companies in the Eastern United States, South
America, Europe and Asia.

Our revenue and profitability are almost entirely dependent on our lessees'
ability to mine and market our coal reserves. Coal royalties are paid to us on
the basis of a percentage of the sales price of the coal, subject to a minimum
royalty per ton. In addition, our leases specify minimum monthly, quarterly or
annual royalties. These minimum royalties are generally recoupable over a
specified period of time (usually three to five years) if sufficient royalties
are generated from coal production in future periods. We do not recognize these
minimum coal royalties as revenue until the applicable recoupment period has
expired or they are recouped through production. Until recognized as revenue,
these minimum royalties are carried as deferred revenue, a liability on the
balance sheet.

Most of our coal is produced by publicly held companies with professional
and sophisticated sales departments. We estimate that 80% of our coal is sold by
our lessees under coal supply contracts that have terms of one year or more.
Coal supply contracts with terms of one year or more are becoming increasingly
rare. Thus, our coal royalty revenue stream is increasingly affected by changes
in market price of coal.

During the last few years, steam coal prices have varied greatly. At the
beginning of 2000, demand for steam coal was depressed due to excessive
stockpiling of coal by utilities in anticipation of "Y2K" problems. By late
summer of 2000, these stockpiles returned to normal levels, utilities reentered
the market to buy coal, and sufficient supply was not available to meet demand.
These events contributed to a rapid increase in coal prices during late 2000.
These higher spot prices prevailed for most of 2001. In late 2001, prices began
to decline as demand for coal fell due to unusually warm weather during the
winter of 2001-2002 and the sluggish U.S. economy. The winter of 2002-2003 has
been colder than normal in many parts of the U.S. As a result of the increased
demand for electricity for heating, electric utilities have used substantial
amounts of coal to generate electricity and have reduced the size of their
stockpiles. Recently our lessees have experienced

22

a greater demand for coal, and spot prices have increased about 10%. The effect
of spot prices on our results of operations for the near future should be
limited because our lessees will receive previously contracted prices for much
of their production. Coal prices are based on supply and demand, specific coal
characteristics, economics of alternative fuel, and overall domestic and
international economic conditions.

During 2002, approximately 20% of our coal royalty revenues were from
metallurgical coal. Prices of metallurgical coal have remained relatively stable
in the past two years. Metallurgical coal, because of its unique chemical
characteristics, is usually priced higher than steam coal. Metallurgical coal
production has gradually decreased during the past few years due to a decline in
exports as a result of the strength of the U.S. dollar and increasing use of
electric arc furnaces and pulverized coal, rather than metallurgical coal, for
steel production. Metallurgical coal can also be used as steam coal. However,
some metallurgical coal mines on our properties may only operate profitably if
all or a portion of their production is sold as metallurgical coal. If the
operators of these mines are unable to sell metallurgical coal, these mines may
not be economically viable and may close.

In addition to coal royalty revenue, we generate nominal revenue from
rentals, royalties on oil and gas and coalbed methane leases, an overriding
royalty arrangement and wheelage payments, which are toll payments for the right
to transport third-party coal over or through our property.

Most lessees are required to reimburse us for property taxes paid on the
leased property. These property tax reimbursements are shown as revenue in the
financial statements. The corresponding property tax expenses are included as
"taxes other than income." The WPP Group's property tax expenses are higher than
its property tax revenue because the WPP Group retained certain properties and
because some of the properties contributed by the WPP Group are unleased and,
therefore, no reimbursements are received.

General and administrative expenses include salary and benefits, rent,
expenses and other costs related to managing the properties. An affiliate
charges the WPP Group for certain finance, tax, treasury and insurance expenses.
The Arch Coal Contributed Properties did not maintain stand-alone corporate
treasury, legal, tax, human resources, general administration or other similar
corporate support functions. Corporate general and administrative expenses were
not previously allocated to the Arch Coal Contributed Properties because there
was not sufficient information to develop a reasonable cost allocation. We
reimburse the general partner and its affiliates for direct and indirect
expenses they incur on our behalf, including general and administrative
expenses.

Depletion and amortization consist primarily of depletion on the coal
properties. Depletion of coal reserves is calculated on a unit-of-production
basis and thus fluctuates from property to property with coal production for the
period.

CRITICAL ACCOUNTING POLICIES

Coal Royalties. We recognize coal royalty revenues on the basis of tons of
coal sold by our lessees and the corresponding revenue from those sales.
Generally, the lessees make payments to us based on the greater of a percentage
of the gross sales price or a fixed price per ton of coal they sell, subject to
minimum monthly, quarterly or annual payments. These minimum royalty payments
are generally recoupable over certain time periods. We initially record minimum
payments as deferred revenue and recognize them as coal royalty revenues either
when the lessee recoups the minimum payment through production or when the
period during which the lessee is allowed to recoup the minimum payment expires.

Timber Royalties. We sell timber on a contract basis where independent
contractors harvest and sell the timber and, from time to time, in a competitive
bid process involving sales of standing timber on individual parcels. We
recognize timber revenues when the timber has been sold or harvested by the
independent contractors. Title and risk of loss pass to the independent
contractors when they harvest the timber.

Depletion. We deplete coal properties on a units-of-production basis by
lease, based upon coal mined in relation to the net cost of the mineral
properties and estimated proved and probable tonnage in those properties. We
estimate proven and probable coal reserves with the assistance of third-party
mining consultants and involve the use of estimation techniques and
recoverability assumptions. Our estimates of coal
23

reserves are updated periodically and may result in adjustments to coal reserves
and depletion rates that are recognized prospectively. Timberlands are stated at
cost less depletion. We determine the cost of the timber harvested based on the
volume of timber harvested in relation to the amount of estimated net
merchantable volume by geographic areas. We estimate our timber inventory using
statistical information and data obtained from physical measurements and other
information gathering techniques. These estimates are updated annually and may
result in adjustments of timber volumes and depletion rates, which are
recognized prospectively. Changes in these estimates have no effect on our cash
flow.

NEW ACCOUNTING STANDARDS

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred with the associated asset retirement cost being capitalized
as a part of the carrying amount of the long-lived asset. SFAS No. 143 also
includes disclosure requirements that provide a description of asset retirement
obligations and a reconciliation of changes in the components of those
obligations. Adoption of SFAS No. 143 on January 1, 2003 did not have a material
impact on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of " and APB Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of the Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The objective of SFAS No. 144 is to establish one accounting
model for long-lived assets to be disposed of by sale as well as resolve
implementation issues related to SFAS No. 121. The adoption of SFAS No. 144,
effective January 1, 2002, did not have a material impact on our financial
position or results of operations.

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

In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities", which supercedes EITF No. 94-3, "Liability
Recognition for Certain Employment Termination Benefits and Other Costs to Exit
an Activity." SFAS No. 146 requires companies to record liabilities for costs
associated with exit or disposal activities to be recognized only when the
liability is incurred instead of at the date of commitment to an exit or
disposal activity. Adoption of this standard is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of this
standard is not expected to have a significant impact on our financial
statements.

24

RESULTS OF OPERATIONS

NATURAL RESOURCE PARTNERS L.P.

FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS
(OCTOBER 17, 2002) THROUGH DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT PER TON DATA)

REVENUES:
Coal royalties............................................ $11,532
Property taxes............................................ 1,047
Minimums recognized as revenue............................ 872
Override royalties........................................ 226
Other..................................................... 216
-------
Total revenues............................................ 13,893
EXPENSES:
Depletion and amortization................................ 4,526
Taxes other than income................................... 1,296
General and administrative................................ 1,059
Override payments......................................... 226
Coal Royalty Payments.................................. 171
-------
Total expenses............................................ 7,278
-------
Income from operations...................................... 6,615
Other income (expense):
Interest expense.......................................... (200)
-------
Net income.................................................. $ 6,415
=======
OTHER DATA:
Royalties
Appalachia................................................ $ 9,492
Illinois Basin............................................ 727
Northern Powder River Basin............................... 1,313
-------
Total................................................ $11,532
=======
Production
Appalachia................................................ 5,448
Illinois Basin............................................ 601
Northern Powder River Basin............................... 1,265
-------
Total................................................ 7,314
=======
Average gross royalty
Appalachia................................................ $ 1.74
Illinois Basin............................................ 1.21
Northern Powder River Basin............................... 1.04
-------
Total................................................ $ 1.58
=======

25

FROM COMMENCEMENT OF OPERATIONS (OCTOBER 17, 2002) THROUGH DECEMBER 31, 2002

Revenues. During the period from commencement of operations (October 17,
2002) through the period ending December 31, 2002, coal royalty revenues were
$11.5 million on 7.3 million tons of coal produced. Approximately 74.4% of the
coal production came from the Appalachian region, 17.3% from the Northern Powder
River Basin and 8.3% from the Illinois Basin.

Expenses. From commencement of operations (October 17, 2002) through the
period ending December 31, 2002, total expenses were $7.3 million. Total
expenses include depletion and amortization of $4.5 million, general and
administrative of $1.1 million, taxes other than income of $1.3 million and
other coal-related expense of $0.4 million.

YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001

The following table sets forth 2002 and 2001 coal royalty revenues from the
properties that were contributed to NRP at the consummation of its initial
public offering on October 17, 2002. These coal royalty revenues represent
production from the properties, for the years ending December 31, 2002 and 2001,
respectively. Coal royalty revenues were generated from the properties in each
of the following areas: Appalachia, Illinois Basin and Northern Powder River
Basin.

COAL ROYALTY REVENUES FROM CONTRIBUTED PROPERTIES

Coal royalty revenues, for the year ended December 31, 2002 were $49.6
million compared to $41.8 million for the year ended December 31, 2001, an
increase of $7.8 million, or 19%. In 2002, production increased by 1.5 million
tons, from 29.0 million tons to 30.5 million tons or 5.2%, compared to 2001. The
increases in production and coal royalties were primarily due to:

Appalachia. Production from our West Fork property increased from 222,000
tons to 2.1 million tons, and coal royalty revenues increased from $357,000 to
$4.7 million because a longwall mine moved onto the property from adjacent
property. On our Eunice property, production increased from 1.8 million tons to
2.6 million tons, and coal royalty revenues increased from $2.7 million to $4.6
million because a longwall mine

26

was on our property for a greater portion of the year and was subject to a
higher royalty rate. On our Welch/ Wyoming property, production increased from
222,000 tons to 609,000 tons, and coal royalty revenues increased from $361,000
to $1.3 million because a new mine, which began production during 2001, operated
on the property for the entire year. On our Dorothy property, production
increased from 652,000 tons to 1.0 million tons, and coal royalty revenues
increased from $1.1 million to $2.0 million. This increase was due to increased
production from a surface mine and the resumption of mining at a temporarily
idled mine. On our Kingston property, production increased from 740,000 tons to
1.1 million tons, and coal royalty revenues increased from $1.3 million to $1.8
million. This increase was primarily due to a new mine starting on the property
during the year.

These increases were partially offset by lower production and coal royalty
revenues from our Rockhouse and Boone-Lincoln properties. On our Rockhouse
property, production decreased from 322,000 tons to 34,000 tons, and coal
royalty revenues decreased from $791,000 to $82,000 because a mine on the
property ceased production. On our Boone-Lincoln property, production decreased
from 670,000 tons to 195,000 tons, and coal royalty revenues decreased from $1.3
million to $389,000. This decrease was due to lower production on the property
from the active surface mine and the temporary idling of the underground mine on
the property. This mine has since been restarted.

Aggregate production from our Beaver Creek, Thomas and Stony River
properties increased from 333,000 tons to 812,000 tons due to higher production
as the lessee concentrated production on our property. This resulted in coal
royalty revenues increasing from $792,000 to $1.7 million. This increase was
partially offset by a decrease in production from our New Gauley property from
441,000 tons to 282,000 tons due to a combination of market-based reductions and
adverse geologic conditions in the mine during part of the year. This resulted
in a decrease of coal royalty revenues from $985,000 to $683,000.

On our Evans-Laviers property, production decreased from 3.8 million tons
to 3.4 million tons. Coal royalty revenues decreased from $5.1 million to $4.4
million. This decrease was due to the idling a higher-royalty-rate surface mine
for part of the year.

Acquisition. In addition to the above increases, the acquisition of
properties from El Paso on December 4, 2002 resulted in additional production of
504,000 tons and coal royalty revenues of $601,000 in 2002.

Illinois Basin. On our Trico property, production increased to 486,000
tons from 253,000 tons because a mine that began operating in 2001 produced for
an entire year. This resulted in coal royalty revenues increasing to $682,000
from $343,000. This increase was offset by lower production on our Cummings/
Hocking-Wolford property. Production decreased from 1.5 million tons to 1.1
million tons, and coal royalty revenues decreased from $1.5 million to $1.1
million. This decrease was due to a larger proportion of the production from the
mine being on adjacent property.

Northern Powder River. Production from our Western Energy property
decreased from 4.9 million tons to 3.7 million tons. This resulted in a decrease
in coal royalty revenues from $5.3 million to $4.3 million. This decrease was
due to the typical variations in production resulting from the checkerboard
ownership pattern of the mine. This pattern causes variations in the proportions
of the total mine production on our property.

27

WESTERN POCAHONTAS PROPERTIES LIMITED PARTNERSHIP

STATEMENTS OF INCOME